Truth in Government Lending Is Long Overdue
March 22, 2012
The federal government has taken over large swaths of consumer lending, most notably the $10 trillion home mortgage and $1 trillion student lending markets. The government's share of new loans for each now approaches 100 percent, says Edward Pinto, a resident fellow at the American Enterprise Institute.
The housing and education lobbies strongly favor government involvement in financial services. Their actions are based on two beliefs:
- That the government is able to charge lower rates for loans.
- That since the programs are designed to be self-sufficient, they pose no risk to the taxpayer.
If only this were true. Government insurance programs suffer from three fundamental flaws:
- The government cannot successfully price for risk.
- Government backing distorts prices, resource allocation and competition.
- Political pressure and congressional demands for a quid pro quo inevitably arise, politicizing the programs.
A twofold solution is needed.
First, government insurance programs must be restricted to being prudent providers of guaranteed financial services to low- and moderate-income Americans. These programs must end their promotion of high-risk behavior.
Second, consumers themselves must be protected from the lack of pricing transparency in government insurance programs. This lack of transparency is used to mask imprudent guarantees from credit applicants. The solution is to pass a Truth in Government Lending Act (TIGLA). Each consumer applying for a government guarantee would be given an easily understandable disclosure form within 72 hours of application and at closing. The document would explain the expected failure rate of individuals with risk characteristics similar to the applicant's.
Source: Edward J. Pinto, "Truth in Government Lending Is Long Overdue," Real Clear Markets, March 20, 2012.
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