Transparency from lenders will help for now

When Congress begins debating whether to create the Consumer Financial Protection Agency that the Obama administration is recommending, I expect we will hear some familiar arguments.

Attempts to protect borrowers from confusing lending products — and from themselves — have been ongoing since well before the current credit-fueled economic crisis.

It’s hard to disagree with a plan to require more transparency in credit agreements. How many of us completely understand the mortgage documents we sign at closing?

Still, even with more transparency, we know some people will continue to take unwise risks no matter how strong the warning. After all, there are still many smokers in this country, even though it has been about 40 years since cigarette packages started warning the product could make you sick.

At Consumer Credit Counseling Service, we are experiencing demand for our services from people at every income level who are in financial trouble because they didn’t understand what they were getting into — and also from those who understood very well but took on more risk than they should have.

We see the latter every day in counseling sessions we conduct for people with a mortgage that started as an interest-only loan, but now has ballooned, as the contract specified, with principal added to the monthly payment.

Our counselors are also working with a lot of people who are struggling with the mortgage they used to purchase their first home. Often these buyers were encouraged by brokers and real estate agents’ advice that home appreciation was almost a given.

Many of these buyers come to us with a so-called 80/20-loan: They signed up for a first mortgage for 80 percent of their home’s value and a second mortgage for 20 percent on closing day, with no down payment. Plus, many of these first mortgages were adjustable-rate.

How many people who financed 100 percent of their home on those terms would have thought twice about their decision with a clear disclosure that their financial health was dependent on their home steadily appreciating in value?

Bankers are already saying that anticipated rules imposed by the proposed new agency could choke off the supply of credit to people who need it.

Proponents of a special consumer protection agency say they simply want to require clear disclosure of the costs of a loan, although the agency as proposed would also have the power to ban loan products it deems overly risky.

These points of view echo prior policy debates over access to credit versus consumer protection.

Look back a few years to the debate in the Georgia Legislature over so-called predatory lending laws.

For several months from fall 2002 to spring 2003, Georgia law required investors who bought mortgages in the secondary market to hold liability for any misconduct in the origination of the loan. In 2003, legislators removed that requirement, convinced the law was too restrictive and cutting off credit to those who needed it most.

Opinions vary as to whether Georgia legislators were right when they passed the predatory lending law, or later when they repealed it. One thing is clear, though: Since, we have experienced an unparalleled mortgage crisis and there has been plenty of blame to go around.

It is now up to Congress to decide how to assure that lenders are more transparent in their future marketing of risky products and that consumers think twice before they sign on the dotted line for expensive products they don’t understand.

Suzanne Boas is president of Consumer Credit Counseling Service of Greater Atlanta..