Lending a mess
Did the federal government bring the current financial mess and housing collapse on itself? As we all know, the primary impetus behind the credit crisis was the implosion of the housing industry – in particular, the defaulting of sub-prime loans and the evaporation of investment vehicles created by the loans.
Political leaders, being the political animals they are, have the comfort of ignoring hard facts and can get away with spewing dramatic rhetoric and blaming others for problems to make it look like they are taking a hard-nosed approach to get things done and clean things up. Take Barack Obama, for instance.
Yesterday, the freshman senator said this in regards to economic woes: “I will crack down on predatory lenders — who all too often target the African-American community, target the Hispanic community — with tough new penalties that treat mortgage fraud like the crime that it is.”
What Obama doesn’t mention is that non-discrimination rules may have contributed to the issuing of home loans (what Obama calls “predatory”) to people who were in no position to repay them.
Title 12 of the Code of Federal Regulations says in part: “A Federal credit union may not deny a real estate-related loan, nor may it discriminate in setting or exercising its rights pursuant to the terms or conditions of such a loan, nor may it discourage an application for such a loan, on the basis of the race, color, national origin, religion, sex, handicap, or familial status (having children under the age of 18).”
A high-minded goal, for sure, just as are many federal laws and regulations that are created with great intentions and zero consideration of consequences.
One consequence of non-discriminatory lending rules and pressure on lenders to make loans to low-income individuals just may be the mess we’ve experienced in the housing sector and the damage it has done in the financial sector.
So if Barack Obama (and John McCain, for that matter) want to avoid similar problems in the future, perhaps they should be talking about less regulation, rather than more. No one is advocating racism in lending practices. At the same time, lending institutions should not be afraid of racism accusations for turning away low-income customers for legitimate, financial reasons.