Editorial: Now, the Rules

Editorial: Now, the Rules
Copyright by The New York Times
Published: August 22, 2010
http://www.nytimes.com/2010/08/23/opinion/23mon2.html?th=&adxnnl=1&emc=th&adxnnlx=1282575656-agiOMhG0/2za95iNSySOOQ


The new financial regulatory reform is supposed to curb the predatory lending practices that led to the collapse of the mortgage market and have put millions of Americans at risk of losing their homes.

The Federal Reserve must now translate the legislative language into rules that will govern how brokers, lenders, appraisers and investors behave from now on. Given the Fed’s long history of putting the financial industry first and consumer protection second, Congress will need to keep a close eye on the rule-making process.

It has become fashionable to blame profligate borrowers for the calamity. And there is no question that in the madness of the housing bubble, some people should never have sought mortgages or bought homes they clearly couldn’t afford. But the crisis was driven by Wall Street’s hunger for quick profits and its eagerness to buy mortgages and package them into securities. Banks, mortgage companies, brokers and appraisers all conspired to steer borrowers into loans with escalating interest rates, balloon payments and other conditions that made them highly prone to default.

The new law does not ban risky loans outright. It does establish several conditions that, if correctly implemented, should discourage lenders from issuing them.

Lenders must now take the common-sense precaution of documenting the borrower’s ability to pay. They can no longer penalize borrowers — eager to free themselves from subprime or other risky mortgages — for paying off the loans early. And lenders are forbidden to pay kickbacks — “yield spread premiums” — to brokers who push borrowers into costly, higher-interest loans.

If loans violate the law, borrowers will be able to stop a foreclosure and sue to recover damages. The risk of being hauled into court should persuade investors to look closer at the underlying loans to make sure that they conform with federal law.

These are all good, and desperately needed, reforms. Industry lobbyists, who do some of their best work in the rule-making phase, will work hard to water them down.

Consumer advocates are especially worried about how the Fed will formulate the rules that are supposed to stop lenders from steering creditworthy minority or female applicants into more expensive mortgages and end “wealth stripping,” under which lenders design loans that quickly rob homeowners of their equity.

Congressional leaders believe that the Fed was chastened by the crisis and will now do all that is needed to protect lenders. Given the agency’s long history of kowtowing to the banks, mortgage lenders and credit card companies, Congress will need to do more than trust. It will have to verify that the new rules finally give consumers — and the American economy — the strong, permanent protections they need.