Consumer groups are lobbying the Obama Administration to expand the ability of consumers to file lawsuits against financial companies selling residential mortgages that fail to meet minimum government sales, marketing and disclosure standards.

 

A new congressional mortgage reform bill would create a new “net tangible benefit” standard for lenders refinancing a loan. It says that they may not extend credit “in connection with any refinancing of a residential mortgage loan unless the creditor reasonably and in good faith determines that the refinanced loan will provide a net tangible benefit to the consumer.”

 

The measure would order bank regulators to come up with a definition of “net tangible benefit.” It also includes an “ability to pay” provision.

If adopted by Congress, the new consumer proposals would expand customer opportunities to file lawsuits, supplementing existing government enforcement options. In particular, consumer advocates are targeting financial products and practices they consider “predatory.”

 

But banks warn the proposals could limit lending and raise borrowing costs, especially if they lead to a new wave of class action lawsuits.

 

It’s likely that such rules will end up in the Administration’s broader proposal for reforming financial regulation. Such provisions generally would not allow a consumer to sue a firm over a mortgage if he suffered financial harm because of his own personal circumstances, such as losing his house to foreclosure after being laid off from a job and becoming unable to make monthly payments, or because of bad practices by a consumer, such lying about income or assets.

Rather, such proposals would mandate new minimum standards for disclosure, terms, customer profiles and other aspects of structuring, marketing and selling mortgage loans. If regulators determined a company violated them and a customer suffered financial harm as a result, the customer would have the right to sue.

In theory, a customer could file suit even without any government investigation and ruling, if the customer suspected a company violated the rules.

 

Can you say higher closing costs?