Can a lender and borrower have the same interests?

Implications: This WSJ article is a cogent summary of recent efforts by State legislatures to protect borrowers against subprime lenders.

If implemented, any one of these proposed laws will immediately cut-off a vital source of funding for subprime borrowers.

In addition, the statutes would generate a significant amount of business for class action lawyers.

Analysis: This article mentions that Iowa's Attorney General is proposing legislation that would require mortgage brokers to limit their loan origination to mortgages that are in the best interest of the borrower and not the Lender.  The inevitable consequences of such legislation would require lenders to offer their customers loans with rates lower than their costs of funds (since to do otherwise would be advantageous to the mortgage lender).  Profits would be eliminated and therefore mortgage lenders would stop making mortgage loans.  Where will the state's citizens obtain funding for a home purchase?  I'm assuming the State Government.

The current Truth in Lending Act is sufficient to protect any literate borrower.  It requires the lender to provide the borrower with a clear explanation of the terms of the loans, including the maximum monthly p&i payment, APR interest and the entire amount the borrower would have paid if he never refinanced (i.e. the amount over the entire 30 year duration of the loan).

Having said that, subprime lenders need to bear some responsibility for such a strong reaction.  Underwriting a hybrid ARM to the teaser rate (instead of the fully indexed rate) is creating a time bomb.  Essentially, such lenders were gambling that interest rates would fall and if they were wrong, the borrower would end up paying the price.

The issue of originating new loan products for subprime borrowers is an emotional one, which is why it is attracting so much attention from politicians. 

In order to accommodate the politicians, borrowers and markets concerns, all mortgage lenders which originated hybrid ARMs or Option ARMs without using a fully indexed rate to determine the borrower's ability to pay, should approach such borrowers and offer to put them into a new fixed rate product (provided the borrowers have been current).  Implementing such a proactive response will clearly take a lot of time and money -but not as much as having to exit an extremely profitable business - A guaranteed result if the proposed legislation is enacted.