Restoring American Finacial Stability Act of 2010 - Continued

Floor Speech

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Mr. MERKLEY. Mr. President, I thank the bipartisan cosponsors of this amendment, including Senator Snowe, Senator Scott Brown, and Members on both sides--my colleague, Senator Klobuchar, will be speaking in a moment--Senator Begich, Senator Boxer, as I mentioned, Senator Kerry, Senator Franken, and Senator Schumer.

I would like to applaud my colleague from Tennessee. Virtually every word that Senator Corker stated tonight is an argument for this amendment that Senator Klobuchar and I are cosponsoring. I will get into the details later because I want to yield time to my colleague from Minnesota and then my colleague from Connecticut to speak to the bill. Then I will offer my remarks.

I do think it is important to recognize that the bulk of what Senator Corker addressed goes right to the heart of this amendment as well. There is a point of distinction between the two amendments, a critical point of distinction; that is, the 5-percent underwriting absolute line. That line is a line of great concern for those of us who have had experience with first-time home buyers, those who have had experience with families who are at the bottom of the income spectrum. I should make it clear that the downpayment is only a portion of the skin in the game that such families have because there are tremendous closing costs associated with these loans that the families must bear as well. So the inflexibility of that standard is a great concern and a great point of distinction between these two amendments.

I will continue on after my colleagues have spoken to address some of the major challenges this amendment addresses, but I would like to yield 5 minutes to Senator Klobuchar.

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Mr. MERKLEY. Mr. President, before I speak on this amendment, I want to applaud my colleague from Connecticut who spoke so passionately and knowledgeably about the challenge that had been faced by subprime underwriting gone astray.

If only the letters that he and his colleagues wrote in 2006 and in 2007, those multiple appeals, if only those who had the power to establish those underwriting standards had been listened to, had been followed up on, then we would have a much smaller challenge today. We would not have had this big meltdown in 2008 and 2009, with so many millions of American families having the value of their home destroyed. I applaud him for his advocacy year after year after year.

I am pleased to be able to join him in this effort now. I particularly applaud the efforts to establish standards for skin in the game. This is a very responsible way to create accountability for our mortgage originators. I do want to note that there are three issues that particularly contributed to dysfunction at the retail mortgage level.

The first is liar loans, undocumented income, where a mortgage originator would tell the client: Well, we will just pencil in here that you earn $150,000. It does not matter. Don't you worry about what you are earning. We will put this in here. That obviously led to a complete corruption of the quality of the mortgage. Certainly the families involved had no prospect of paying for those mortgages and the interest rates they were being signed up for.

A second was to fail to employ basic underwriting measures, measures like loan to value and credit history and employment history, and current obligations and debt to income, and so forth.

These are the types of measures any responsible originator goes through to understand whether this loan makes sense for this family, whether there will be the ability to repay.

The third piece is the incentives that were provided to mortgage originators put those originators 180 degrees out of sync with their customers. Essentially, it worked like this. If a loan was good for a family, it didn't make as much money for the lender. If it was bad for a family, it made a lot of money for the lender. So the lender and the home buyer have different interests; one wants a low-interest mortgage, a fair mortgage; the other wants a mortgage that has hidden clauses, prepayment penalties, and exploding interest rates. But incentive payments, sometimes called steering payments, technically called yield spread premiums--these were paid to the mortgage originators to induce them to sign those families they had taken into their trust into a loan that was good for the lender but not good for the family, corrupting a transaction at the heart of the most important financial moment in a family's experience, the moment of buying their family home.

This amendment addresses all three of these core pieces of dysfunction in the mortgage market. It ends no-documentation or liar loans as they are called, where income is created like writing a work of fiction. It sets minimum underwriting standards related to loan to value, ability to repay, and ability to repay not based on some teaser rate but on any rate the loan could potentially go up to in the first 5 years. So you make sure, if this has a variable rate clause, that this family will be able to manage those payments in the first 5 years and certainly verification of income in the process. So you have documentation and verification, essentially the sound underwriting process that was in place for decades before it all went awry over the last 10 years.

This amendment will apply to all loans. It amends the Truth in Lending Act or TILA, which applies to all loans. It will base broker compensation on the size of the loan and on the loan value or the loan amount and the volume of loans a broker makes, rather than on the type of loan. We take this impossible situation that mortgage originators were put in, where their interests were 180 degrees reversed from the client. Yet it is a trust relationship, it puts them in sync, where the broker has no incentive to steer a family into an exploding interest rate, no incentive to steer a family into a loan with a prepayment penalty, no incentive to steer a family into a loan that has other hidden clauses designed to strip wealth from working families.

Finally, this amendment provides a safe harbor to make sure mortgage originators are on sound ground if they follow this set of originating principles and, in the process, makes sure they do not do balloon payments or fees that exceed 3 percent, a series of sound business practices that serve the industry and serve the family.

I mentioned before that my colleague from Tennessee has a bill that has many of these mortgage underwriting standards. I applaud him for his long experience and concern in helping families to succeed. But we do disagree about two provisions. One provision is stripping the skin in the game that makes sure mortgage originators have a stake in the quality of the mortgage. The second is to establish a solid line on a 5-percent standard. Many families, when they are buying a modest home, have a significant expenditure in all kinds of closing costs, independent of their downpayment. They may well have thousands of dollars, $5,000, $8,000 of skin in the game before they ever get to the downpayment. So we want to create the flexibility for first-time home buyers and for families on the lower end of the income spectrum to be able to get into home ownership.

In fact, frankly, it is these families for whom it is so important we make the mortgage process available. Because a young family who is able to buy that first home and do so with the responsible underwriting principles laid out in this amendment, in 5 years they will be buying their second home, maybe a bit nicer home, maybe an extra bedroom or two for the children, and maybe later on they are able to move up again to the sort of home they have always dreamed about having or the sort of yard with the trees in it that the treehouse is going into and so forth. That is the American dream, to be able to engage in this progression. You engage in that progression because you build equity. You build equity by getting into home ownership at the start. Having solid underwriting standards but not an inflexible line is the way to go on this.

I do note that the amendment Senator Klobuchar and I are offering is supported by a host of organizations: The Center for American Progress, the Center for Responsible Lending, the National Association of Consumer Advocates, the National Consumer Law Center, the National Fair Housing Alliance, Consumer Action, the Housing Finance Alliance, and Mortgage Insurance Companies of America.

This is a bipartisan sentiment to restore solid mortgage underwriting standards. I appreciate the thoughtfulness and energy that has gone into it from both sides of the aisle to craft ways to approach this. When we vote tomorrow morning, I ask all my colleagues to vote yes for strong underwriting standards. Vote yes for putting mortgage originators in sync with their clients rather than radically oppose the interests of their clients. Vote yes to end liar loans. Certainly, vote yes for the young families and those families with lower income who wish to get into that first home so they can get their share of the American dream.

I yield the floor.

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