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Let The Subprime Fight Begin

If the legislative process were a race, lobbyists interested in shaping the future regulation of the mortgage industry would have just started the 100-meter dash.

House Financial Services Committee Chairman Barney Frank (D-Mass.) fired the starting gun Monday morning when he released the details of legislation that aims to prevent the abusive lending practices experts say contributed to the current crisis in the subprime mortgage market.

The groups will barely have time to catch their breath before facing the first major test in the influence contest. On Wednesday, Frank is scheduled to preside over a hearing where federal regulators, industry players and consumer representatives will weigh in on the bill.

Yet while interest groups said it would take time to digest the broad and complex proposal and decipher its total impact on their members, two teams have already clearly emerged: those in the lending industry, and the consumer and civil rights groups who represent borrowers.

Mortgage industry groups warn that certain aspects of Frank’s bill would unfairly hurt the industry and make it harder for poorer consumers to get affordable credit.

Consumer advocates say the bill’s protections would go a long way toward curbing so-called predatory lending in the mortgage industry — but only if its enforcement provisions are given more teeth.

The breakneck legislative pace won’t let up after today’s hearing, either, and that will influence lobbying strategies. Frank said the bill will be marked up by his committee in a week or two and will get to the floor as early as mid-November. House leaders have decreed the bill should pass before the House adjourns for the year, lobbyists said, though the November goal could slip amid a busy floor schedule.

At least some on Team Mortgage are considering focusing their work on rallying opposition to Frank’s bill, rather than laboring to alter the text. “We’ll be looking for a polarized bill; we’ll be looking for Republicans to vote against it,” one industry lobbyist said.

The gist of the predatory lending measure, introduced Monday by Brad Miller (D-N.C.) and co-sponsored by Frank and Mel Watt (D-N.C.) was not a surprise. Frank and his co-authors regularly consulted both sides of the debate as they crafted the bill, lobbyists say. But the devil is in the details, and lawmakers did not share draft text with lobbyists in any meaningful way before Monday, leaving those who want to influence the legislation waiting for detailed language to which they could react.

Hill staff allowed lobbyists to see a draft during an Oct. 17 briefing, but no one was allowed to take the text out of the room.

Frank made it clear, both in public and privately through his staff, that he’s not done working on the legislation. He told reporters he expects the measure to change on its way to the House floor but to pass “substantially” as written.

“Everything’s negotiable,” he said Monday. “I have to get a majority of votes at all points. … I’m not emperor.”

The bill would hold all mortgage lenders accountable to minimum underwriting standards, which would include ensuring borrowers can afford loans.

After its release, lending industry players offered positive assessments of some aspects of the legislation. But they also made clear they see major flaws.

“We still have serious concerns and we want to work with the committee as the legislative process goes forward,” said Floyd Stoner, executive director of congressional relations and public policy at the American Bankers Association. “This is a major issue, and this is major legislation.”

One top industry objection: Frank’s bill does not create a uniform federal standard for mortgages that would pre-empt state consumer protection rules — what lenders describe as a &dquo;ceiling.” Instead, the bill would lay down a federal “floor” — a minimum standard that states could go above and beyond with further regulations.

If that doesn’t change, a key industry group — the Mortgage Bankers Association — won’t be able to support the bill, said Kurt Pfotenhauer, the group’s senior vice president of government affairs.

The mortgage market is national, Pfotenhauer said. “Without a uniform national standard, this legislation could only serve to foster more confusion in the marketplace for borrowers and lenders alike.”

Team Consumer supports a floor.

Lending industry representatives also say the underwriting standards mandated by the bill would limit and even cut off legitimate sources of credit for consumers with less-than-perfect credit.

For instance, the bill would lower the threshold for what constitutes a “high-cost loan” under federal law, a designation that brings additional rules and penalties on lenders.

That provision amounts to “government-sanctioned redlining,” said Roy DeLoach, executive vice president of government affairs for the National Association of Mortgage Brokers. Many lenders would decline to offer such loans, essentially cutting off access to consumers in lower-income areas, his group contends. “What it’s really going to do is take away loans [from] people who actually really need them and deserve them,” he said.

Not so, argue consumer groups that support the protections outlined in Frank’s bill. It’s the enforcement of those consumer protections that have them worried.

Frank’s bill “does a lot of good on the front end,” said Brenda Muniz, legislative director of the Association of Community Organizations for Reform Now, or ACORN. But there’s a question of “whether or not the remedies that are provided in the bill are really significant enough to discourage these kinds of bad actors in the marketplace.”

“It appears that by adopting a few broad policies or fixing the loans of the few people who actually voice their concerns, the industry can almost completely insulate itself from liability, except for borrowers who end up in foreclosure,” Alys Cohen, a staff attorney with the National Consumer Law Center, said of the bill’s enforcement structure. The reality, Cohen said, is that the mortgage industry won’t be forced to conform to the protections in the bill.

In addition to penalizing bank lenders and mortgage brokers, the bill seeks to make securitizers — the mortgage industry players who package and sell mortgages on the secondary market — share some of the responsibility for bad loans. The financial services lobby warns that making securitizers liable could scare off investors whose capital has helped expand homeownership across the country. Again, the devil is in the details, they say.

It remains to be seen which side will win the lobbying contest over Frank’s bill. Historically, the lending industry has had more success on Capitol Hill. Consumer groups complain their efforts to push anti-predatory-lending measures before this year’s subprime crisis — which could have prevented the current mess, they contend — were consistently thwarted by the lending industry in previous years.

Now, of course, the crisis has hit, and the lending industry faces some pretty bad PR, with stories of distressed homeowners and market turmoil in the headlines day after day. It certainly has caught lawmakers’ attention, prompting a number to offer their own proposals.

Even on a good day, though, consumer groups say they have significantly fewer resources to deploy on Capitol Hill than mortgage lenders and other industry groups, who have showered lawmakers with millions over the years. The Center for Responsible Lending, a key player on the consumeside of this matchup, recently received a hefty $15 million contribution, but that won’t help its lobbying efforts. The contribution goes specifically to a separate nonprofit arm that provides legal aid to individual homeowners facing foreclosure, said Josh Nassar, CRL’s vice president of federal affairs.

Team Consumer may find its efforts to beef up regulation distracted by the need to shore up general support for the bill, if industry lobbyists do indeed push for “no” votes among GOP members and market-minded Democrats, rather than for language changes.

The goal of that industry strategy would be to influence the final shape of the Senate version of the bill. Senate Banking, Housing and Urban Affairs Chairman Chris Dodd (D-Conn.) has released a detailed outline of predatory lending legislation he plans to introduce, but there’s no firm word when the actual bill will emerge.

“If you’ve got 200 people voting against [the House bill], that will send a strong signal to the Senate that this isn’t where you start,” said the industry lobbyist.