Pennsylvania Department of Banking Foreclosure Report Spurs New Legislation

01 Nov Pennsylvania Department of Banking Foreclosure Report Spurs New Legislation

In 2003, the Pennsylvania House of Representatives directed the Pennsylvania Department of Banking to commission a study on the residential mortgage industry. The study was released in 2005 and was entitled “Losing the American Dream: A Report on Residential Mortgage Foreclosures and Abusive Lending Practices.” The report rattled lawmakers by revealing that Pennsylvania is home to the 8th highest foreclosure rate for standard mortgag loans and the 4th highest foreclosure rate among subprime mortgages.

The Report identified radical changes in the mortgage market over the past ten years. Most of these changes are related to the phenomenon known as “securitization”. Securitization is a practice developed by Wall Street to create pools of collateralized assets which can be bought and sold on the market. Securitization encourages lenders to close on as many loans as possible within a short period of time and in turn sell them to large trusts.

Upon the closing of the loan, the homeowner is introduced to a “servicer” that acts as the “public face” of the mortgage loan. It is the servicer who accepts the homeowners payments and is usually the only company that the homeowner knows to contact when there is an issue with the loan. Occasionally, the original lender which closed the loan will retain the servivcing rights after selling the loan to the trust. What occurs more often is that the servicer is a company which the homeowner had no notice of at the time the loan closed and has no pre-existing relationship with the homeowner.

Securitzation creates an environment in which there is no relationship and hence no personal accountability between mortgage broker, mortgage lender, servicer, homeowner and loan owner. Each of these parties is motivated by different impulses which are often times inimical to the peaceful servicing of the loan on behalf of the homeowner.

The study commissioned by the Department of Banking recognized these features of modern lending and recommended several action points to be taken by lawmakers as well as various stage agencies. Primary among these action points was the recommendation that several existing lending related laws be updated to reflect modern lending practices. As a result, several Bills have been introduced by Senator Patrick Brown which would amend the following statutes:

  1. Loan Interest and Protection Law (more commonly known as Act 6 of 1974);
  2. Banking Code of 1933 to expand the enforcement powers of the PA Department of Banking;
  3. Real Estate Appraiser Certification Act;
  4. Pennsylania Housing Finance Agency Act;
  5. Mortgage Bankers and Brokers and Consumer Equity Protection Act;
  6. Secondary Mortgage Loan Act.
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