Good Government Regulation

Let's all give a hearty hoo-rah for the Federal Reserve, which is expected to approve rules that protect homebuyers and investors from dishonest lenders. Give Mr. Bernanke the blue ribbon for being a day late and a dollar short.

The rules take two forms. One protects the borrower from the lender, and the other protects the lender from itself.

The Fed will likely announce a rule that will stop lenders from charging borrowers a penalty for early repayment. Only in America must a customer pay not to do business with a company. Think about how expensive it is to end a cell phone contract. Some cable companies also charge a fee to discontinue service. Why is that legal? If a customer owes money to a lender, and pays it early, the lender has no reason to complain. It has the capital to lend elsewhere. Charging prepayment penalties is a predatory practice. It used to be illegal and should have remained that way.

Lenders will have to ensure that borrowers pay their property taxes and insure their houses against loss. All lenders used to do this, knowing that the guaranteed price of a house sold at a tax auction was only the amount of the taxes owed on it, and that borrowers rarely made payments on a pile of ashes. These were not burdens to the lender; they were merely sound business practices.

The Fed also wants lenders to ensure that borrowers can pay back their loans before giving them the money. What kind of lender would fail to do so? Only a truly reckless lender would not see the need for borrowers to prove their ability to pay. With the advent of collateralized debt obligations, or CDOs, reckless has come to describe the loan-making frenzy. CDOs are bundles of mortgages sold as bonds to investors. A lender who no longer holds a mortgage also no longer holds the risk.