The Sub-Prime Lending Debate: Regulate or Educate?
Sharon L. Secor
November 04, 2007
The sub-prime lending industry has been the topic of much discussion over the past few months, with many placing the blame for the foreclosure crisis on sub-prime lending practices, calling for tougher consumer protection standards, while others argue that a great deal of responsibility must be borne by the consumers who agreed to loans that were beyond their means. Government officials, federal, state, and local have been paying attention to the debate, and many of these politicians are proposing new legislation to regulate the sub-prime mortgage industry.
The Boom in State and Local Legislation
Since the beginning of 2007, more than half of the states in the nation have proposed or passed legislation for additional regulation on the sub-prime mortgage industry. Local and regional governments have also jumped on the bandwagon, with a variety of cities initiating their own actions geared towards addressing demands for new predatory lending guidelines.
On the local level, many cities and towns have seen low and moderate income neighborhoods suffer as a result of the sub-prime meltdown. Many such areas saw a significant rise in home ownership in recent years, as growth in the sub-prime mortgage industry made borrowing easier for residents. However, as the sub-prime foreclosures crisis has worn on, these neighborhoods have been among the hardest hit. Many streets in such areas are dotted with empty homes as borrowers, unprepared for the change from teaser rates to market ones, are unable to meet rising payments on adjustable rate mortgages and are driven out by foreclosure.
Since state and federal legislation takes priority over local laws in these matters, options are very limited for municipal leaders in addressing these issues. However, some cities, frustrated by lending practices that they feel have contributed to the decline of their neighborhoods, have begun to take action, pressuring state and federal officials for relief. For example, the City Council of Seattle has passed a resolution to request assistance, urging Federal Reserve regulation to prohibit lenders from selling adjustable rate mortgages with low teaser rates, prohibit large prepayment penalties on adjustable rate loans, and demand that lenders disclose whether property taxes and insurance fees have been included in the monthly payment quoted to borrowers.
State officials have a bit more power to regulate the lending industry within their own borders. Officials in several states, heavily hit by the sub-prime meltdown, feel that federal regulations do not go far enough to protect the consumer from predatory lending practices. Many states have passed legislation during 2006 and 2007 to prevent lending practices that they consider to be unfair or predatory, and still more states have new regulations pending, some of them introducing standards that are much more stringent than any proposed on the federal level.
Separate Camps in the Halls of Federal Government
Legislation pending at the federal level includes two proposals introduced in the House of Representatives, one introduced by Rep. Bob Ney (R-OH), and the other sponsored by Reps. Mel Watt and Brad Miller (D-NC), and Barney Frank (D-MA). Each of these proposals takes a different approach towards addressing the sub-prime lending debate.
Rep Ney's proposal, called the “Responsible Lending Act” would supersede laws already adopted by individual states, creating uniform federal guidelines for predatory lending regulations. This bill is favored by the mortgage industry and others who advocate lighter restrictions on the market, as it will negate some of the tougher standards set by state governments. Many of these advocates feel that less regulation will benefit the consumer by ensuring that a wide variety of options remain available to borrowers.
On the other side of the debate are many consumer groups, who favor the tougher restrictions that would be placed on the mortgage industry by the “Prohibit Predatory Lending Act”, proposed by Reps. Watt, Miller, and Frank. This bill would place more comprehensive restrictions on the sub-prime lending market, regulating all sub-prime loan products. Modeled after North Carolina's predatory lending regulations, which are among the toughest in the nation, this law would mandate credit counseling for borrowers who are considering higher cost loans and put more stringent disclosure requirements in place for sub-prime lenders. This bill would also allow states to create stricter requirements within their own jurisdictions, making it more popular with officials in states with harsher restrictions already on the books.
In the Senate, a bill has been introduced by Senator Christopher Dodd , (D-CT), chairman of the Senate Banking Committee and a candidate in the 2008 Presidential election. Endorsed by many consumer advocacy groups, this bill also favors strict regulation, and would ban prepayment penalties on home loans, which are found only in the sub-prime market, making it easier for consumers to refinance higher cost loans. Late payment fees charged to borrowers would be limited, and the authority would be expanded for federal agencies to investigate lending practices.
While it is clear that there have been some reckless lending practices among sub-prime lenders, consumers must also be held accountable for their role in the sub-prime meltdown. Poor choices were made on both sides, with many lenders too willing to make risky loans, and many consumers willing to take them, despite the high costs, all parties gambling on rising home prices to balance the books. As home prices plummet, and foreclosure statistics rise, both lenders and consumers are suffering the consequences. While the harshest penalty certainly lies with the consumer, who stands to lose the roof over his head, so to does the responsibility to ensure that the loan for which he signs is within his financial means. No amount of new sub-prime lending regulation can provide consumers protection against the disregard of their own common sense.
The Boom in State and Local Legislation
Since the beginning of 2007, more than half of the states in the nation have proposed or passed legislation for additional regulation on the sub-prime mortgage industry. Local and regional governments have also jumped on the bandwagon, with a variety of cities initiating their own actions geared towards addressing demands for new predatory lending guidelines.
On the local level, many cities and towns have seen low and moderate income neighborhoods suffer as a result of the sub-prime meltdown. Many such areas saw a significant rise in home ownership in recent years, as growth in the sub-prime mortgage industry made borrowing easier for residents. However, as the sub-prime foreclosures crisis has worn on, these neighborhoods have been among the hardest hit. Many streets in such areas are dotted with empty homes as borrowers, unprepared for the change from teaser rates to market ones, are unable to meet rising payments on adjustable rate mortgages and are driven out by foreclosure.
Since state and federal legislation takes priority over local laws in these matters, options are very limited for municipal leaders in addressing these issues. However, some cities, frustrated by lending practices that they feel have contributed to the decline of their neighborhoods, have begun to take action, pressuring state and federal officials for relief. For example, the City Council of Seattle has passed a resolution to request assistance, urging Federal Reserve regulation to prohibit lenders from selling adjustable rate mortgages with low teaser rates, prohibit large prepayment penalties on adjustable rate loans, and demand that lenders disclose whether property taxes and insurance fees have been included in the monthly payment quoted to borrowers.
State officials have a bit more power to regulate the lending industry within their own borders. Officials in several states, heavily hit by the sub-prime meltdown, feel that federal regulations do not go far enough to protect the consumer from predatory lending practices. Many states have passed legislation during 2006 and 2007 to prevent lending practices that they consider to be unfair or predatory, and still more states have new regulations pending, some of them introducing standards that are much more stringent than any proposed on the federal level.
Separate Camps in the Halls of Federal Government
Legislation pending at the federal level includes two proposals introduced in the House of Representatives, one introduced by Rep. Bob Ney (R-OH), and the other sponsored by Reps. Mel Watt and Brad Miller (D-NC), and Barney Frank (D-MA). Each of these proposals takes a different approach towards addressing the sub-prime lending debate.
Rep Ney's proposal, called the “Responsible Lending Act” would supersede laws already adopted by individual states, creating uniform federal guidelines for predatory lending regulations. This bill is favored by the mortgage industry and others who advocate lighter restrictions on the market, as it will negate some of the tougher standards set by state governments. Many of these advocates feel that less regulation will benefit the consumer by ensuring that a wide variety of options remain available to borrowers.
On the other side of the debate are many consumer groups, who favor the tougher restrictions that would be placed on the mortgage industry by the “Prohibit Predatory Lending Act”, proposed by Reps. Watt, Miller, and Frank. This bill would place more comprehensive restrictions on the sub-prime lending market, regulating all sub-prime loan products. Modeled after North Carolina's predatory lending regulations, which are among the toughest in the nation, this law would mandate credit counseling for borrowers who are considering higher cost loans and put more stringent disclosure requirements in place for sub-prime lenders. This bill would also allow states to create stricter requirements within their own jurisdictions, making it more popular with officials in states with harsher restrictions already on the books.
In the Senate, a bill has been introduced by Senator Christopher Dodd , (D-CT), chairman of the Senate Banking Committee and a candidate in the 2008 Presidential election. Endorsed by many consumer advocacy groups, this bill also favors strict regulation, and would ban prepayment penalties on home loans, which are found only in the sub-prime market, making it easier for consumers to refinance higher cost loans. Late payment fees charged to borrowers would be limited, and the authority would be expanded for federal agencies to investigate lending practices.
While it is clear that there have been some reckless lending practices among sub-prime lenders, consumers must also be held accountable for their role in the sub-prime meltdown. Poor choices were made on both sides, with many lenders too willing to make risky loans, and many consumers willing to take them, despite the high costs, all parties gambling on rising home prices to balance the books. As home prices plummet, and foreclosure statistics rise, both lenders and consumers are suffering the consequences. While the harshest penalty certainly lies with the consumer, who stands to lose the roof over his head, so to does the responsibility to ensure that the loan for which he signs is within his financial means. No amount of new sub-prime lending regulation can provide consumers protection against the disregard of their own common sense.
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