The Federal Reserve has issued new rules to end bad lending practices. The proposed rules:
- Improve financial disclosure to borrowers
- Restrict penalties for early payoff of loans
- Require lenders to escrow money for taxes & insurance
- Prohibit making loans without considering a borrowers ability to pay
Conspicuously absent from this list of reforms are two measures which in my mind underscore the crux of our banking problem. First, on the consumer side the reforms conveniently omit the banking trade practice of penalizing borrowers for late payments while simultaneously jacking-up their interest payments. It would seem obvious to the blind, deaf and dumb that such a practice only increases the probability of consumer default. Moreover, it would also seem completely obvious that if you want to mitigate defaults and actually HELP the consumer, prohibiting such predatory lending practices would at least in a small way, be beneficial to both the consumer and stated purpose of the Federal Reserve. Why not do this? It's too profitable and banks need the extra profits.
Secondly, and in my mind more incredulous, is the omission of any punitive element for those banks and mortgage lenders, and those who provide regulatory supervision and oversight, for defrauding final lenders--notably insurance companies, mortgage guarantors, Fannie Mae (FNM), Ginnie Mae, Freddie Mac (FRE) and the numerous foreign investors and sovereign governments. This problem has not be addressed because of the inherent conflict of interests at the Federal Reserve vis a vis their constituent banks. Where is GAO? Where is Congress? Where is the thinking press? Banking practices need reform as does the whole Federal Reserve system.