With the recent subprime industry fallout and exposure of some of the lending industry’s questionable practices, new requirements are finally being enacted to regulate lender operations, ensure consumer protection and stabilize the housing market. Although they are still in development, these new regulations have been proposed at the commercial and federal level.

One of the first new lending policies began to be enforced by banking regulators just this past June. The requirements force lenders to ensure would-be borrowers could afford the increased monthly payment on an adjustable-rate mortgage when the interest rate changes. This is an alternative to previous lending criteria, which simply required borrows could afford the introductory period payment, often hundreds if not thousands of dollars lower than the adjusted-interest rate payment. Although estimated adjustable payments may not be completely in-line with future interest rate levels, it at least provides a litmus test for long-term borrower stability in light of a variable mortgage.

However, many lending and housing market experts suggest this regulation may have come up to three years too late. Many buyers during the real estate boom took variable rate or interest only loans based off their ability to make payments at the time of home purchase. Now, with sharply rising payments due to interest rate changes, the foreclosure rates already experienced are only set to increase. Along with other shifts related to the lending, credit, and hosing industries, availability of homes are expected to increase, while prices should plummet.

In addition to stricter requirements for borrowers, lender activities are coming under scrutiny. Much of the free-flowing credit available during the housing boom enabled some to engage in predatory practices, or target certain borrowers for with higher-risk loans that presented better incentives lenders, even when they were not in the best interests of borrowers (see “The Subprime Fallout: Lending Practices” and “Targeting Women” for more information).

The Federal Trade Commission has engaged in regulation and prosecution of unscrupulous or predatory lenders by the FTC as early as the late 1990s. The cases at the time were isolated incidents. However, with many problems in the new housing market rooted in the coercive tactics of lenders during the boom, regulation activities have fallen in the hands of lawmakers at the federal and state level. Congress as well as state legislators are now developing bills outlawing lending terms that lead borrowers into default, such as prepayment penalties that indirectly prevent refinancing.

References

Consumer Federation of America. Women are Prime Targets for Subprime Lending

Federal Trade Commission. FTC Testifies on Enforcement and Education Initiatives to Combat Abusive Lending Practices.

Democracy Now. Subrime Lending Crisis: Millions of Families Face Losing Their Homes to Foreclosure.

Floyd Norris and Eric Dash. In a Credit Crisis, Large Mortgages Grow Costly. New York Times, August 12, 2007.