House bill targets subprime lending

A foreclosure sign hangs in front of a home in Miami.

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KAI RYSSDAL: Only in the world of international finance is a write down of $2.7 billion described as a tolerable loss. The British bank Barclay's clued us in to its subprime losses today. The aforementioned 2.7 billion. Barclays is just the latest to report losses due to the U.S. housing meltdown. Congress is doing its part to make sure the whole thing doesn't happen again. The House is set to vote today on a bill that would lay down some rules for lending.

Stacey Vanek-Smith has more.


STACEY VANEK-SMITH: Three years ago, Lucy Hadley was looking for a condo. She'd been saving up and the market was going gangbusters. But it wasn't easy to buy in super-expensive Los Angeles. Hadley had excellent credit, but her salary was on the low side, so her bank wouldn't offer her the roughly 400 grand she needed to buy a one-bedroom apartment.

LUCY HADLEY: I didn't owe any credit cards or anything, cause I'm kind of sticky about that kind of stuff. I couldn't understand why I couldn't get a loan.

So Hadley turned to a small, subprime lender. She says she started getting uncomfortable when she saw how the lender was trying to qualify her for the loan she wanted.

HADLEY: They find money that you don't even know you have. They looked at my savings, my 401K and all that. They include all of that and they consider that part of your income. And they would say stuff like, you know, you're in a prime area and property is going to keep going up and up and up, and you'll be building up equity.

The interest on Hadley's loan will soon triple to more than 11 percent, and her condo has gone down in value. Now Congress has introduced a bill aimed at the kind of practices that landed Hadley in this trouble. Democratic Congressman Melvin Watt says the House bill will help protect people from getting sucked into loans they can't afford.

MELVIN WATT: If we set rules of the road that apply at the federal level, basically what we've done is set a minimum standard that would apply across the board.

The House bill would make it illegal for lenders to reward brokers for giving out subprime loans, and require that borrowers meet minimum standards. It would also prevent things like prepayment penalties that punish people for paying loans back early. The thing is, a lot of the organizations doling out the shadiest loans were not banks, and they won't have to follow federal rules. David Lereah is the former chief economist for the National Association of Realtors.

DAVID LEREAH: It was the mortgage brokerage companies that were out there trying to sell a lot of these irresponsible type loans.

Still, Lereah says reigning in the banks will make a big difference. That's because there won't be many organizations left to buy up risky loans from lenders like Countrywide. Lereah says the bill is also an important feel-good measure. He says Wall Street is watching Capitol Hill, and Congress needs to act.

DAVID LEREAH: If there isn't any legislation, it's going to prolong the contraction that we're currently experiencing in real estate. So any type of legislation that's going in a positive direction for the real estate industry is good legislation at this juncture.

Meanwhile, homeowner Lucy Hadley needs to take out another loan to cover her new mortgage payments. But she's scared she'll end up in an even deeper hole.

HADLEY: I don't know how high my loan could go. I really don't. With all that paperwork, I don't understand. I know it's going to be difficult, so...

Hadley says she'll do everything she can not to foreclose. She doesn't want to lose the money she's already invested. The Center for Responsible Lending estimates Americans will lose more than $9 billion a year because of predatory mortgages.

In Los Angeles, I'm Stacey Vanek-Smith for Marketplace.

About the author

Stacey Vanek Smith is a senior reporter for Marketplace, where she covers banking, consumer finance, housing and advertising.

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