Bankers In A Tizzy Over Proposed Toxic Loan Restrictions

The banking industry is having collective heart failure over the Obama Administration’s proposed Consumer Financial Protection Act. It would do such terrible things as ban unfair, deceptive or abusive acts or practices.

The banking industry contends that the proposed legislation will stymie the development of alternative lending products and, of course, raise consumer costs — as if that’s a real concern. Sure sounds like socialism, more regulation and big government at its worst….

This is nonsense.

First, the government ALREADY has the power to regulate mortgages which constitute “unfair and deceptive acts or practices” (UDAP) under the Home Ownership Equity Protection Act of 1994 (also known as “HOEPA” — Section 32 of Regulation Z, part of the Truth in Lending Act).

The problem is that HOEPA was never invoked in 2003, 2004, 2005, 2006, 2007 or in 2008 by the Federal Reserve, thus the marketplace was flooded with option ARMs, interest-only mortgages and stated-income loan applications. These are, apparently, the type of “alternative lending products” that thrill many large lenders — the ones who have needed billions of dollars in bailout money and the creation of artificial markets by Uncle Sam to buy their junk paper.

Happily, many banks, credit unions, mortgage lenders, servicers and investors want to stay away from innovation which bankrupts their customers, their government and their economy. Look around and you can find plenty of lenders with white hats.

Here’s what the new law would do if passed.

SEC. 1031. PROHIBITING UNFAIR, DECEPTIVE, OR ABUSIVE ACTS OR PRACTICES.

(a) IN GENERAL.—The Agency may take any action authorized under subtitle E to prevent a person from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service.

(b) RULEMAKING REQUIRED.—The Agency may prescribe rules identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service. Rules under this section may include requirements for the purpose of preventing such acts or practices.

(c) UNFAIRNESS.—The Agency shall have no authority under this section to declare an act or practice in connection with a transaction with a consumer for a consumer financial product or service to be unlawful on the grounds that such act or practice is unfair unless the Agency has a reasonable basis to conclude that the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers and such substantial injury is not outweighed by countervailing benefits to consumers or to competition. In determining whether an act or practice is unfair, the Agency may consider established public policies as evidence to be considered with all other evidence.