I wish I could say that I feel confident that Congress will protect mortgage borrowers when the House and Senate eventually reconcile on financial reform. But the way things are going, it looks like consumer protection is an afterthought.
Almost a year ago, the Obama administration asked Congress to require lenders to offer "plain vanilla" mortgages if they offered mortgages at all. The idea: If the lender wants to pitch a 3/1 option ARM, it has to give the details of a boring old 30-year fixed, amortizing, fully documented mortgage. The administration's proposal went nowhere. Neither the House nor the Senate passed such a requirement.
The loss of the plain-vanilla requirement matters because, eventually, we'll have another housing boom. When that time comes, lenders will compete by lowering their underwriting standards, just as surely as nightclub patrons lower their standards toward closing time. Lenders lost their heads in the 80's and there was an S&L bust. Lenders lost their heads in the early 2000s and we got this housing meltdown. Lenders will offer irrational products again in the next boom. It would help if they were at least required to inform consumers of the availability of sane loans.
The House's financial reform bill established an independent consumer financial protection agency. The bill that the Senate passed establishes a "Consumer Financial Protection Bureau" within the Federal Reserve. Sen. Chris Dodd, D-"Countrywide," says the bureau would be independent. Uh huh. Independent, but within the Federal Reserve. Gotcha.
There are simple ways to hobble regulatory agencies or to discredit government altogether. For example, you could appoint a horse-racing executive to take charge of emergency management. A subtle approach to undermining a new agency is to give it the old-timey moniker "bureau."
When I think of a Consumer Financial Protection Agency, I picture well-shod, college-educated people walking purposefully through cubicle farms. When I think of a Consumer Financial Protection Bureau, I picture old fedora-wearing guys in brown suits, secretively nursing glasses of bourbon in their dark offices. And I think Dodd had this subliminal notion in mind when he helped draft the bill.
At the Consumer Federation of America, Travis Plunkett says in a news release that the bill's passage is a big win for consumers: "The consumer bureau will ensure that credit and payment products do not have predatory or deceptive features that can harm consumers or lock them into unaffordable loans," he says, adding: "It will also allow consumers to shop or take out a loan knowing that there is an agency looking out for their best interests."
I wish I could read that without scoffing.