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I have to give Dodd credit. For the second time in two weeks he's doing some great work. First it was the credit card industry. Now it's the sub-prime lending market. It's about time Congress started to do something about some of the abuses that have taken place.

In his opening remarks, Dodd first started by mentioning not all sub-prime lending is bad. This is an important point because it is true. Companies that specialize in higher-risk borrowing are an important part of the economy. However, he next states into these facts:

* Over half of subprime mortgages are stated-income loans, loans which the industry often refers to as “liars loans.” The question is, who’s lying? According to a survey of over 2,000 mortgage brokers, 43% of brokers who make these loans do so because they know that their borrowers don’t have the income to qualify for the loan. Why do they make these loans? Because they are paid more to do so.

* Brokers “upsell” borrowers. That is, they put borrowers in loans with higher interest rates than they could otherwise qualify for, because the brokers make greater commissions, called “yield spread premiums,” by doing so. YSPs are a perfectly legitimate tool to provide borrowers with no closing cost loans. But HUD has told us that half of the YSPs paid, about $7.5 billion, do not go to closing costs, but go simply to increase broker profits.

* Minority borrowers are being targeted for higher cost subprime mortgages, regardless of their financial health. The 2005 Home Mortgage Disclosure Act (HMDA) data show that over half of African-American borrowers and 46% of Hispanic borrowers were given high cost subprime loans. By comparison, only 17% of whites took out such loans. Yet, according to the Federal Reserve, borrower-related characteristics such as income could explain only about 20% of this disturbing difference.

* About 70% of subprime loans have costly prepayment penalties that trap borrowers in high cost mortgages, mortgages that strip wealth rather than build it, and these penalties keep borrowers from shopping for a better deal. Unfortunately, living in a minority neighborhood puts a homeowner at significantly higher risk of having a prepayment penalty.

* Approximately 8 in 10 subprime loans today are 2/28 adjustable rate mortgages, mortgages whose monthly payments will spike up by as much as 30% to 50% or more. Many of the borrowers who take these loans – unaware of the payment shocks that await them – have no prospects of being able to make the higher payments, and are forced to refinance the loan, if they have sufficient equity to do so. Each refinance generates new fees for the lenders and brokers, and strips more equity from the homeowner. One lender, in discussions with my office, called subprime 2/28 loans “foreclosure loans.”

Let's take these points one at a time.

1.) Stated income loans: While some of the burden here clearly falls on the consumer who mis-represents his income, the fact that 43% of mortgage brokers know the borrower is not qualifies indicates these brokers are after commissions rather than providing the proper financial product for the person (and realizing that some people are simply not in a position to buy a home).

2.) Upselling: One of the basic problems here is that mortgage brokers are paid by commission, so they are looking to sell loans that make them the most money, regardless of the whether or not that product is appropriate. Again, here we have the self-interest of the broker trumping the borrowers needs.

3.) There is clearly a racial element in these statistics. 'Nuff said.

4.) Some homeowners want to try and pay off their loan as quickly as possible. This behavior should be encouraged. However, prepayment penalties prevent homeowners from doing this. Compounding this problem is that some of these loans are interest only loans -- meaning the borrower is only paying interest for a specific period of time. During this period of the loan is simply waiting to actually lower in total value as the entire outstanding principal balance remains. This is where prepayment penalties really hurt.

5.) The old adjustable rate loan. Again we're probably looking at a situation where the commission (broker's self-interest) trumped the buyers needs.

The short version of all this is simple: Business has had its way with the US economy for the last 12 years. While I am all for capitalism, there is a point where consumer interests have to come into play. It's refreshing to see that finally happening.