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Thursday, July 24, 2008

Editorial: Short Memories Compel Rules



      In a perfect world, everybody would be financially literate, and nobody would live beyond his means. There would be no P.T. Barnums and no subprime borrowers. Step right up if you think that's going to happen.
    The Federal Reserve, perhaps belatedly, has recognized that those imperfections have a lot to do with today's economy. And officials have stepped up with some basic rules to curtail lending practices that provided the dream of home ownership, then followed up with the nightmare of foreclosure. Starting in October 2009:
    n Lenders can't make loans until borrowers show proof of income.
    n Lenders have to ensure that risky borrowers set aside cash for taxes and insurance — no more losing a six-figure house because you couldn't scrape up the four-figure property-tax payment.
    n Lenders can't automatically penalize all risky borrowers who find the discipline and means to pay off their loan early.
    n Lenders can't use misleading ads — like advertising "fixed" rates or payments when in fact the fix is only in for a limited period of time. All mortgage advertising must include details on rates, monthly payments and other loan features.
    n Companies that service mortgages must credit payments to homeowners' accounts on the day they are received — no more hanging on to them until late fees kick in, as consumer advocates have claimed.
    n Borrowers can sue lenders without having to prove a "pattern or practice" of lending without considering ability to repay. But a lender has protection if it follows certain steps to verify that borrowers could indeed repay their loans.
    The rules target the subprime market — high-cost loans for folks with low credit scores — but they apply to all mortgage lenders, not just the banks supervised by the Fed. Chairman Ben Bernanke says "although the high rate of delinquency has a number of causes, it seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower."
    While the rules don't provide a do-over for existing subprime loans, they are a solid step toward ensuring U.S. Mortgage Crisis II doesn't happen. Susan Wachter, a professor of real estate and finance at the University of Pennsylvania's Wharton School of Business, warns that protections need to be in place because "memories are short."
    And just as sure as there are P.T. Barnums ...
   

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