Mortgage mess help – too little, too late?


We support reforms to the financial marketplace that protect consumers from unscrupulous banks and lenders.

By Consumers Union on Monday, April 14th, 2008

The Federal Reserve Board has proposed some changes in regulations to respond to the subprime mortgage mess, but the first draft of those regulations is too short on real consumer protections.

The Board acknowledges the need for strong regulation and the problems faced by borrowers when dealing with the mortgage lenders. But its proposals won’t prevent another mortgage meltdown. That’s because the Board continues to make access to credit the guiding principle for regulation – even when the terms of the credit are harmful to the consumer.

Consumer and community groups have done an in-depth critique of the Federal Reserve Board’s regulatory proposal responding to subprime mortgage problems, that lays out the shortcomings of the proposal.

The California Reinvestment Coalition called the Fed’s proposal “baby steps” and joined with 31 other groups to call for more protections.

Consumer groups are calling on the Federal Reserve Board to use its regulatory power in the subprime market to:

•End prepayment penalties, make it too expensive for consumers to refinance, locking them into bad loans.

•Eliminate yield spread premiums, which are fees the lender pays to the broker for loans made at rates higher than the borrower actually qualifies for.

•Protect consumers against steering, which is where the lender or broker offers the consumer a higher priced loan even when the consumer could qualify for a better loan.

•Promote pre-purchase counseling so that consumers have a better chance of understanding complex loan papers.

These measures should be accomplished without stopping states from going further or in new directions to protect their residents.

We all are feeling the economic fallout from the subprime-sparked credit squeeze. Home values have fallen and consumers who have never missed a payment are seeing their home equity lines of credit reduced, their credit card companies tightening standards, and other effects.

Consumers should pay their bills, but lenders should not make loans where there is no reasonable basis to expect that the consuemr will be able to reply the loan. Loan terms should be fair and understandable, and without time bombs such as steeply escalating payments that are clearly beyond the borrower’s means. Lenders shouldn’t lock the consumer into a bad deal for a long time, pay the broker to place the consumer in a higher-than necessary interest rate, or play other tricks on the borrower.

The Federal Reserve Board and Congress have the ability to make sure the current mortgage crisis doesn’t happen again. This is an opportunity they should lock in now.

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