Predatory Legislating

Yaron Brook has an excellent article at titled “Predatory Legislating.” Here’s an excerpt:

After months of deliberating over what, if anything, to do about the large number of defaults in the subprime industry and the lax lending and borrowing standards that led to them—the House has passed its answer: The Mortgage Reform and Anti-Predatory Lending Act of 2007. But while this bill purports to foster a well-functioning mortgage-market in which borrowers get affordable loans, it attempts to do so by making life impossible for lenders.

The bill tells lenders they may not engage in the undefined practice of “predatory lending”—examples of which include vague offenses such as offering loans that are not “solely in the best interest of the consumer” or offering loans that a borrower does not have a “reasonable ability to repay.”

Since the bill offers no clear standard of a “reasonable ability to repay” or the “best interest of the consumer,” if it is passed, lenders could be held liable for any loan a borrower fails to pay off. All an irresponsible borrower or unscrupulous lawyer needs to do is convince a jury in hindsight that the lender should have known better—and he can cash in at the lender’s expense. To compound the injustice, the new law would apply, not only to those who initiate loans that fail, but to any financial institution that buys and pools loans made by others (a practice that makes possible better risk management and lower mortgage rates)….

Why is the knee-jerk response to the subprime defaults to blame business first? Because of the common belief that the cause of any and all economic problems is unrestrained profit-seeking by businessmen. Most Americans believe, on some level, that the profit motive is morally tainted, if not outright immoral; thus, the safest political response to subprime problems is to intimidate all businessmen in the mortgage industry with vague prohibitions and big punishments….

Read the whole thing.

Also, to understand why most American’s regard the profit motive as corrupt—and what must be done to correct that widespread error—read Dr. Brook’s article “The Morality of Moneylending” in the current issue of The Objective Standard.

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