April 29 (Bloomberg) -- A U.S. House panel approved legislation that would prevent lenders from transferring all mortgage risk as part of a bid to boost consumer protection during the deepest housing slump since the Great Depression.

The measure, passed today by the House Financial Services Committee on a 49-21 vote, also would limit upfront commissions to mortgage brokers and revise other standards.

Lawmakers said they were trying to curb lending abuses that contributed to record losses on securities linked to mortgage payments and a 24 percent increase in U.S. foreclosure filings in the first quarter from a year earlier.

“If this bill passes, there will continue to be a vigorous mortgage market, and it will continue to function better,” said Committee Chairman Barney Frank, a Massachusetts Democrat.

The bill would require lenders, bond investors and others involved in the repackaging of home loans into securities to retain a minimum of 5 percent credit risk.

Frank said last month that 100 percent securitization “allows bad originations because people make loans and don’t have to worry about being paid back.”

The committee debate included efforts by Republicans to change a measure they said would impose too many limits on lenders.

“It sounds like every mortgage made in the past 10 years has been a toxic asset, and that’s just not the case,” said Representative Randy Neugebauer, a Texas Republican. “And how many of those people” with bad loans “have taken out mortgages they really shouldn’t have.”

The measure encourages the use of traditional 30-year, fixed-rate loans and requires lenders to ensure borrowers have the ability to repay their mortgages.

Win Approval

Similar legislation passed the House of Representatives in 2007, and then failed to win approval in the Senate. Frank said he expects better support for the bill than before because there are now more Democrats in the Senate.

The mortgage industry opposes a provision in the bill that holds companies that package mortgages into securities responsible for loans that don’t meet certain standards.

Industry groups, such as the Mortgage Bankers Association have said the legislation would constrain credit and increase the number of lawsuits against the industry.

The legislation would prohibit lenders from “directly or indirectly” hedging or transferring a minimum retained credit risk on most nontraditional mortgages, including some loans that have adjustable interest rates or require little documentation of a borrower’s income. The bill, introduced last month, is sponsored by Representatives Melvin Watt and Brad Miller of North Carolina, both Democrats.

‘Protections in Place’

“If the protections in this bill had been in place, we would not have had the foreclosure crisis, we would not have had the financial crisis,” Miller said.

Consumer protections in the bill include a requirement of a physical property visit by an appraiser, who must prepare a written report. The bill also establishes a state-by-state system of monitoring appraisal management companies.

Irvine, California-based RealtyTrac Inc., a seller of default data, reported that foreclosures rose 12 percent since December.

To contact the reporter on this story: Holly Rosenkrantz in Washington at hrosenkrantz@bloomberg.net.

Last Updated: April 29, 2009 16:03 EDT