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Crack down on abuses in loan industry
By A TIMES EDITORIAL
Published September 22, 2007
Until recent months, the lending industry has handsomely profited by selling subprime mortgages to risky borrowers, and in defense of those loans, it likes to argue that this form of lending led to a larger proportion of Americans enjoying homeownership than ever before. This is a smokescreen, one that is expected to take years of foreclosures and dislocation to clear. At the end, according to the nonprofit Center for Responsible Lending, this type of instrument will have caused a net loss of homeownership for almost 1-million families, primarily due to all the refinancing of existing mortgages secured with subprime loans.
When borrowers, even those with spotty credit and lower incomes, are offered reasonable loans for their financial circumstances with clear terms and fees, they can be responsible debtors making a secure investment in a home. But when predatory lending practices lure vulnerable people into loans that are clearly wrong for them, disaster is sure to follow.
The center predicts that before the dust settles, upward of 2.4-million subprime foreclosures will occur, causing millions of people to lose their homes and creditworthiness.
Now Democratic leaders in Congress are drafting legislation aimed at shutting down some of the worst offenses of the industry. The bill deserves to become law.
A measure being offered by Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, would bar mortgage brokers from steering people into subprime loans when they would qualify for a conventional mortgage. It is estimated that somewhere between 20 and 40 percent of people in the subprime market could have obtained a regular, fixed-rate mortgage. Other fixes in the measure include banning prepayment penalties, charges that make it very expensive to refinance a subprime loan, and prohibiting the practice by mortgage brokers of rolling hidden fees into the interest rates.
Under the Dodd proposal, subprime lenders would also have to analyze the ability of the borrower to repay an adjustable-rate loan even after the mortgage rates reset, and lenders would have to include escrow taxes and insurance so borrowers aren't surprised by those bills on top of their monthly mortgage payment.
Over the last nine years, subprime lending became an out-of-control practice in which people were sold mortgages that they clearly could not afford. Brokers and lenders used teaser rates and other tricks to entice borrowers with promises of easy payments, then stuck them with loans that were essentially foreclosures waiting to happen.
When an industry exhibits this kind of bad faith, lawmakers need to act. The lending industry is already squealing about how current regulations are sufficient, but it is obvious that they are not. A new law is required, and the Democrats have it about right.