Yesterday, all of the Democratic members of the Senate Banking Committee (except Senator Johnson) sent a letter to Federal Reserve Chairman Bernanke urging the Fed to take further action regarding predatory lending. The text of the letter is posted on Senator Dodd’s web site: http://dodd.senate.gov/...
The Washington Post also has a story about the letter this morning. http://www.washingtonpost.com/...
Many of us remain critical of Senator Dodd for failing to aggressively use his position to create tougher legislation on predatory lending, but this letter putting pressure on the Federal Reserve is a half step in the right direction and should be applauded and followed up on. I’ll outline the three key points made in the Democrat’s letter over the jump.
A key problem with the regulation of mortgage lending is that there is not a consistent national regulation of mortgage lending. Mortgage brokers are regulated at the state level and state laws and regulation range from good to awful. The brokers in turn place the loan with a mortgage lender which may be:
- Regulated by the Office of the Comptroller of the Currency if it is a national bank.
- Regulated by the FDIC or the Federal Reserve if it is a state-chartered bank
- Regulated by the Office of Thrift Supervision if it is a thrift or savings bank.
- Regulated by HUD or the FTC if it is an independent mortgage company
- Also regulated by a state (less than 10 states have strong laws) if it is not a national bank, which are exempted from state regulation on these issues.
Most mortgage loans are then packaged into securities and sold either to Fannie Mae or Freddie Mac or to a private securitizer, which also have their own regulators.
Because it regulates holding companies the Federal Reserve is the one entity with anything close to the authority to provide overarching regulation on this issue. The Home Ownership and Equity Protection Act of 1994 (HOEPA) gave the Federal Reserve the authority with this language:
“The Board, by regulation or order, shall prohibit acts or practices in connection with (A) mortgage loans that the Board finds to be unfair, deceptive or designed to evade the provisions of the sections; and (B) refinancing or mortgage loans that the Board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower.”
Citing this authority the Democrats on Senate Banking in yesterday’s letter asked the Federal Reserve to take three actions that would apply to subprime loans:
- “Require all mortgage originators to evaluate a borrowers ability to repay prior to making a mortgage loan. The Board should create a presumption that a loan that requires a borrower to pay more than 50 percent of his or her income to cover the cost of principal, interest, taxes and insurance is not a sustainable loans and fails to meet this test.”
- “Designate that the failure to escrow taxes and insurance as (sic) an unfair and deceptive practice.”
This acknowledges the common practice of brokers to sell a mortgage based on “a lower monthly payment” without telling the borrower that while their current loan escrows for insurance and taxes the new one will not. Many low income borrowers who fall for this trap find themselves in a crisis as soon as taxes become due.
- “Restrict the use of low- and no-documentation loans.”
The letter acknowledges that 45% of recent subprime loans have been made as low doc and no-doc loans, not because the borrowers requested that product, but because it was easier and simpler to do and gave the originator more compensation.
Chairman Dodd and the Senate Democrats are certainly to be applauded for asking the Federal Reserve to get off the dime, but the fact remains that the current laws governing mortgage lending are outdated, provide too few consumer protections and have no clear ways to punish lenders who put unsophisticated borrowers into unsuitable loans.
You can keep the pressure up on Senator Dodd and the members of the Senate Banking Committee to do the right thing and work with Chairman Barney Frank of the House Financial Services Committee to create a strong national anti-predatory lending law.
Take the time to call them today; thank them for their letter to the Federal Reserve, but tell them that we also expect them to improve the laws governing abusive lending.
Senator Dodd:
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
Senator Jack Reed (Rhode Island)
Washington Phone: (202) 224-4642
Senator Charles Schumer (New York)
Washington Phone: (202) 224-6542
Senator Evan Bayh (Indiana)
Washington Phone: (202) 224-5623
Senator Thomas Carper (Delaware)
Washington Phone: (202) 224-2441
Senator Robert Menendez ( New Jersey)
Washington Phone: (202) 224-4744
Senator Daniel Akaka (Hawaii)
Washington Phone: (202) 224-6361
Senator Sherrod Brown (Ohio)
Washington Phone: (202) 224-2315
Senator Robert Casey (Pennsylvania)
Washington Phone: (202) 224-6324
Senator Jon Tester (Montana)
Washington Phone: (202) 224-2644
While we should cut Senator Tim Johnson from South Dakota some slack during his recuperation period, there is no reason that his staff shouldn’t be hearing about this issue as well.
Senator Tim Johnson (South Dakota)
Washington Phone: (202) 224-5842