Will New Regulations Force Mortgage Lenders to Be More Discerning With Their Decisions?
Yesterday, the Obama Administration put together a proposal (an 85 page white paper) offering suggestions for a regulatory overhaul of the financial system. Some of the key changes include:
- Formation of a council comprised of regulatory agency heads.
- More power to the Fed to supervise large companies.
- Creation of a new agency aimed at protecting consumer interests in financial transactions.
These measures would change the structure of the regulatory system, making it more centralized and (theoretically) creating a situation in which serious problems for the economy could be avoided through careful regulation and by looking for warning signs. One of the more interesting developments is connected with the creation of a consumer protection agency. This agency would be tasked with overseeing all institutions that offer financial products and services — including mortgages.
Making mortgage lenders more accountable
One of the many things that led to the economic crisis was the fact that mortgage brokers and lenders could encourage costly and risky loans, collect commissions and then get rid of them to be securitized. No risk to the person making the loan, so it didn’t matter if the borrower defaulted down the road. In order to prevent that, the consumer protection agency would have the power to craft regulations that could:
- Require mortgage brokers and lenders to encourage borrowers to get the best possible mortgage for their financial situation.
- Encourage mortgage lenders to steer borrowers toward mortgage loans with simple and transparent terms.
- Require mortgage lenders to verify that borrowers can actually afford the loan.
- Create national lending standards.
- Stop the practice of charging prepayment penalties.
As expected, many in the banking industry are upset at the prospect of these regulations. They do not like the idea of some of the possible restrictions on their business activities, and claim it would limit innovation. Consumer advocates, however, are reasonably pleased and believe that consumer protection is needed in order to help consumers obtain the information they need to make responsible decisions.
