Reform opponents love to bash the idea of a new Consumer Financial Protection Agency by blaming borrowers who signed up for loans they knew they couldn't afford -- it's their own fault, the saying goes. But it's clear that mortgage brokers, who often operate on commission, encouraged people to do just this, in part because many anticipated refinancing within a year or so. (And why not, since it had been working out that way?) This piece, from the ever-precious Dave Eggers empire, is worth reading in its entirety but also shows why the CFPA can protect both consumers and lenders by restricting certain kinds of loans and emphasizing sustainable lending:
When asked what would happen if the rate "adjusted" and the payments increased, borrowers like the Lipkins were told, "Oh, don't worry, by that time your property will have significantly appreciated. You can always refinance the loan and take money from the growing equity."
"We just did what the bank said to do," explained Natalie. "Our broker said, 'Here, sign this paper and you'll get the loan.' So we did. We wouldn't have qualified otherwise."
... On the stated-income loan, the bank claimed Carl was making $25,000 a month. In reality, Carl was netting a salary of $26,000—a year.
"But you knew it was a lie, right?" I asked. "So why do it?"
"You're right," Carl admitted. "I mean, I knew I wasn't making that much, but the broker said it would be no problem, that it was what everyone was doing. And they said it was the only way the bank would approve it, so I just trusted him and signed the paper. He said everything would be okay."
Most borrowers trust the expertise of their financial advisers because they aren't experts, and if these advisers have a financial interest in taking advantage of borrowers, they will. This is why we need an independent agency -- one that consolidates and streamlines seven different bureaucracies, by the way -- that will make clear rules about consumer lending and prevent fraud.
-- Tim Fernholz
