[Congressional Record Volume 146, Number 84 (Wednesday, June 28, 2000)]
[Senate]
[Page S6016]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SARBANES (for himself and Ms. Mikulski):
  S. 2806. A bill to amend the National Housing Act to clarify the 
authority of the Secretary of Housing and Urban Development to 
terminate mortgagee origination approval for poorly performing 
mortgagees; to the Committee on Banking, Housing, and Urban Affairs.


                        CREDIT WATCH ACT OF 2000

 Mr. SARBANES. Mr. President, today I am introducing, ``Credit 
Watch,'' a bill that will authorize the Federal Housing Administration 
(FHA) to identify lenders who have excessively high early default and 
claim rates and terminate their origination approval. This legislation 
is necessary to protect the FHA fund and take action against lenders 
who are contributing to the deterioration of our neighborhoods.
  A recent rash of FHA loan defaults have led to foreclosures and 
vacant properties in a number of cities around the country. In 
Baltimore, the effects of high foreclosure rates are acute. In some 
neighborhoods, there are numerous foreclosed homes, now abandoned, 
within just a few blocks of each other. This can often be the beginning 
of a neighborhood's decline. It creates a perception that the property 
and the neighborhood is not highly valued. In turn, these neighborhoods 
become physically deteriorated and often attract criminal activity.
  It's like a rotten apple in a barrel. The rundown appearance of one 
home spreads to the surrounding neighborhood. Neighborhoods that are 
struggling to stabilize and revitalize find their efforts undermined by 
the presence of abandoned homes.
  The Department of Housing and Urban Development (HUD), community 
activists, and local law makers have come together to examine the loans 
being made in neighborhoods with high foreclosure rates.
  In Baltimore and other cities, these groups found that careless 
lenders are offering FHA insured loans to families who cannot afford to 
pay them back. Early default or claim of these loans frequently leads 
to foreclosure of the home. A foreclosed property can easily turn into 
an uninhabited home, which can either begin or continue a cycle of 
decline.
  In an effort to reduce the number of loans that end in foreclosure, 
the FHA developed several new oversight methods. One of which is 
``Credit Watch.''
  ``Credit Watch'' is an automated system that compares the number of 
early foreclosures and claims of lenders in the same area. This 
legislation authorizes FHA to revoke the origination approval of 
lenders who have significantly higher rates of early defaults and 
claims than the other lenders in the same area. FHA is currently 
targeting lenders with default rates over 300% of the area average. 
They estimate that in Baltimore this threshold would allow them to 
terminate the origination privileges of three major lenders that 
account for 40% of early defaults and claims.
  The legislation accounts for differing regional economies by ensuring 
that lenders are only compared to others making loans in the same 
community. It also provides a manner by which terminated lenders may 
appeal the decision of the FHA, if they believe there are mitigating 
factors that may justify higher rates.
  When lenders make loans with no regard for the consumer or the health 
of the community, the FHA must be able to take action in a timely 
manner. This practice is a costly abuse of the FHA insurance fund. 
Quick action not only protects the health of the Mutual Mortgage 
Insurance (MMI) fund, but it protects neighborhoods from the 
detrimental effects of high vacancy rates and consumers from the pain 
of foreclosure and serious damage to their credit.
  Lenders that offer loans to individuals who cannot afford them should 
not be able to continue making those loans. It is a bad deal for 
taxpayers. It is a bad deal for neighborhoods. It is a bad deal for the 
families who take out the loan.
  Credit Watch is an effective and efficient way that the FHA can 
prevent these unfortunate foreclosures from happening. While we need to 
address the larger issue of predatory lending in our communities, 
``Credit Watch'' is an obvious and immediate solution to one part of 
the problem.
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