[courtesy of California Progress Report]

By Ted Lieu
Chair
California State Assembly Banking and Finance Committee

The roots of the worst home foreclosure crisis in American history can be traced directly to the Federal Reserve’s lax regulatory regime during the last few years. Apparently the Federal Reserve still has not learned its lesson when today it promulgated reforms that will do little to stem a crisis of this magnitude from repeating.

The Federal Reserve utterly failed to ban yield spread premiums, also known as broker kickbacks, which allows mortgage brokers to receive incentives to place people in higher interest, riskier loans even though the borrower qualified for a lower interest, prime loan. Two respected studies have shown that between 55% to 61% of all subprime borrowers had actually qualified for prime loans.

Instead of banning such kickbacks, the Federal Reserve merely required disclosure. However, in states across the nation and particularly in California, there is zero emphasis on financial literacy and most people fail financial literacy tests. As a result, the disclosures will largely be meaningless and do nothing to prevent brokers from being financially rewarded by placing people in higher interest loans that are unsuitable for them.