New Lending Rules Represent Small Step Forward, But Giant Leaps Still Needed
Feature Story by David Schraub - 7/21/2008
Housing advocates praised the Federal Reserve's new rules regulating the mortgage industry, but warned that much work still needed to be done to prevent a future collapse similar to the current mortgage crisis.
Among other reforms, the new regulations, released on July 14, require lenders to carefully evaluate borrowers' ability to pay back loans and verify their sources of income. The rules also protect borrowers from certain abusive lending practices, particularly prepayment penalties that trap customers in subprime loans.
But many advocates say the changes, while promising, do not go far enough. The new rules leave intact several problematic mortgage practices, such as the use of Yield Spread Premiums, which make it easier for brokers to give customers costlier loans than those for which they are qualified.
James H. Carr, chief operating officer of the National Community Reinvestment Coalition (NCRC), said that in spite of the reforms, "There remain a number of trap doors for prospective home buyers that need to be eliminated."
Furthermore, The New York Times reported last December that fair housing and civil rights groups had advocated for many of the reforms in the new rules years before the current mortgage crisis, to no avail. In today's climate, many advocates fear they may already be obsolete.
"The real issue isn't what the Fed is doing to regulate subprime lending in 2008; it's what the Fed didn't do in 2002 or 2003 when regulation might have prevented a crisis. These rules amount to heroically rushing in with a fire hose a year after the house burned down, when lenders aren't so eager to play with matches anymore. I'm not sure what they get us," said Rob Randhava, LCCR counsel.
Michael Calhoun, president of the Center for Responsible Lending, expressed hope that the Federal Reserve's new found concern for the problem of mortgage lending abuse would lead them to "continue to look for real solutions, not cosmetic ones."
But as Calhoun and others have pointed out, those solutions would need to come a lot more quickly in the future, in order to avoid any similar meltdowns down the road.
"Many observers seem bewildered by the current mortgage crisis. The most confusing question is why did it take a national foreclosure epidemic and the near collapse of the financial system to bring better regulation to the markets?" said NCRC's Carr.
