Consumer Law

An Argument Against Legislation to Help Those Facing Foreclosure?

By Jeff Sovern

Each year the Business Lawyer provides a valuable service by publishing a survey on consumer financial services law.  In the introduction to this year's survey, Donald C. Lampe, Fred H. Miller, and Alvin C. Harrell, Introduction to the 2008 Annual Survey of Consumer Financial Services Law, 63 Bus. Lawyer 561, 568 (2008) (footnotes omitted): write as follows:

Solutions designed to prevent future problems by reducing the availability of credit to marginal borrowers may (in addition to affecting adversely those future borrowers) worsen the current plight of existing marginal borrowers who need to refinance their homes.  Direct relief for troubled borrowers, e.g., a foreclosure moratorium or expanded bankruptcy relief, may have the same effect.  To some extent this has already happened.  The tightening of mortgage law requirements and regulatory restrictions over the past few years in response to allegations of predatory lending have probably contributed to the dramatic increase in foreclosures by making it more difficult for troubled borrowers to refinance.  A significant further tightening of these restraints?we have heard the further tightening referred to as ?more robust regulation??may worsen the problem and increase the number of consumers facing foreclosure as a result.

My comment:  It is fair to say that measures that make it harder for lenders to collect when borrowers default are likely to increase the cost of future borrowing or even make it impossible for some to borrow in the future (which may or may not be a good thing), and that's an argument against such measures.  But I'm skeptical that adoption of such measures will make life harder for those already facing financial difficulties.  My understanding is that credit for those in such circumstances has already dried up and indeed, many in better circumstances are reportedly facing problems obtaining credit.  Consequently, legal restraints on unwise lending, limits on foreclosures and expansions of bankruptcy relief are unlikely to worsen the short-term problems of those in financial distress.  Such rule changes may be unwise for different reasons, but not because they will make the lives of those facing foreclosure worse in the short-term.

Full post as published by CL&P Blog on July 29, 2008 (boomark / email).