Image via CrunchBaseNY Times Editorial - December 19, 2010The Federal Reserve has been rightly criticized for not protecting borrowers — and the economy — in the years before the financial crisis. Under the law, it had the power and the obligation to curb bad lending. It was warned, by Fed insiders and by consumer advocates, of lender recklessness. It still failed to act.
Now, the Fed has proposed a rule that could undermine an important borrower protection passed by Congress in 2008. Hasn’t anything been learned?
At issue are reverse mortgages, which let homeowners, starting at age 62, borrow against their home equity without monthly repayments. Instead, fees and interest are added to their balance, with the total repaid later, often by selling the home when the owner dies.
The 2008 law prohibited “cross selling,” in which lenders required reverse-mortgage borrowers to use some of the loan proceeds to buy other financial products, such as annuities or long-term care insurance policies, that in many instances made no sense for the borrowers. The Fed has proposed a much weaker prohibition that would allow lenders to sell financial products to reverse-mortgage borrowers as long as the purchase occurred at least 10 days after the loan was made.
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