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Friday, August 31, 2007

Call for rules to curb predatory lending

Call for rules to curb predatory lending
By Jeremy Grant in Washington
Copyright The Financial Times Limited 2007
Published: August 30 2007 21:15 | Last updated: August 30 2007 23:34

This week, organisers of the forthcoming Five Star Default Servicing conference in Texas trumpeted the event with a promise to “quiet the swarm of negative headlines” about their industry.

DS News – which focuses on what it proudly calls the “rich landscape of default servicing” – pledged to show how lenders were not “out to foreclose on homeowners”.

Small wonder some in the mortgage lending industry are feeling defensive.

With millions of Americans braced for a wave of foreclosures on their homes as a result of the subprime mortgage crisis, politicians in Washington have been pointing the finger of blame at the “unfair and deceptive” mortgage lending practices that many say are responsible for homeowners’ woes.

About 20 per cent of subprime mortgages taken out in 2005 and last year will end in the loss of the home to foreclosure – representing more than 1m lost homes, according to the non-profit Center for Responsible Lending.

Barack Obama, the Democratic presidential hopeful, proposed this week that “irresponsible” lenders be fined and the proceeds used to help people refinance. He also urged tighter regulation to prevent future problems.

Yet Mr Obama’s proposals highlight a double dilemma: how far should any bail-out of distressed borrowers go, and how would the federal government enforce any new rules given fragmentation in the way the mortgage industry is regulated?

Karen Shaw Petrou, managing partner at consultancy Federal Financial Analytics, says: “The big problem is determining which borrowers facing foreclosure were the victims, and who were the speculators with speculative [mortgage] structures who were just caught in a downturn. If every borrower facing foreclosure is rescued, then no borrowers in future will take care to get a prudent mortgage.”

Echoing the Bush administration’s more hands-off approach, Ben Bernanke, Federal Reserve chairman, this week suggested that Congress consider allowing the Federal Housing Administration – which insures home loans – to work with the private sector in helping some borrowers to refinance.

On the regulatory front, the last time Washington tackled predatory mortgage lending was in 1994, when Congress passed the Home Ownership and Equity Protection Act (Hoepa).

The Fed is considering proposing additional rules under Hoepa this year, including those that could deal with pre-payment penalties, seen by critics as among the most egregious practices.

But Randall Kroszner, a Fed governor, has pointed out that crafting new rules under an “unfair and deceptive” standard is hard. “Rules must have broad enough coverage to encompass a wide variety of circumstances so they are not easily circumvented. At the same time, rules with broad prohibitions could limit consumers’ financing options.”

As Mr Bernanke has acknowledged, enforcement of any new rules also would be tricky.

While Hoepa applies to all lenders, enforcement is handled by an alphabet soup of authorities each with some oversight of the US mortgage industry: the Federal Trade Commission, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation, to name three that cover bank lenders. States have their own powers too.

Arguably more problematic, the vast army of non-bank mortgage lenders that has proliferated in recent years is subject to Hoepa rules – yet federal authorities have no power to enforce them, because such brokers and lenders are regulated in their home states.

Gilbert Schwartz, a lawyer with Schwartz & Ballen in Washington, does not believe the answer is federal oversight. “You can’t send people around to every small broker to keep on top of what the fringes of the industry may be doing,” he says.

Deborah Goldstein, the Center for Responsible Lending’s executive vice-president, says the secondary mortgage market has a role to police itself in addition to any tightening of rules on abusive practices. But the CLR still believes the mortgage crisis is in part due to the “unintended consequences of under-regulation” at the time of Hoepa, and urges “substantial regulatory reform”.

Impatient at lack of action in Washington, North Carolina this week struck out on its own, approving a law to limit the ability of mortgage brokers to charge pre-payment penalties.

Next week all eyes will be on the House financial services committee, where Barney Frank will chair a hearing into predatory lending practices.

His committee is also drafting a bill dealing with the problem.


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