What Does Barney Have Planned?: Are Stricter Mortgage Lending Rules On Their Way?

    By Brian Wolfman

    Today's Washington Post has this annoyingly non-specific article based in part on the author's interview with Rep. Barney Frank (D-Mass.), the new Chair of the House Financial Services Committee.  The topic is "suitability" in mortgage lending -- the quaint notion that lenders should only lend on terms that provide borrowers a realistic ability to stay out of foreclosure.  Frank is quoted as saying that "[y]ou shouldn't lend [home buyers or refinancers] more than they can afford to pay back, and you [shouldn't] lend them more than their house is worth."  As I said, the article is short on specifics, but Frank seems to be considering a combination of more disclosure for potential borrowers and substantive requirements that would prohibit lending to people who don't have a realistic likelihood of repaying.   Is he contemplating a sort of HOEPA for all mortgage lending or something with more teeth?  Comments anyone?

Comments

[John]

Once homeowners start missing payments on the old house, the foreclosure process will start (especially if they planning on letting it go into foreclosure and are doing nothing to gain foreclosure advice or seek out options to save their home). The bank will sell the house at a sheriff sale, and the new owners will be able to evict the foreclosure victims and anything that is left in the old house. Purchasing a new house after this process has begun will be impossible due to the foreclosure status of the old house and the negative effect on one's credit after several mortgage payments go unpaid.
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[Juno888]

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[realestateglendaleca]

Are we concerned about ALL mortgage loans, or just those marketed to unsophisticated, vulnerable borrowers? I am personally more concerned about the sub-prime market (however you define it). I applaud efforts to combat abusive mortgage lending, and do not have a problem exploring "suitability" regulation. But I fear broad regulation of the market, as being over-kill.

[Brian Wolfman]

Andrew,

Excellent comment. I don't know enough to know where I stand on this issue. But the statement attributed to Rep. Frank - - that a person shouldn't be able to borrow more than the value of his or her home - - seemed odd to me given that (1) some people can afford it, and (2) people incur unsecured debt all the time, often without "suitability" concerns.

Any other comments from cyberspace?

Brian

[Andrew Engel]

I've practiced in the predatory lending area for some time, but do not like the idea of wholesale suitability standards. One of the biggest problems with sweeping federal regulation is that it tends to becomes overly-broad, stifling creative financing. I don't have a problem with a consumer deciding to over-borrower on his home - if she knows what she is doing!!!

Are we concerned about ALL mortgage loans, or just those marketed to unsophisticated, vulnerable borrowers? I am personally more concerned about the sub-prime market (however you define it). I applaud efforts to combat abusive mortgage lending, and do not have a problem exploring "suitability" regulation. But I fear broad regulation of the market, as being over-kill.

[Brian]

Very interesting, Jeff. Without knowing who is "right," your citations suggest that academics who are interested in the real world make a difference at the policy level. I take the apparent relationship between the cited pieces and what Frank is considering to suggest that there is a discussion taking place between practitioners, academics, and legislative policy makers.

[Jeff Sovern]

Proposals in academic literature to transplant the "suitability" requirement from investment law to lending can be found in Kathleen C. Engel & Patricia A. McCoy, A Tale of Three Markets: The Law and Economics of Predatory Lending, 80 Tex. L. Rev. 1255, 1318 (2002) and Daniel S. Ehrenberg, If the Loan Deosn't Fit, Don't Take It: Applying the Suitability Doctrine to the Mortgage Industry to Eliminate Predatory Lending, 10 J. Affordable Housing 117 (2001). The proposal is in turn criticized in Abraham B. Putney, Rules, Standards, and Suitability: Finding the Correct Approach to Predatory Lending, 71 Fordham L. Rev. 2101 (2003).