The legislation was drafted by Rep. Frank (D-MA) and Rep. Waters (D-CA) and the same list of consumer special interest groups that strong-armed lenders into creating subprime mortgages and that are now requiring mortgage lenders to restructure troubled mortgages doomed to default by approving loan to value ratios of up to 125% and discounts for preferred borrowers. The intention of the sponsors is obvious by now.  Affordable housing and consumer credit is a right; higher income consumers and investors will be forced to pay whatever it takes to provide this right.

If enacted, the proposal would provide a boost to home-buying and all consumption for several years until lenders again neared insolvency from a rise in unpaid loans and higher collection costs.  Taxpayers would again be asked to replace the lost capital as they have been in the past year. There is no free lunch.  If lenders are not permitted to charge higher fees to people who are more expensive to serve, the rest of us will have to pick up the fees that they are unable to collect.

The pending legislation would effectively, in a few years, establish uniform federally approved contract for all consumer financial transactions. Look at the contract forms that the federal housing finance agencies now use. Many are unprofitable for lenders to use without subsidies from Congress to cover the costs that they are prohibited from collection.  Freddie Mac, Fannie Mae, FHA and FDIC (mortgages inherited from failed banks) are all unable to cover their costs and will be returning to Congress of the FRB for additional capital.

In addition to income redistribution, the proposal is motivated by obvious abuses in lending practices that impact all consumers, even those who responsibly pay their debts. Many shady firms are basically in the “fee generating” business. They sell a product or service on credit, often a non-financial product, and then pile on huge fees related to the financial contract for late payments, lost statements, returned checks, contract revisions or early payment. Widespread disgust with this may be enough to support enacting the proposal. Unfortunately, there is no reason to believe that a new set of regulators will be quicker or more effective than the old ones in stopping abuses.

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