Barney Frank tries to regulate subprime loans

Rep. Barney frank, D-MA, Chair of the House Financial Services Committee, is trying to pass a bill that would (to quote a negative editorial in the Wall Street Journal) “…forbid banks from signing up borrowers for “overly expensive” loans, require banks to make sure the consumer has a “reasonable ability to repay the loan” and insist that loans must be “solely in the best interests of the consumer.” “

Also (and this sends the Wall Street Journal into apoplexy, banks that package up mortgages and resell them would be “explicitly liable for for violations of lending laws.” That means the bank that buys the loan package could be sued if the bank that issued the loans did not follow the laws.

The Journal argues that this will dry up the sub prime lending market. But the fact is that if subprime lenders had simply followed their own rules for good underwriting, we would not be in the pickle we are in now. They didn’t police their own brokers and many bad mortgages were written. Those involved in the business knew this was going on and everyone looked the other way.

Banks have already tightened up their practices and the subprime market has already tightened up. This new law probably will not make much of a difference, But it will give borrowers who are led down the garden path by their mortgage brokers some ability to sue the lenders who make the loans.

For info on different mortgage terms, click here.

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