Dodd Proposes Mortgage Reform Bill; Will Seek to Force Fiduciary Responsibility for Brokers

Senator Chris Dodd (D-CT) said Wednesday that he will introduce a bill to reform the mortgage industry that would establish the grounds for a fiduciary relationship between mortgage broker and borrower. Dodd said he wants to “make brokers responsible to the people who pay them,” along with a host of other proposed reforms within his proposal for the Homeownership Preservation and Protection Act. According to a press statement, the bill will seek to supplement state law regarding broker duties by establishing a fiduciary duty of mortgage brokers towards borrowers. In addition, Dodd said the bill will also similarly seek to supplement existing lender liability for broker actions by requiring that whenever a broker is compensated via yield spread premium, the originating lender would be liable for that broker’s actions. The bill will also seek to abolish prepayment penalties altogether and would incorporate the usage of yield spread premiums into calculations used to determine if a loan triggers HOEPA (Homeownership and Equity Protection Act) protections. Further, Dodd said he wants to expand current rulemaking authority under the unfair or deceptive acts or practices (UDAP) provision of the FTC Act to give the FDIC and the OCC greater regulatory power — clearly a shot at the Federal Reserve’s recent decision not to issue a similar standard for the banks under its current jurisdiction. The bill also will seek to curtail common servicing practices, such as limiting late fees and requiring that all payments go first to current amounts due before going to cover delinquencies as well as limiting the circumstances in which servicers can force-place insurance for the borrower. I see a number of areas in the proposal — particularly on the servicing side — that are likely to be seen as counterproductive and/or overkill. But I also see some ideas, such as including YSP in HOEPA calculations, that have some creative merit. And, of course, I’m sure the broker lobby will be up in arms over the whole “you mean we’re legally bound to look out for the best interests of borrowers?” thing.