Editorial: Predatory lending bill needs to be refined

Staff Writer
Mount Shasta Herald

The Mortgage Reform and Anti-Predatory Lending Act, which goes before the House Rules Committee this week, would prevent lenders from washing their hands of loans once the loans have been bundled and sold off to investors.

But the bill in its current form is a crude form of economic chemotherapy that may eliminate the problem but not without unintended collateral damage.

Central to the proposal is requiring brokers and bankers retain a 5 percent stake in any mortgage they originate.

“We’ve got to put an end to 100 percent securitization,” says U.S. Rep. Barney Frank, D-Newton, one of the bill’s co-authors. “You’ve got to have some skin in the game.”

It’s a prescription that sound good until you start looking at side effects.

The bill makes it harder for disreputable lenders to fleece consumers but it does so in a way that also makes it more difficult for reputable lenders to stay in business and potentially increases the cost of credit for borrowers.

The Mortgage Bankers Association says it supports many of the principles in the bill but worries forcing small and medium-sized mortgage companies to set aside capital to cover 5 percent of their loan production would be difficult if not impossible.

And fewer lenders – offering fewer mortgage options – inevitably means higher lending costs.

This would come at a bad time for the struggling housing market.

The South Shore was the only region in Massachusetts where single-family sales rose during the first three months of 2009. We want to keep that momentum.

Yes, some form of action is needed. The lack mortgage industry regulation is largely responsible for the crash of the housing market, which precipitated our current recession.

There were too many incentives for brokers to push buyers into loans they couldn’t afford, that had excessive penalties and that were unnecessarily expensive to obtain.

This bill takes those incentives away.

The worst brokers – those steering home buyers into inappropriate mortgages simply to increase their commission – will no longer have an easy target. But the majority of mortgage brokers deliver value to home buyers by matching their needs with the best programs offered by banks and other lenders.

Putting them out of business could chill credit markets at a time when we’re trying to thaw them.

Frank’s spokesman, Steve Adamske, said sponsors of the bill are aware of the pain this might cause good lenders.

“We’re going to be sensitive to that,” he said. “It won’t be overly prescriptive.”

We hope so.

More protection against predatory lending is a worthy goal. The challenge is doing it in a way that doesn’t undermine two sectors of the economy – housing and finance – that are already on life support.

The Patriot Ledger