Mortgage Reform And Anti-Predatory Lending Act Of 2007
Mr. Chairman, I offer an amendment. Mr. Chairman, I yield myself 3 minutes. This amendment, which I am offering with my good friend and colleague from New Jersey, Albio Sires, addresses prepayment penalties and prime loans. This is a…
Mr. Chairman, I offer an amendment.
Mr. Chairman, I yield myself 3 minutes.
This amendment, which I am offering with my good friend and colleague from New Jersey, Albio Sires, addresses prepayment penalties and prime loans. This is a well-balanced amendment that has gained the support both of consumer groups and industry.
Prepayment penalties are designed to deter borrowers from refinancing, or just paying off their loans. This seems unfair; why should anyone be penalized for paying off their loans? Why should borrowers not be able to take advantage of a better offer if it becomes available? Isn't that how the free market system is supposed to work?
The underlying bill prohibits prepayment penalties on subprime loans and requires that prepayment penalties on prime loans expire 3 months before a loan resets. But I think we need to offer all borrowers, including prime borrowers, an alternative to loans with prepayment penalties. At the most, prepayment penalties should last 3 years, the time needed for lenders to recover their investment.
Mortgage lenders argue that prepayment penalties enable them to offer loans at lower interest rates because they are assured of income for a period of time. Our amendment just requires them to offer prime borrowers an informed choice. If a lender offers a borrower a loan with a prepayment penalty, they also have to offer that borrower a loan with no prepayment penalty.
Also, our amendment would limit the period of prepayment penalties to 3 years and limit the amount of the penalty to 3 percent of the outstanding balance in the first year, 2 percent in the second, and 1 percent in the third. This standard has already been adopted in many States and is often referred to as the ``California standard.'' It represents what reputable lenders consider best practices. Prepayment penalties beyond 3 years are simply unjustified by any market need.
This is a balanced amendment that gives lenders adequate security and the option to offer prime loans with prepayment penalties, but also gives prime borrowers a choice to avoid prepayment penalties if they so wish. It is a sensible and necessary step to improved disclosure and improved choice.
I urge my colleagues to support it.
Madam Chairman, I reserve the balance of my time.
Mr. Chairman, I yield the remainder of my time to my colleague who has personal experience with prepayment penalty abuses.