Today Senator Dodd hosted a meeting of leaders of Congress, industry and consumer groups in order to throw cold water on the idea that there should be a legislative fix to the problem of predatory lending this year. Whatever his motives may be, Senator Dodd is being spectacularly unhelpful on this issue. See news story here: http://www.reuters.com/...
It's time for Connecticut Kossacks to give him a talking to. I'll explain how and why after the fold.
There are two separate and very distinct problems involved in straightening out the current subprime/predatory lending mess. The first is to create a legal and regulatory framework to make certain that the bad loans and bad lending practices of the past five years are stopped or at least slowed to a trickle.
The second issue is what should be done to prevent the current crisis from becoming a meltdown that affects whole neighborhoods and could conceivably significantly affect the larger economy.
Senator Dodd, by framing the issue as one of "not bailing out the lenders" completely sidesteps his legislative responsibility for the first problem and mis-states what consumer groups are asking to be done on the second problem.
Senator Dodd is pushing all responsbility for fixing the legislative and regulatory mess back on the Federal Reserve. While the Fed (in its rule-making capacity) does share some of the burden for the extent of the problem, the inadequacy of current law to also blame.
Let me outline a couple of issues to structure the problem. When a potential investor goes to an investment adviser they have every right to expect, because it is written into law and regulation, that an investment adviser will only give them investment options that are suitable to their situation. An investment adviser could get into serious legal trouble for instance, for advising an 80 year old widow to put all of her money into a highly speculative and risky investment. We don't just say "buyer beware" in these kind of situations.
The same person acting as a mortgage broker on the other hand will not get into any trouble for steering a borrower with little financial sophistication into a high cost loan or an ARM with rapid rate increases, just because the broker will get a higher fee for getting someone into that loan. This disparity in how well-heeled investors get protected by law versus how low income home buyers are left to the wolves has got to stop.
Some current practices to consider:
Yield Spread Premiums - currently completely legal kickbacks from the mortgage lender to the broker --must be made illegal or severely limited. We can't have a regulatory structure which allows a broker to have a self interest in putting a borrower into a dramatically worse loan than their credit record entitles them too.
Underwriting to the Teaser rate - currently completely legal - allows a lender to qualify someone for a loan at a low rate without taking into account dramatic rate increases that are inevitable and are built into the product. This practice has to stop.
Stated Income Loans - A lot of people, including too many on this site have assumed that most of the people currently in stated income loans are there because they asked for that kind of loan - "Liar Loans" they are called. These loans which can make sense for self-employed people, should not be allowed for people on fixed incomes or who are wage-earners. The brokers are pushing people into these loans, because they know they couldn't qualify for a loan otherwise. The borrowers certainly aren't begging for them.
These are just a few examples of things currently legal, that aren't going to be fixed by financial education or by Fannie Mae and Freddy Mac raising their standards. As long as a broker has incentives to put a borrower into a bad loan and the lender can quickly get that loan mixed in with other good loans in a mortgage-backed security and sold, this problem will re-occur and get worse.
Congressman Barney Frank on the House side has been moving the ball forward on good strong legislation - it is way past time for Senator Dodd to join him and stop dragging his feet.
We can help accomplish this in two ways.
His constituents call call, fax or email him:
Washington Phone: 202) 224-2823
Washington Fax: 202) 224-1083
Hartford Phone: (860) 258-6940
Hartford Fax: (860) 258-6958
(800) 334-5341 —CT only
Email: http://dodd.senate.gov/...
Or we can begin to place some sunshine on all the donations that Senator Dodd is currently taking from financial services companies in his vanity run for the Presidency, and we can attempt to shame him. I encourage others with more knowledge of how to pull campaign finance information out in useful form to take up this challenge.
The second issue of falsely framing attempt to help consumers as "bailing out the lenders" will have to wait for another day.