The Federal Reserve has just proposed new consumer protections for home mortgages and home equity loans. Perhaps the timing has something to do with the Fed's objection to the creation of a new Consumer Financial Protection Agency (CFPA).
The Fed's proposed regulations are generally about disclosures. It believes that by giving consumers simple and clear information on the various pluses and minuses of various mortgage products, the consumer can then make intelligent decisions. The CFPA, to be contrasted, would get much more granular -- devising a plain vanilla mortgage product and encouraging its use by all. If lenders and consumers sought to do something different -- i.e., not plain vanilla -- there would be CFPA hurdles to be leapt over.
In short, the Fed's proposals are much less paternalistic than what CFPA has contemplated.
As an attorney who has closed several thousand residential mortgage transactions, I worry about disclosures having the desired effect. As a practical matter, they are often ignored given that most home buyers (and borrowers) are just in a hurry to get the mortgage they need/want and therefore give short shrift to the paperwork. So, I worry that improved disclosures will do they job for which they are intended.
But I also worry about the government stepping in and creating a whole new slew of paperwork -- vanilla lending products with waivers (for non-vanilla). Although the intent is a good one, the execution and reality often causes confusion, delay and cost, the best example of which is the existing HUD form which all parties must sign at closing.
I feel that our energies (and money) should be directed at making U.S. consumers more financially savvy -- so that all these protections not be necessary. Understanding the principles of mortgage borrowing is not rocket science. People can get it if they want to. We could create, for example, a 10-point checklist that any mortgage borrower can access -- which gives the relevant questions to ask a lender when contemplating a mortgage. We could provide a 30-minute video available for free on line to any consumer who wants to understand mortgages. Basic, simple stuff that will cost the government nothing and will be there for consumers who want advice. Should we as a country be creating a whole new slew of regulations and documents and protocols and procedures to protect people from themselves? I propose instead that we create clear and understandable educating resources that are available to all who are willing to invest say one hour in learning what kind of mortgage product works best for them.
Jim Randel is the author of The Skinny on the Housing Crisis which last month was awarded the First Prize in a book competition sponsored by an organization of 600 journalists who following real estate and finance.
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