If there was ever a time when federal regulators should be knocking heads it’s now. The plain truth about the subprime meltdown is that investors got greedy and lenders began looking the other way. There’s plenty of blame to go around but now the blame rests with those who should pass rules that stop the industry from manipulating the system.
Final subprime underwriting guidelines were released recently by the patchwork of federal regulators charged with overseeing the soundness of our banking system. (See FDIC press release from June 29, 2007.) Guidelines aren’t rules, they are suggestions. And they apply only to those lenders under jurisdiction of the federal agencies. Calling this a ho-hum approach is charitable.
It was almost predictable that regulators would emphasize the need for even more arcane disclosures to ensure that consumers will receive information they need about the features of these loans. They didn’t disappoint us. We’re headed for more mandatory disclosures that attempt to simplify what is a very complex transaction. Worse, lawyers – the last people who should be writing a simple explanation for anything, will write them.
The feds decided to sidestep any call for increased regulation of third-party originators, leaving that issue in the laps of wholesale buyers of loans from brokers. Not a good idea. Why? Nearly all of the disclosures are made at or within three days of loan application. That occurs long before a lender or investor sees the loan. Add to this the fact that some mandatory disclosures are so out of date they actually contribute to misleading borrowers.
The final TILA Reg Z disclosure doesn’t even contain the actual loan amount. More than a few major fraud cases have shown that unscrupulous brokers use this fact to trick borrowers. The ancient RESPA-required Good Faith Estimate form, which is rarely completed correctly, is an industry joke. There isn’t even a federal penalty for those who don’t provide the form! Other examples abound.
The Beltway would rather encourage lenders to be more lenient in working out potential foreclosure problems than clamp down on rules designed to prevent all of this in the first place. No one in Washington has the stomach to create real change so the regulatory team has thrown the ball back to lenders and called for an early lunch.
What the agencies failed to address was that many loan servicing agreements prohibit the servicer from modifying loan agreements entirely, or limit such modifications to no more than 5-10 percent of a total pool. Further, loan modification may run afoul of FASB Rule #140, which says that if a bank alters the terms of a loan it has pooled, it cannot keep the loan off its books. It must repurchase the loan, return it to the books, set aside a reserve for losses, and actively manage it. The industry is asking for relaxation of this rule.
Two years ago, these agencies wanted to tighten this rule to keep predation in control but were shouted down. Endless hearings will keep the issue on hold for a long time. Meanwhile predators who’ve survived the upheaval will design new and improved loan programs complete with premiums for delivering above par rates. How will this be resolved? By the entity that pumps the most money into congress for re-election campaigns.
Gordon Schlicke is a consultant and expert witness on predatory lending and mortgage fraud, RESPA, the HUD-1 Settlement Statement, federal and state lending compliance, and RESPA-compliant Affiliated Business Arrangements. He is affiliated with BPI Consulting Group and Ethical Lending Foundation.