06/22/2011 02:50 pm ET Updated Aug 22, 2011

Mortgage Counseling: HUD Should Do More Than "Incorporate by Reference"

According to some, the housing bubble came crashing down in the fall of 2008 partially due to the predatory lending practices of mortgage banks. Part of the problem may have been consumer confusion when it came to the fine print of complex financing arrangements. Unknowingly, homebuyers might have signed on for more than they could manage -- a situation that consumer education could have ameliorated.

To date, the federal agency responsible for educating mortgage shoppers has done little in regulating the homeowner education industry. No action has been taken yet to standardize the practices of groups that counsel homebuyers to help make sure consumers understand the terms of their agreement.

Now, the Department of Housing and Urban Development (HUD) has taken some baby steps toward improving housing counseling by indicating that new rules may be on the horizon. But to really make a difference, HUD must balance the needs of diverse homebuyers and tailor its rules to maximize the benefits of counseling.

The mortgage counseling industry, run mostly by nonprofits, works to educate homebuyers on the long-term implications of their financing options. It seeks to help them make informed and workable decisions about their repayment plans before signing on the dotted line. The goal is to avoid people taking on debt that they are financially unprepared to pay.

But the quality of counseling varies widely, from perfunctory to extremely thorough and useful. Standardizing the industry would weed out the least effective actors and help direct traffic to those services that do good work.

But in its first moves in this positive direction, HUD has sent some questionable signals. In its regulatory agenda, the agency has said it might "incorporate by reference" a set of voluntary standards recently agreed upon by the counseling industry. The standards emphasize the need for competent and knowledgeable counselors who adhere to a prescribed code of ethics, a good thing, since making them mandatory could help ensure quality and consistency that would ultimately benefit consumers.

However, HUD must do more than simply adopt wholesale standards that were set by interested parties.

In legal terms "incorporate by reference" means including the text of one document within a second document by simply citing, or mentioning, the first one. By using this language, HUD suggests it may not intend to undertake a full and complete investigation into how best to regulate, or whether each of the standards would, in fact, make a suitable regulation.

It's possible that the agency will do a more in-depth analysis of the standards before it releases the rule and will revise or rewrite certain standards to align them with best regulatory practices. Overall, a well-analyzed rule will enhance the quality of existing counseling services and encourage new ones to spring up in lacking markets. It will also help potential borrowers distinguish between counselors who provide quality services and those with poorer records. It will facilitate effective enforcement mechanisms, and provide for the collection of relevant data so that in the future, HUD can determine which standards work and which might need to be revised.

But the language used by HUD is direct enough to spark concern that insufficient thought will be given to how to best regulate this community. By stating an intention to incorporate by reference, HUD leaves open the possibility of ineffective rules that do not adequately reduce the risk that uninformed homebuyers could once again threaten their own financial futures, as well as our nation's economy.