The financial regulation the U.S. government is working hard to pass won’t effect just credit card contracts and big banks’ ability to trade derivatives — the mortgage market will also undergo some changes meant to safeguard consumers.

Members of the U.S. House of Representatives and Senate want to make sure mortgage lenders make sound loans, while the lenders want to make sure they can still make money under the new rules.

What Lawmakers Propose

Both the House and Senate bills would require mortgage lenders to hold onto a 5% stake in the loans they package and sell as securities. The fact that the companies would have a stake in the product means they would make better, safer loaning decisions, the lawmakers hope.

The legislation would assure that any home loan refinancing be beneficial to the borrower. Leading up to the mortgage meltdown and financial crisis, many mortgage lenders had refinancing policies that punished borrowers, driving them further into debt and precarious financial situations. The proposed bill would ensure that any refinancing provide a “net tangible benefit” to the customer. The Senate and the House alike want to limit the ability of lenders to charge fees when borrowers pay off loans early or refinance.

The bill would disallow lender-paid commissions based on what kind of loan the borrower took out. The fees associated with opening a loan would either have to be paid up front (all at once) or over an extended period (at a higher rate), not a mixture of the two.

What Lenders Want

Banks and mortgage lenders are pushing back against these proposals and trying to carve out pieces of the legislation to leave a little room for their profits.

Above all, lenders — assuming they meet the tougher loan standards put forth by the government — want greater protection from lawsuits. The mortgage industry is arguing that it should not face legal challenges from consumers if it meets the government’s new tougher lending requirements.

Mortgage lenders are completely against the barring of liquid commissions. The industry says that upfront-only fees could end up costing consumers more in the long run.

The new rules could make taking out a mortgage more inconvenient — due to more stringent background checks — and more expensive — due to new fee structure, but consumers will probably benefit. The rules could protect under-qualified prospective buyers from making purchases and protect many homeowners from predatory loan refinancing policies.

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