by Jeff Sovern
I just finished listening to the audio version of Barney Frank's autobiography, Frank: A Life in Politics from the Great Society to Same-Sex Marriage, which Frank reads himself. I listened to it to learn more about consumer law--Frank was so involved in creating the CFPB that the statute doing so carries his name--but the book doesn't actually add much to what I have encountered elsewhere on the subject (though it adds a little, as noted below). Nevertheless, the book is well worth listening to. Frank is an entertaining and informative writer and I loved his volume. Regular readers of the blog will probably care about many of the issues Frank discusses and will likely enjoy learning more about Frank's insights into Congress and the electoral process.
Despite what I just wrote, the book has a few interesting items on consumer protection issues. Critics of the Dodd-Frank Act and other consumer protection laws often charge that government regulation led to the Great Recession in that lenders were forced to make unwise loans by laws supported by Democrats (see below). This, of course, is hard to reconcile with the fact that at the time the Great Recession hit, we had had a Republican president for nearly eight years, and Congress had been in Republican control for much of that time. Yet somehow, the minority party ruled banking. In fact, as Frank points out, Republicans opposed efforts to restrain subprime lending. Here are a couple of memorable quotes Frank includes in an appendix:
In 2007, Jeb Hensarling, now chair of the House Committee on Financial Services, said the following during a Committee hearing to consider a bill to limit subprime lending:
We still have to remember that millions of people have homeownership opportunities due to a subprime market. I am very leery of any legislation that could under cut that market.
And from the Wall Street Journal, a November 6, 2007 editorial about the same bill, titled A Sarbox for Housing:
Throughout the 1980s and '90s, Congress prodded, even strong-armed, banks into making more mortgage loans to low-income and minority families. Washington enacted anti-discrimination and community lending laws with penalties against lenders for failing to issue riskier mortgages to homebuyers living in poor neighborhoods or with low downpayments and subpar credit ratings. And so it was that the modern subprime mortgage market was born.
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But for all the demonizing [of subprime lenders], about 80% of even subprime loans are being repaid on time and another 10% are only 30 days behind. Most of these new homeowners are low-income families, often minorities, who would otherwise not have qualified for a mortgage. In the name of consumer protection, Mr. Frank's legislation will ensure that far fewer of these loans are issued in the future.
In other words, even though bad government regulation created the subprime market, that market is so wonderful that we shouldn't regulate it. Of course, we all know what happened because that market was insufficiently regulated. Oh, and just to make clear, I don't agree that bad regulation created the subprime market.