Under Dodd-Frank, at least there now will be a law dictating that a lender is legally responsible for assessing a borrower's ability to pay. The Center for Responsible Lending, a non-partisan policy and research outfit, dubbed the new rule a "strong" and "prudent" one, and there's also the view of Bill Brennan, the Atlanta Legal Aid lawyer. Brennan first got involved in the fight against predatory mortgage lending in 1991, when an 80-year-old woman named Annie Lou Collier walked into his office. She was petrified at the prospect of losing her home of 37 years because she had been hoodwinked, "Tin Men"-style, into taking out a home loan carrying a 25 percent interest rate and with 20 percent in upfront costs. "Basing a mortgage on a person's ability to pay has been the key to this whole thing," Brennan said.
This legislative package addresses another of the bad practices that helped to fuel the subprime disaster by banning what people inside the industry call a "yield spread premium." That's basically a fancy term for the kickback lenders paid mortgage brokers willing to steer customers into higher-priced subprime loans. So what if Mrs. Jones qualified for a 6 percent mortgage? Put her in a higher interest loan carrying more fees and that could mean a commission equal to 2 percent of the loan amount -- a $4,000 bonus, for instance, on a $200,000 loan.
Is it any wonder, then, that a study commissioned by The Wall Street Journal found that more than half of the borrowers taking out a subprime loan between 2000 and 2006 had a credit score high enough to qualify them for a conventional rate loan? Half the subprime mortgage loans, of course, would have meant half the inventory for Wall Street to slice and dice and sell to the unsuspecting manager overseeing a pension or university endowment.
This new legislation, which may pass in both chambers by the July 4th weekend, also limits prepayment penalties, another anathema to consumer advocates. Prepayment penalties have long been a staple of subprime loans, though they had been pretty much eliminated from conventional rate loans by 2000.
Will It Work?
Questions remain, of course. It's unclear how much flexibility the new agency will have to respond to new threats and there are, of course, limits on its powers. Some activists wanted this new watchdog to have the power to set a national usury cap to combat the payday lenders and those selling other high-priced loan products. But the Obama administration and ultimately Congress sensibly thought that it should be our elected officials who make that kind of decision, not the appointed head of a regulatory body.
Yes, Congress didn't do anything this round about Fannie Mae or Freddie Mac. I'm sure they could have done more about the credit rating agencies. There were other shortcomings. But give our much-maligned elected representatives a break. One historic agency with a hodgepodge of other sensible proposals: not bad for a year's worth of multitasking.