New bill gives prime borrowers a pass

Editor's note: This is Part 2 of a two-part series. Read Part 1.

A competitive mortgage market that would work for borrowers requires an effective system of mortgage disclosures and a set of transaction simplification rules to equalize the playing field between borrowers and loan originators.

As indicated last week, an effective disclosure system would require that Congress remove itself from disclosure operations, eliminate all existing congressionally mandated disclosures, which are largely useless, and entrust sole responsibility to one agency that would set and revise the required disclosures as needed. Last week, I lamented that HR 1728 did not fix any of the deficiencies in the system of mandatory disclosures, but simply added more disclosures to an already excessive pile.

Transaction simplification rules are needed to separate third-party service transactions from the mortgage transaction; to sharply reduce the number of lender charges that can vary from loan to loan; and to assure the validity of price quotes. These rules would empower borrowers to protect themselves from abuse by loan providers.

Rule 1, as simple as it is obvious, is that any third-party service required by lenders must be paid for by lenders. The cost of these services would be embedded in the mortgage price, in the same way that the cost of automobile tires is embedded in the price of an automobile. But the price would be much lower because lenders can buy the services for less than borrowers, and it would no longer needlessly complicate the mortgage transaction.

Rule 2 would limit lender charges to points, expressed as a percent of the loan amount, which are traded off against the interest rate; and one fixed-dollar fee, that must be posted and the same for all transactions. This rule would eliminate fee escalation, which is common practice.

Rule 3 would require that the prices that lenders lock be the same as the prices they quote to a borrower shopping the identical loan on the same day. This rule would eliminate lowball price quotes, which pervade the market.

Not surprisingly, none of these rules are found in HR 1728, which is aimed not at empowering borrowers to protect themselves, but at replacing private decision-making by lenders with government-imposed rules.

Some of the rules in HR 1728 are sensible, such as the requirement that mortgage originators be licensed. It would also prohibit the sale of single-premium credit insurance, which would be barred by my more comprehensive Rule 1. But other rules in HR 1728 -- which are essentially knee-jerk reactions to abuses that arose during the go-go years prior to the crisis -- are toxic. ...CONTINUED

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