How Can More Regulations Possibly Solve the Economic and Housing Crises?

With the government's overreaction to the financial crisis, there are thousands of pages of new regulations covering the investment banking, mortgage lending, loan servicing, student loan, credit card, and every other financial industry. All of these new rules will create more burdens on consumers, who will have to deal with even more confusing disclosures and higher costs of borrowing.

The lenders, of course, will just ignore these laws as they have all of the other regulations on the books. If they do not just ignore them, they will rely on the incomprehensibility of the laws to confuse loan applicants and keep them in a perpetual state of confusion about the lending process. Instead of dealing with borrowers on a rational level, these new laws will make the lending process even more difficult.

For instance, one of the most common calls to fix the crisis is to have more disclosure, as if the book-length package of disclosures homeowners receive when buying or refinancing is not enough paperwork. But new amendments to the Real Estate Settlement Procedures Act will allow third-party payments not to be disclosed at their actual cost. Instead, they may be disclosed at an average price. So much for transparency.

However, some of the new regulations allow for more statutory and other damages to be awarded to homeowners if lenders violate certain acts, as well as broadens the range of certain regulations. The Truth in Lending Act now applies to private student loans over $25,000. Previously, there was a TILA exemption to private student loans over $25,000. Student loans guaranteed by the federal government, however, are still exempt.

In terms of statutory damage issues relating to mortgage transactions, the Mortgage Disclosure Improvement Act amends the law to require more timely disclosures to borrowers. As of July 30, 2009, lenders must give good faith estimates of certain costs to borrowers within three business days of receiving a loan application. If disclosures are not made, courts may find the new laws will make it easier to grant statutory damages.

New laws are also in place relating to the loan servicing industry, which has always been plagued by crooked profit incentives that make it worthwhile to push homeowners into foreclosure. After October 1, 2009, servicers are prohibited from engaging in the following abuse tactics against borrowers:

• Failing to respond to payoff requests within a reasonable amount of time
• Pyramiding of late fees
• Failing to credit payments as of the date they are received

There are simply so many new laws coming into effect in the next year and a half that it is almost impossible to keep up. Homeowners facing foreclosure or attempting to apply for new credit lines will find even more burdens and higher costs, if they are able to qualify at all. And lenders will be passing along their higher costs of compliance to borrowers. Will any of these new laws change how banks operate? Probably not.

There has never been a shortage of regulations to put the brakes on bad lending or abuse practices by creditors. But the main problem has been the implicit guarantees that the federal government has given to companies that get huge by preying on people. With companies being bailed out as a result of failure, it makes economic sense to violate or ignore laws, and the new regulations do not change this.