05/18/2010 08:02 am ET | Updated May 25, 2011

Predatory Mortgage Lending is Still Legal

With all the yelling and screaming in Washington regarding financial reform the fact remains that predatory lending remains perfectly legal and will be perfectly legal once a financial reform package is passed.

"The Wall Street reform bill in Congress represents the strongest consumer financial protections in history," says President Obama. "You'll be empowered with the clear and concise information you need to make the choices that are best for you. We'll help stop predatory practices, and curb unscrupulous lenders, helping secure your family's financial future."

Well, yes and no.

There's no doubt that many of the provisions outlined in the proposed legislation, S.3217 -- the Restoring American Financial Stability Act of 2010 -- will do much to end abuse in the mortgage lending field. And while it's true that the version of the bill online today uses the term "mortgage" 109 times, it's also true that it contains no federal requirement that would make predatory lending illegal. In fact, the term "predatory" does not appear once in the 1,421 pages of the proposed legislation.

What's A Predatory Loan?

In basic terms "mortgage fraud" can be seen as some sort of abuse where a lender or mortgage investor is hurt. If you want examples of mortgage fraud just look at the annual statistics produced by the FBI. The latest edition, the 2008 Mortgage Fraud Report "Year in Review," tells us that "fraud filings from financial institutions increased 36 percent to 63,713 during Fiscal Year (FY) 2008 compared to 46,717 filings in FY2007. The total dollar loss attriSbuted to mortgage fraud is unknown; however, at least 63 percent (1,035) of all pending FBI mortgage fraud investigations during FY2008 involved dollar losses totaling more than $1 million."

And what about predatory lending, instances where borrowers are screwed by lenders? Nope, not one reported case of lender abuse.

The FBI report is entirely right. Why? Because predatory lending is not a federal crime.

Attorney Benny Kass, a long-time real estate columnist for The Washington Post and an authority in his field has told that "there are no federal laws making predatory lending illegal."

The reason predatory lending is not a federal crime is allegedly that no one can define "predatory" lending. In fact, lenders and loan officers under federal rules have no duty to get the best possible rates and terms for borrowers. Instead, their obligation is elsewhere. As the Mortgage Bankers Association explains "mortgage originators already have significant 'skin in the game' in the form of representations and warranties that they make to their investors."

It doesn't have to be this way. For instance, S. 3417 talks about "rules with respect to fiduciary or suitability requirements in the sale of annuities that meet or exceed the minimum requirements established by the Suitability in Annuity Transactions Model Regulation of the National Association of Insurance Commissioners."

Okay, so why can't there be rules establishing "fiduciary or suitability requirements in the sale of mortgage liens?" After all, the legislation says that it's intended to "to protect consumers from abusive financial services practices."

With such rules in place there would be a liability to borrowers for lenders who sold high-cost subprime loans to borrowers who qualified for FHA, VA or conventional financing. There would be a liability to borrowers for lenders who recommend toxic mortgages. There would be a liability to borrowers for lenders who fail to properly underwrite -- and reject -- unqualified borrowers. There would be a liability to borrowers for lenders who sell 6 percent financing to borrowers who qualify for 5 percent mortgages.

Had such rules been in place five years ago there would have been no financial meltdown and no federal bailout. Mortgage-backed securities would be backed by quality paper. Insurance used to compensate investors for bad mortgage-backed securities would have had far fewer claims. Ratings agencies could correctly rate mortgage-backed securities as safe and secure. Millions of foreclosure notices would have been avoided. While home values may not of soared to the heights seen in 2007 they also would not have collapsed to the levels seen in 2010. The value of your home would be worth more today and there would be a ready market if you wanted to sell.

Predatory lending will always be legal and lawful as long as big lenders have a strangle-hold on Washington. While the new legislation potentially holds many benefits for consumers, the most important benefit of all -- the right to a fair deal in the mortgage marketplace -- remains missing.


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