'Goin' Round in Circles' . . . And Letting the Bad Loans Win - When Subprime Lending Fails Borrowers: The Need for Uniform Broker Regulation

Abstract

This Article provides a framework for regulating mortgage brokers. After introductory comments about the prevalence of this industry and its functional importance in today's consumer mortgage finance market, the article briefly explores the underlying structural framework of the mortgage broker industry. Explaining the market in which mortgage brokers make sub-prime loans as a largely unregulated one, it examines the economics of the mortgage loan transaction from the perspective of the borrower and concludes that lenders are comfortable with the reckless nature of sub-prime home lending. Next, the article examines the dual banking system and its attendant concern of federalism. It compares preemption, dual federalism and cooperative federalism, and concludes that cooperative federalism with its shared jurisdiction between state and federal governments offers the best solution. The Article then discusses the concept of fiduciary duty and concludes that imposing a fiduciary duty on mortgage brokers who make non-traditional loans is an appropriate goal to achieve through regulation. Finally, the Article outlines the scope of a duty under the shared regulatory approach.

Keywords: mortgage brokers, regulation, sub-prime loans, fiduciary duty, predatory lending

JEL Classification: K19, K29, K39