Who’s watching the henhouse?

From the Philly Inquirer:

States, feds must impose tighter lending standards

The Federal Reserve’s proposals last week to address deception and fraud in mortgage lending will all be for naught unless the states, the Fed, and other federal agencies tighten their enforcement of the lending rules.

Lending standards weakened sharply in 2005 and 2006 as home prices soared. Fraud and predatory lending were rampant in the subprime market, which served borrowers with the weakest credit histories.

Yet there wasn’t any federal sheriff. No one made sure that borrowers received complete and clear information from lenders so they would know what they were getting into – and that lenders checked to be sure borrowers would be able to handle the monthly payments. During the housing boom of the early 2000s, lenders were so anxious to write mortgages that information provided was sometimes misleading or fraudulent, and borrowers’ financial backgrounds weren’t verified.

At least eight federal agencies, including the Federal Reserve and even the FBI, have had some oversight responsibility for mortgage lending. Also, mortgage brokers and non-bank lenders are regulated at the state level.

“This does not change the current enforcement scheme,” a senior Fed official acknowledged when explaining the rules proposed by the Fed last week. He was one of a team of officials who briefed reporters on the condition that they not be identified by name.

But the status-quo enforcement is a problem, given the weak track record on self-regulation by industry and widely varied government enforcement.

“I think, with the subprime blowup, we’ve seen that markets aren’t good at governing themselves,” said Kurt Eggert, a law professor at Chapman University in Orange, Calif.

Eggert, who is finishing a three-year term on the Fed’s consumer advisory committee, credited Fed Chairman Ben S. Bernanke with recognizing the need for tighter enforcement rules. His predecessor, Alan Greenspan, did not.

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3 Responses to Who’s watching the henhouse?

  1. This is all about the money. Markets aren’t good at governing themselves because the people in those markets like to make extra money to buy themselves happiness and prosperity. The end result is exactly the opposite of the boom. Everyone knew that runaway mortgage lending would go bust sooner or later, but the lust for money was simply too great and the desire to beat out the Joneses on the part of the buyer was simply too great to put a damper on the illusion of wealth.

  2. Confused In NJ says:

    Dec. 27, 2007, 1:22AM
    Employers can cut benefits for retirees at 65
    AARP attacks new regulation as discriminatory

    New York Times

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    WASHINGTON — The Equal Employment Opportunity Commission said Wednesday that employers could reduce or eliminate health benefits for retirees when they turn 65 and become eligible for Medicare.

    The policy, set forth in a new regulation, allows employers to establish two classes of retirees, with more comprehensive benefits for those under 65 and more limited benefits — or none at all — for those older.

    More than 10 million retirees rely on employer-sponsored health plans as a primary source of coverage or as a supplement to Medicare, and Naomi C. Earp, the commission’s chairwoman, said, “This rule will help employers continue to voluntarily provide and maintain these critically important health benefits.”

    Premiums for employer-sponsored health insurance rose an average of 6.1 percent this year and have increased 78 percent since 2001, according to surveys by the Kaiser Family Foundation. Because of the rising cost of health care and the increased life expectancy of workers, the commission said, many employers refuse to provide retiree health benefits or even to negotiate on the issue.

    In general, the commission observed, employers are not required by federal law to provide health benefits to either active or retired workers.

    AARP angered by rule
    Dianna B. Johnston, a lawyer for the commission, said many employers and labor unions had told it that “if they had to provide identical benefits for retirees under 65 and over 65, they would just drop retiree health benefits altogether for both groups.”

    In a preamble to the new regulation, published Wednesday in the Federal Register, the commission said, “The final rule is not intended to encourage employers to eliminate any retiree health benefits they may currently provide.”

    But AARP and other advocates for older Americans attacked the rule. “This rule gives employers free rein to use age as a basis for reducing or eliminating health care benefits for retirees 65 and older,” said Christopher G. Mackaronis, a lawyer for AARP, which represents millions of people age 50 or above and which had sought in court to forestall the regulation’s adoption in final form. “Ten million people could be affected — adversely affected — by the rule.”

    The new policy creates an explicit exemption from age-discrimination laws for employers that scale back benefits of retirees 65 and over. Mackaronis asserted that the exemption was “in direct conflict” with the Age Discrimination in Employment Act of 1967.

    The commission, by contrast, said that under that law, it could establish “such reasonable exemptions” as it might find “necessary and proper in the public interest.” The 3rd U.S. Circuit Court of Appeals, in Philadelphia, upheld this claim in June, in the case filed by AARP, which has asked the Supreme Court to review the decision.

    In its ruling, the appeals court said, “We recognize with some dismay that the proposed exemption may allow employers to reduce health benefits to retirees over the age of 65 while maintaining greater benefits for younger retirees.” But the court said the commission had shown that the exemption was “a reasonable, necessary and proper exercise” of its authority.

    Under the new rule, employers may, if they choose, provide retiree health benefits “only to those retirees who are not yet eligible for Medicare.” Likewise, the rule says, retiree health benefits can be “altered, reduced or eliminated” when a retiree becomes eligible for Medicare.

    Further, employers will be able to reduce or eliminate health benefits provided to the spouse or dependents of a retired worker 65 or over, regardless of whether benefits for the retiree are changed.

    Shifting the cost
    Employers and some unions contend that retirees under 65 have a greater need for employer-sponsored health benefits because they are generally not Medicare-eligible. Large employers have often provided some health benefits to retirees 65 and older, to help cover costs not paid by Medicare. But employers have for years been trying to reduce retiree benefits or to shift more of the cost to retirees.

    Lawyers for the commission said the new Medicare drug benefit, now nearing the end of its second year, had strengthened the case for the regulation because it guaranteed that retirees 65 and older would have access to drug coverage. Younger retirees have no such guarantee, so employers may want to provide drug coverage to them in particular, the lawyers said.

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