Last week, S.J. Quinney Law Professor Christopher Peterson met with U.S. Federal Reserve Board Governors Fredric Mishkin and Randall Krozner in Washington, D.C. to discuss reform of federal mortgage lendingregulations. Peterson was joined by four other law professors in briefing the Governors and their staff on how to prevent future subprime mortgage lending defaults and consumer abuses.
Currently the American mortgage lending system is in crisis,with millions of American families facing default and foreclosure from unaffordable loans. Nationally, a debate is underway about how to address the current crisis. The Federal Reserve Board of Governors is currently revising regulations that implement the Truth in Lending Act and the Home Ownership and Equity Protection Act — both statutes that govern home mortgage loans.
Professor Peterson joined Professors Alan White of Valparaiso University, Patricia McCoy from the University of Connecticut, Kathleen Engel of Cleveland State University, and Lauren Willis of Loyola of Los Angeles in briefing the Governors.
Peterson urged the Federal Reserve to adopt aggressive reform of how mortgage brokers are compensated. Currently, many mortgage brokers sell consumers loans with higher interest rates than the consumers qualify for based on the consumers’ credit history and income. Mortgage lenders agree to kick-back the proceeds of the higher interest rates to mortgage brokers in payments called “yield spread premiums.” “In effect,” explains Peterson, “millions of unsuspecting borrowers have been paying their mortgage brokers thousands of dollars in fees for the privilege of having higher interest rates.”
Current law requires disclosure of yield spread premiums.However, Peterson explains that the disclosure is buried in a pile of paperwork that virtually no consumers read or understand. “Besides,” says Peterson, “the concept of paying a fee so one can pay a higher price is so counterintuitive and misleading that most consumers don’t imagine that their brokers would do such a thing.”
Professor Peterson submitted draft regulations to theFederal Reserve Governors that would draw on their authority to define unfair and deceptive trade practices to prohibit yield spread premiums in subprimehome mortgages.