Legislators Consider More Oversight of Subprime Home Lenders

BY AARON CLARK
The Associated Press
April 26, 2007
Lawmakers are considering clamping down on subprime lenders who they say are trapping Oregon residents into making poor financial decisions that can keep them debt-ridden for years or force them into bankruptcy.
Regulators and industry representatives told members of the Business, Transportation and Workplace Development Committee on Wednesday that several bills under consideration would create more transparency for borrowers and promote long-term stability for the mortgage industry.
"The ability to buy and finance a home is critically important; it may be the single most important financial decision an Oregonian ever makes," said Cory Streisinger, the director of the state's Consumer and Business Services department. "Having good information and having lenders take some responsibility to make sure that the loan is suitable for that person -- that is very important."
Streisinger said many companies that issue subprime loans -- mortgages with high interest rates and fees, generally offered to high-risk borrowers -- have no incentive to ensure that borrowers can pay back the loan over the long term because they are paid on commission.
Regulators and consumer advocates said they want to stem loans in which a lender refinances an existing home loan but the borrower receives no net benefit. Moreover, they said that any legislation should ensure that lenders and brokers demonstrate a borrower's ability to pay back the loan.
Another practice that Streisinger identified as harmful to consumers is negative amortization, when lenders offer mortgage loans with such low payments that the principle balance of the loan increases over time.
Prohibitive fees also can trap unsuspecting borrowers.
Oregon is one of 22 states that has introduced legislation this year aimed at curbing subprime lending practices, which many economists say threaten to hurt the economy.
In recent months, high-risk mortgage lending practices have resulted in shocks in the housing market as dozens of mortgage companies have gone under and many others have laid off workers.
Although Wall Street has expressed concern that the blowup of companies that make higher-risk loans could spill into other industries, Treasury Department officials have said the current situation is manageable.
The crisis has been less pronounced in Oregon, where housing and land prices have continued to rise, albeit more slowly, protecting borrowers who took out subprime loans.
Fifteen percent of outstanding loans nationally, including those made decades ago, are subprime, but the comparable figure for Portland is 9.8 percent, according to First American LoanPerformance data from 2006.
In 2006, subprime loans accounted for 17 percent of new mortgages in Oregon, down from the 20 percent in each of the previous two years, according to the organization.