Can we protect consumers without closing down the subprime market?

Larry Lindsey, former chief economic advisor to George Bush, is attacking a proposal by NY Senator Chuck Schumer to increase regulation in the mortgage market. The most important provision of the proposed regulation (and the one that makes Lindsey see red) would make the lender legally responsible for the “acts, omissions, and representations made by the mortgage broker.”

In the current system, mortgage brokers can lie through their teeth to borrowers (and some do exactly that) without any consequences for the lender. As long as the lender does not have any reason to believe the broker is lying, the lender can rely on the contract you signed, and the deal you signed takes precedence over what you were told.

I know from friends in the business that subprime lenders sometimes go out of their way to ignore any evidence that the broker is lying. Usually this involves qualification data. For example, the broker may add things to the application — sources of income are common — that are simply not true.

Now you might argue that such lies benefit the borrower as they get a mortgage for which they would not otherwise qualify, and if the lender has to be more careful about the applications, fewer mortgages would be granted.

On the other hand, suppose the broker lies about the interest rate. I have talked to many people who claim that they were told they were going to have one interest rate when in fact the mortgage contract (which they did not read carefully) called for a much higher rate.

I think that lenders should be responsible for what the brokers they do business with say to the borrowers, if in fact in can be proven.

But if you are a borrower, you should never, ever (that’s never, ever) sign a mortgage contract without at least having the paperwork read and explained to you by your lawyer, not the lawyer for the bank. It will cost a couple of hundred bucks and it may be the best couple of hundred buck you ever spend.

For info on different mortgage terms, click here.

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