Thursday, September 21, 2006

Feds: Don’t sell, advise consumers

Predatory lending is wrong. Misleading a home loan borrower is illegal. Fraud has been called a cancer in our industry, and I agree. But how much handholding can a lender be expected to do and still have a reasonable chance of staying in business?

Earlier this week, Federal regulators criticized the residential finance industry for aggressively marketing "exotic" mortgages without making full disclosures on the payment shock associated with some of the loans, according to a story in National Mortgage News’ Daily Briefing.

There is some hand wringing going on in Washington because a recent report issued by the Government Accountability Office (that sounds pretty exotic to me, or do I mean Orwellian) on exotic loan products stated that some recent borrowers now lack sufficient equity in their homes to refinance out of the loans. I’m guessing that’s because these borrowers asked a lender how much equity they had in their homes and then borrowed that much, which is pretty much the point of a home equity loan.

According to NMN, the report notes that in their advertisements, "some lenders and brokers emphasize the benefits of AMPs (alternative mortgage products) without explaining the risks associated."

These loans are currently big business, as you would expect during this part of the cycle and SourceMedia’s Quarterly Data Report indicates they added up to more than $250 billion in the second quarter, almost a third of all mortgages funded. That makes it a serious issue, which makes lenders who sell them a target for federal regulators.

I see where this is going and it’s not good. Today, you won’t hear an ad for a new car dealer on the radio without listening to 15 seconds of mumbled fine print. Likewise, you won’t hear Mandy Patinkin talk about the new blood pressure medication without him spending a third of the commercial telling you about how you could die, or at least suffer a great deal, from taking the pill.

I guess if federal regulators have their way, everyone will spell out the downside before they make a sale. I guess it would be good to have drug dealers warn folks about possible jail time and the ordeals of withdrawal. The Olive Garden could describe the ruptured gut that could result from truly capitalizing on the “Never Ending Pasta Bowl.”

Had such rules been in place, I could have avoided that expensive HELOC I once bought. They offered me a very attractive rate but told me that it was tied to an index and could move. They assured me that it wouldn’t move beyond a certain cap, which made it seem fine to me. Gotcha!! The rate doubled before my first payment came due. Shame on me for not reading all the fine print. They knew that would happen and chose not to spell it out for me. I should have been smart enough to catch it. That’s life. They didn’t get any more of my business and never will.

But that’s how it works. We live in a capitalist society built around the concept of free enterprise (at least that’s what I was taught in school). We get to buy whatever we want, pretty much, and if we get burned we learn. Or not, as God intended.

As I see it, the government has two choices. One solution would be to tack on a lot more mandatory disclosures (what’s another inch of paper at this point?) and then further complicate the predatory lending laws by building in limits on all the terms of each of these new loans (which is a never-ending process, perfect for bureaucrats).

I think a better solution is to hunt down and punish lenders that cheat and defraud consumers by breaking the existing laws but to stop short of punishing them for bad decisions consumers might make (or risks consumers choose to take) when engaging in complicated financial transactions.

You’re free to disagree. Post below or e-mail me.

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