The House Financial Services Committee approved legislation today that may potentially bring sweeping changes to the way the mortgage industry conducts business. HR1728 or the Mortgage Reform and Anti-Predatory Lending Act, aims to curb forms of lending that have been a major factor in the highest home foreclosure rate in the nation in 25 years, the committee said in a statement. “The bill would ensure that mortgage lenders make loans that benefit the consumer and prohibit them from steering borrowers into higher cost loans,” the Committee says. “It would establish a simple standard for all home loans: institutions must ensure that borrowers can repay the loans they are sold.” The sponsor, Brad Miller (D-NC), and the committee called it a tougher version of the bill approved by the House in 2007 but never passed by the Senate. Among the current bill’s loaded provisions approved by the Committee is a risk retention provision, holding creditors responsible, to some extent, for the loans they originate. In testimony Thursday before the committee, the Mortgage Bankers Association (MBA) chairman David Kittle said a risk retention provision could make it impossible for many lenders to compete, among other faults. But as the legislation stands, creditors would be required to retain an economic interest in a material portion — at least 5% — of the credit risk of each loan that the creditor transfers, sells, or conveys to a third party. Federal banking agencies would, however, have the authority to make exceptions to the bill’s risk retention provisions, including form and amount. HR1728 would also ban yield spread premiums and other “abusive compensation structures” that create conflicts of interest, protect tenants who rent homes that go into foreclosure and encourage the market to revert back to originating fixed-rate, fully documented loans. The House of Representatives is expected to consider HR 1728 as soon as next week. Write to Kelly Curran at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.