by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
New Minnesota Attorney General, Lori Swanson, vows to put an end to predatory lending. She formed an 11-member task force to come up with proposals to curb the practice.
That sounds pretty good unless you don’t know how to define predatory lending. Arizona Governor, Janet Napolitano, pursued this fight back in 2000. She was Attorney General Napolitano then and proposed that Arizona adopt legislation that mirrored the North Carolina predatory lending bill. Napolitano had the good sense to listen to banking industry representatives before moving forward and was surprised with some of the things she didn’t know:
1- No “over equity loans”- VA loans are 103% value loans when a buyer purchases a home; that got cast aside as Arizona has a large military presence.
2- No negative amortization loans- three staff members had loans on their homes that were considered a violation of that guideline. They explained the usefulness of those loans as a financial planning tool.
3- No prepayment penalties- It was quickly realized that prepayment penalties reduce the overall costs of the loan and encouraged responsible home ownership by encouraging homeowners to view real estate as a long-term investment
4- No balloon payments- balloon payments can reduce the overall cost to the consumer and are now extendable with a good payment history.
This sounds like I’m an apologist for my industry; I’m not. There are some despicable originators in my industry who have taken advantage of consumers by:
1- “Steering” them in to more expensive first liens when refinancing for as little as $5,000 cash when a less-expensive second mortgage would have solved the problem.
2- Engaging in the practice of “flipping” loans through serial refinance transactions.
3- Encouraging borrowers to borrow more money they can afford.
4- Making loans to borrowers whom have not demonstrated an ability to repay the loan.
I wonder if legislation is really the answer to these problems facing our industry. I have repeatedly claimed that legislated loan guidelines stifle creative loan products that encourage homeownership and penalizes the 96% of the consumers who benefit from these loans. Borrowers make poor decisions, often against the advice of an originator. Prepayment penalties, negative amortization loans, stated income documentation requirements and over-equity loans are offerings that can reduce the overall borrowing costs to a responsible consumer.
Unfortunately, it is not politically advantageous to legislate personal responsibility. That, however, is an argument for a political or philosophical weblog. I’m just a purveyor of debt.
Dan Green says:
You lend nationally, Brian, so I am sure you are aware of Illinois House Bill 4050.
As I’ve been quoted many places by now, the law has its heart in the right place, but the execution is all wrong.
Just today, I wrote about a homeowner that is facing certain foreclosure just because of where he lives. You can read it at If not, check it out on my blog at http://www.themortgagereports.com/illinois_house_bill_4050/.
January 12, 2007 — 6:42 am
Brian Brady says:
Dan:
I was not aware of IL HB 4050 and thank you for pointing it out. We are afilaited with a fedreally-chartered institution and are exempt (which is unfair).
IL HB 4050 is silly legislation (as I read it on your weblog). The example of the under 500 client who’s house you were about to save shows that lenders will just back away from problem areas.
January 12, 2007 — 8:39 am
Mike Thoman says:
Dan,
Excellent coverage of this issue. I was marginally aware of the legislation, but had no idea on the details or it’s impact (I don’t live in or near Illinois).
It seems to me the core issue (for the mortgage industry) is the uncertainty of a clean title and resultant lack of a right to foreclose.
This is a perfect example of governments’ inability to effectively and properly regulate, even when well-intentioned. As much as I would hate my internet provider to slow my connection, your coverage of this bill, and other recent opions and information I’ve gleened from the web, make me strongly question the ability of Congress to legislate Net Neutrality.
Mike
January 12, 2007 — 9:50 am
NVmike says:
Certainly something needs to be done.
Lenders have not been forthcoming with any serious proposals to address the problem, so it’s only natural that legislators would be the next to get involved.
Will legislation fix the problem of predatory lending? Probably not. But, unless the industry itself does something, you can rest assured that legislation – perhaps even federal legislation – is in the future.
January 12, 2007 — 10:19 am
Dan Green says:
Believe it or not, federal oversight may be the right answer.
Today, every state is making its own mortgage lending laws and that adds tremendous compliance costs to end investors. Naturally, those costs get passed on to consumers at the wholesale level. Federal regulation would create new compliance issues, but at least it would be consistent.
I look at the NASD and I see a model that works. In order to operate as a securities dealer, a person must pass a series of challenging exams and a criminal background check.
The mortgage industry (and borrowers everywhere!) would benefit from a similar structure. The system would be rigid and self-policing and would inject confidence back into the business.
January 12, 2007 — 10:31 am
Brian Brady says:
Both NV Mike and Dan speak the truth:
1- Something should be done (however it’s not as drastic as most portray)
2- NASD-type licensing creates a license that really means something(in the consumer’s eyes). I can’t see the harm in a strong SRO for the mortgage industry.
January 12, 2007 — 11:01 am
Mike Thoman says:
Would NASD-type oversight preclude the bait and switch tactics that I see as too common in this industry?
I’ve been a victim of this in the past (and I do not consider myself an irresponsible consumer – I was young and trusting once, but no longer). The “good faith” estimate seems to lack good faith and is loosely an estimate. Often, the consumer also has little control or choice as a closing nears, unless they want to lose money, or worse. And switching lenders 5 days before closing IS going to cost you money.
If someone gets baited and switched today, what recourse do they have?
Mike (not affiliated, nor to be confused with, any other Mikes on this blog 😉
January 12, 2007 — 11:45 am
Brian Brady says:
Great question (independently affiliated) Mike !
That just plain sucks. If that loan was made within the past four years, you may have recourse under the Truth-In-Lending Act (TILA). If your loan was not disclosed properly, (as few are), tou may be entitled to all of the interest and all of the loan acquisition costs under TILA consumer protection.
TILA places a HUGE onus on the funding
My friend, Jeff Corbett, The X Broker,
http://www.thexbroker.com/xbroker2004/default.aspx
offers a consultation about TILA violations. I strongle urge you to call him.
January 12, 2007 — 12:25 pm
teresa boardman says:
It is against the law in Minnesota to impose pre-payment penalties for paying off a mortgage due to resale.
January 12, 2007 — 3:04 pm
Brian Brady says:
Teresa clarifies the Minnesota law for me about prpayment penalties. That’s a bummer for Minnesotans. Like New Mexicans, they have to pay a higher costs for the credit than say, an Oregonian. Oregon homeowners can choose to accept a prepayment penalty for a lower cost of credit.
January 12, 2007 — 6:26 pm
Jillayne Schlicke says:
An industry is far better off self-regulating ethical conduct rather than letting the government regulate for you. The mortgage lending industry will pay bigger fines and have to spend way more money on a host of expenses if they let the government oversee their conduct.
Why should taxpayer dollars be spent hunting down predatory lenders? The answer is simple: taxpayers shouldn’t have to do the job a billion dollar industry should do for itself.
Up to this point, self-regulation within the mortgage industry is non-existent.
The industry is at a historical crossroads: Step up and become more professional with higher standards of conduct and in doing so, increase your value to the consumer, OR keep things the same and leave consumers to view mortgage lenders the way they do now: right next to the porn spam and viagra spam. Unfortunately, even the awesome mortgage lenders get their reputation pulled down a notch the way things stand today.
January 13, 2007 — 9:24 pm
Brian Brady says:
Amen, Jillayne
January 14, 2007 — 1:51 am
Alan says:
The mortgage industry has demonstrated that it cannot responsibly handle creative financing options. I would support a solution that only allowed 30-year fixed mortgages on primary residences.
January 14, 2007 — 3:07 am
Jillayne Schlicke says:
Hi Brady. I hope I’m not sounding like I’m preaching, just sharing a well-researched opinion that I have been co-writing about for many years. Thank you for the encouragement.
Alan, Interesting insight. Here is how I would take your idea and modify it. What would you think about having individual loan originators being able to offer certain types of products if they passed a certain level of professionalism?
For example, securities deales have all kinds of advanced licenses they obtain or tests they can take in order to sell different types of products/services.
January 14, 2007 — 3:22 pm
Brian Brady says:
I don’t think Alan’s point was true critical analysis. A thirty-year fixed rate loan is the most expensive loan product out there. I think Alan was expressing the displeasure so many consumers feel towards the mortgage industry.
I spent six years as a securities broker prior to becoming an originator and can tell you that mortgage loans are far less complicated than securities analysis. An NASD type license requiring proficiency in all products would be helpful. It would have to be national and originate from the banking industry to have any teeth.
State licensing is just a revenue stream. The originator licensing by the states does not test competency.
January 14, 2007 — 7:02 pm
Toby says:
Brian,
Great post! I love the thought of “proving” your competency with a series of tests, but as you say it will be very tough battle to make it happen.
You’ve been included in the 7th Carnival of Real Estate Investing (http://www.delawareohrealestate.com/archives/221 ). Have a wonderful Monday!
Toby
January 15, 2007 — 5:17 am
Russ says:
Brian:
Great post. I definitely would favor some type of national licensing with teeth. I generally favor less government intervention, but the mortgage industry has shown that it is incapable of cleaning up its own house. The biggest concern is that any licensing is implemented with common sense and the input of those that know the business. Unfortunately, most of the new legislation that has been coming out is borderline idiotic. I think Ohio with SB185 has eclipsed Illinois’ HB4050 as the craziest new law.
I agree that something like NASD or requirements similar to CPAs would serve the industry and consumers well. However, it will probably never happen from within the industry. The bankers want legislation that only applies to brokers like YSP disclosure. The brokers want laissez faire. I am sure the mega lender telemarketing body shops with call centers won’t want anything that would prevent them from staffing up with 19 year old newbie LO’s either.
January 15, 2007 — 5:13 pm
Mike Thoman says:
Great comments. Thanks for the tip, Brian.
Whether or not the policing will come from within the industry or without, it WILL come. The internet has virtually assured that. Expanding transparency of the industry and improving education of the consumer will eventually paint the predators into a small corner. Or send them underground. They will never go away completely; there’s always the fraudsters and the thieves. But they are a dying breed, whether they know it or not.
It’s unfortunate that a lot of people (consumers) will get hurt (financially) along the way, but evolution is taking hold, and I’m watching for the dinosaurs to show up on the endangered species list.
Mike
January 16, 2007 — 10:09 am
Brian Brady says:
Good comments, Mike Thoman. I really have nothing else to add to it. The predators and thieves will be painted into a corner by transparency on the net
January 16, 2007 — 5:21 pm
Diane Cipa says:
Excellent post and discussion. I think you are all on the right track by focusing on a self-policing mechanism like the NASD. I’d like to see it broadened though to include real estate sales and title insurance.
It’s really one big industry, the business of real property conveyance.
We have plenty of laws and regulations but predators do not obey. See post In the hands of a predator.
http://radicaltitletalk.blogspot.com/2007/02/in-hands-of-predator.html
February 18, 2007 — 2:34 pm
Personal Injury Lawyer Warren Redlich says:
I appreciate your mention of steering and other genuinely predatory practices. One solution I don’t see mentioned in your post or the comments is to end federal preemption of state law claims that comes with the various federal laws that supposedly protect homeowners, such as the Truth In Lending Act, Fair Credit Reporting Act, and the Fair Debt Collection Practices Act. When the lenders really are predatory, they should be subject to punitive damages. I discuss this in more detail in a post on my blog about predatory lending.
March 10, 2007 — 10:18 pm