Home loan reform is near

With the foreclosure crisis accelerating, Maryland lawmakers approved last night the final elements of one of the most aggressive reform packages in the nation to guard against future mortgage-related calamities.

Maryland is poised to enact tougher sanctions for mortgage fraud; to force banks to establish a borrower's ability to pay before making a loan; and to require more notification and a longer waiting period before a home can be repossessed or sold.


With passage of the last bill yesterday, lawmakers expect to quickly reconcile minor differences between versions of the legislation approved by the Senate and House of Delegates before sending them to Gov. Martin O'Malley, whose administration made the reforms a top priority this year.

"This puts us at the top of the pack in the country in terms of protecting consumers in Maryland," said Steve Silverman, chief of the Maryland Attorney General's Consumer Protection Division.


But many of the measures will be of little use to homeowners who are having trouble making their payments. Thousands of Maryland homeowners, particularly in Baltimore and in the Washington suburbs, have lost their homes or fallen behind on their mortgages.

To provide more immediate assistance, the state has expanded loan programs to help troubled borrowers. Also, O'Malley met yesterday for the second time with loan servicing companies to broker new standards for their efforts to help Marylanders stay in their homes. The Democratic governor has accused the industry of shoddy customer service and unfulfilled promises of aid.

"We still have some problems to overcome," O'Malley said as he emerged from the meeting. "Communication is still very much strained by the volume of the problem."

More than 13,000 homeowners in Maryland were in foreclosure at the end of last year, a 150 percent increase from the previous year, the biggest annual rise since the Mortgage Bankers Association began tracking the numbers in 1979. Foreclosures jumped after a boom in subprime lending and as adjustable-rate mortgages reset to higher rates, increasing homeowners' payments.

The latest foreclosure figures underscored the urgency in the General Assembly, where lawmakers said they tried to balance stricter lending standards with the need to keep credit available for consumers. The bills were the result of months of talks with consumer advocates and industry representatives.

Lobbyists had warned lawmakers not to over-regulate and stifle lending, pointing out that other states were harder hit than Maryland, and some lawmakers echoed those concerns. Sen. E.J. Pipkin, an Eastern Shore Republican who is on the Finance Committee, said during a recent hearing that lenders "have a gun to their heads and worry government could ruin their business."

But, in the end, industry groups, including the Maryland Bankers Association, backed the bills. Pipkin did, too.

"There's an acknowledgment that we have a national crisis on our hands," said Del. Brian J. Feldman, a Montgomery County Democrat who worked on some of the bills. "Industry understands that there's strong momentum to get something done. I don't think they had any choice but to come to the table."


Under the legislation, brokers must make sure that borrowers can pay the higher rate that kicks in after a period of time on adjustable loans, and they have to verify a borrower's income sources. That essentially outlaws no-documentation mortgages that are sometimes referred to as "liar's loans." The legislation also would increase licensing requirements for brokers.

Lawmakers initially considered prohibiting loans in which the payments would exceed 45 percent of the borrower's monthly income, but they eventually struck that provision. Sen. Verna L. Jones, a Baltimore Democrat, held the bill up in the Senate for days over the issue, saying the standard was needed.

"You don't want people to have more debt than they can afford," said Jones, a former housing counselor.

But lawmakers and consumer advocates said the provision would create a safe harbor for lenders, who might automatically assume a loan passes muster if the debt-to-income ratio is even slightly lower than that threshold. Jones eventually voted for the bill because she said its other provisions should be enacted.

Another bill would create a mortgage fraud statute that would apply to anyone involved in the mortgage transaction, from the title agent to the borrower. Proponents said that existing laws weren't sufficient for prosecutors.

The bill also would allow aggrieved borrowers to pursue a fraud case in private litigation, which drew criticism from some lawmakers who said it could lead to frivolous lawsuits from borrowers who got in over their heads, or prompt lenders to scour loan applications for mistakes so they could sue borrowers in default.


Other bills would overhaul Maryland's foreclosure process, one of the quickest in the nation, by stretching out the time before foreclosure can take place from 15 days to more than four months. They also would crack down on foreclosure-rescue scams in which troubled borrowers are duped into losing title to their homes.

"This crisis has emphasized more than ever that even people who think they are savvy can always learn more," said Jennie M. Forehand, a Montgomery County Democrat. "We hope the combination of bills will make a big difference. I don't think anybody thinks it will be an overnight fix."