The Federal Reserve Announces Measures to Reign in Abusive Lending

We all know about locking the barn door after the horses have already left and it's happening in this case. Under Alan Greenspan, the Fed took the stance that its powers did not extend to doing exactly what it is now doing. You wonder what kind of world we would have today had they been bold and done it anyway and waited for someone to tell them they had over-stepped their regulatory powers.

First, the rules apply only to subprime lending and, in general, do not affect the loans made to borrowers with good credit. But that market has already been dried up anyway. There is no secondary market to tell those loans into, the securities firms won't facilitate sales, the rating agencies won't rate them, and the investors won't buy them, so what is the point?

What they are attempting to do is to regulate an industry that does not exist any more. That's not a joke. According to the Implode-O-Meter, 207 lenders have now bitten the dust. I can remember when I first saw this site perhaps six months ago and the number stood at 26. An entire industry has vanished and here comes the Fed on a white horse attempting to save the poor consumers.

I suppose that one piece of good news in the package is that there are proposed rules affecting Yield Spread Premiums, YSPs for short. In my experience, borrowers ask a lot of questions about checks that they have to write, but don't ask questions about fees if it "appears" that someone else is paying them, as in the case of YSPs. These fees have not been transparent, borrowers do not understand what they are, do not know how to read the paperwork to discover one's existence, and do not know how to negotiate it away.

The other sad history of YSPs is that the borrower shows up to sign loan docs and finds that he is paying a higher rate than promised. At that late date, however, it is impossible to negotiate with the lender. YSPs aren't forbidden, but lenders and borrowers must acknowledge the existence of a YSP and agree in advance about the fee.

So there certainly are some good steps being taken here and perhaps when Congress gets through diddling around, maybe they will have some more ideas. In the meantime, though, consumers and others who wish to comment have 90 days in which to do so.

That still does not address enforcement. As I mentioned in my last article there are too many regulatory agencies now and virtually none have any effective enforcement powers. So what is the value of a bunch of new rules?

Click here to read a summary of the changes to Regulation Z.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles. Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.