Later Than Late: Fed’s Regulations on Subprime Mortgage

It is by now widely understood that the Federal Reserve remained passive as the subprime mortgage boom unfolded, even though a 1994 law gave it sweeping powers to regulate unfair and deceptive mortgage lending practices.  An editorial in yesterday’s New York Times, quoting Congressional testimony (pdf) by the Consumer Federation of America’s Travis Plunkett, cited the Fed’s inaction as one reason to support the Obama administration’s proposed Consumer Financial Protection Agency.

A detailed account of the Fed’s failures to regulate abusive mortgage lending – in spite of ample authority and multiple warnings – is provided on pages 5-12 of last week’s Congressional testimony (pdf) by Lauren Saunders of the National Consumer Law Center.  She notes that although the subprime mortgage industry imploded by mid-2007, the Fed did not circulate proposed regulations for public comment until December of that year, and that the final regulations were not issued until July 2008.

In fact, it’s even worse than that.  What is not well understood is that more than a year after they were issued in final form, these regulations still have not taken effect.  Mortgage lenders’ behavior will not be limited by the new rules until October 1, 2009.  But wait, there’s more – the rule that requires lenders to establish escrow accounts for subprime mortgage loans (for property tax and insurance payments) won’t kick in until six months after that, on April 1, 2010.

It’s a good thing that the subprime industry collapsed because of its own excesses – because as far as the Fed’s rules are concerned, even now there are no more restrictions in effect than there were during the industry’s heyday.

(Photo: Laura Padgett)