Michael Calhoun, Center for Responsible Lending President Responds
The Federal Reserve Board (FRB) issued proposed rules that hold great promise for eliminating abusive and unfair practices that have become commonplace in the mortgage industry. If fully implemented, these rules could remove perverse incentives that now encourage mortgage brokers and lenders to routinely overcharge on mortgages, particularly higher-cost mortgages.
Under the proposed rules, brokers and loan officers could no longer get paid more for placing people in more expensive loans. Kickbacks-known as yield-spread premiums (YSPs)-would be completely banned. This measure would be significant in restoring fairness to home lending, particularly in communities of color, which were targeted disproportionately for expensive, wealth-draining YSPs.
In addition, the proposed rules would prohibit steering consumers into loans with a higher interest rate when they could qualify for a better loan. As with broker kickbacks, African Americans and other people of color bore the brunt of unfair steering practices.
The FRB's proposal indicated that it considered rules that fell short of an outright ban on these abusive practices, but concluded that half measures would not be effective. The Board also explicitly recognized that more consumer disclosures-more information added to the blizzard of closing papers-would not, by themselves, prevent abusive lending.
The FRB's proposed rules hold significant potential for relieving future home buyers of unfair overcharges, allowing them to apply for mortgages with greater confidence that they will get a fair deal. These rules also represent a potential victory for the American economy by helping to restore stability and confidence in the mortgage market.
We will submit comprehensive comments on the proposed rule, and we look forward to eliminating these abusive lending practices that have caused American families and our economy so much harm.