Predatory lendingAndrew Liput Esq.trend toward stated, no-doc and no-ratio loan restrictions
The trend toward stated, no-doc and no-ratio loan
It was inevitable that the recent sub-prime collapse would trigger
legislative hearings, investigations and the enactment of tighter
consumer protection laws relating to mortgage loans. The mantra in
the media has been that consumers were victimized by overzealous
lenders, brokers and loan officers, and convinced to enter ill
prepared into loan transactions.
There may be some merit in the argument that too many in our
industry were focused on profits rather than serving the personal
needs of borrowers. However, it is also true that borrowers were
only too eager to snatch up the lowest payment, lowest rate
products, regardless of repayment terms.
That is all in the past now. We can glimpse the future of our
industry in the statutory regulations emerging nationwide that are
requiring lenders, brokers and their employees to act more like
financial advisors to their borrower clients.
At hearing after hearing around the country and in Washington,
D.C., tragic stories were told of borrowers in dire financial
straights after entering into low-rate, quick-adjustment products
and "choose-your-payment" loans that suddenly saw greatly
accelerated interest and principal payments far beyond the initial
On June 14, Minnesota Attorney General Lori Swanson testified
before the Board of
Governors of the Federal Reserve about a "stacked deck" and
"lack of market discipline" as serious problems in the mortgage
industry in need of greater legislative requirements for consumer
protection. Recounting the recent boom mortgage years, the attorney
general opined that the recent sub-prime blowup was an inevitable
result of a lack of discipline by loan officers and brokers looking
to make money regardless of the personal needs and financial
situation of consumers. She also talked about the un-level playing
field between mortgage lenders and borrowers when the consumers
face incredibly complex financial transactions, usually for the
first time in their lives, with very little guidance and
understanding of the documents, the terms and all of the financial
consequences beyond the closing.
Statewide legislative initiatives have been pushed to the front
of the line by a shared understanding (articulated in media as
diverse as The Wall Street
Journal and consumer blogs on the Internet) that with many
Americans living daily with bad credit and little savings, they are
particularly susceptible to undisclosed and hidden fees and terms
(such as pre-payment penalties), bait-and-switch rates and unfair
manipulation by loan officers and brokers.
New consumer protection and predatory lending statutes are
springing up, most recently in Nevada (NV Rev. Stat. §
598D.100; AB 440) and Minnesota (Minn. Stat. Ch. 58; SF 988; HF
2004), creating an affirmative obligation to anyone involved in
originating a mortgage loan to first make a determination, using
commercially reasonable means, that a borrower has the financial
ability to repay his loan at the time of the closing. While there
was talk of prohibiting stated loans, no-doc loans and no-ratio
loans altogether, the actual legislation permits those products to
be sold to borrowers as long as the borrower's financial ability to
repay is still verified before closing.
The new restrictions, which I predict will be codified in most
states by the end of 2008, will add new obligations on loan
officers and brokers to stop and evaluate a consumer's ability to
pay and properly document it before proceeding with a loan. One of
the ambiguities with the legislation already in place lies in the
interpretation of just what type of "commercially reasonable"
action satisfies the statutory requirements. While some
commentators suggest that accessing independent records sources,
such as data found at Salary.com, is sufficient, others say that
nothing short of viewing and verifying bank records, pay stubs and
employment records will insulate a lender from possible liability
for post-closing defaults.
In offering guidance, Nevada has gone so far as to propose a
worksheet, certified by consumers and a lender representative, and
verifying the ability to pay has been discussed, investigated and
confirmed. The new document will be required to be maintained as a
record of compliance upon an audit.
Massachusetts, Rhode Island, New York, California and several
others states are considering similar amendments to existing
predatory lending or consumer protection statutes to address a
lender's obligation to verify the accuracy of a borrower's
financial information and his ability to afford a mortgage. This
trend suggests that stated-income, no-ratio and no-doc loan
products may indeed be on the endangered list. It may not be very
long before lenders, brokers and their employees evolve into the
type of personal financial consultants to their borrower clients
that one could find at the old Bailey Building and Loan, the
fictional savings and loan in the film "It's a Wonderful Life."
To many lawmakers, that is the type of personal service mortgage
professionals should have been performing for consumers all
Andrew Liput Esq. is senior managing attorney and president
Resolution Specialists Inc. He may be reached at (888) 424-3728
or e-mail email@example.com.