February 19, 2007
Iowa Attorney General Targets Sub-Prime Lenders
The Iowa Attorney General has issued the following news release:
Attorney General Tom Miller unveiled a package of legislative proposals aimed at predatory mortgage lending. He said the worst abuses tend to occur with "sub-prime" lenders, who provide mortgages to borrowers who have impaired credit, limited income, or other situations that prevent them from obtaining loans in the prime market.
The Iowa Division of Banking and Superintendent Tom Gronstal joined Miller in backing the proposed legislation.
"Predatory lending exploits consumers," Miller said. "We are trying to outlaw some questionable practices that cause consumers to pay too much and get trapped in high-cost loans. In the worst cases, consumers can’t make their loan payments, and they lose their homes."
Miller said he was concerned by increasing foreclosure rates in Iowa and around the nation. (Foreclosures in Iowa were up 64% in 2006 compared to 2005.) "This bill is about conduct - about reining-in bad practices we have seen. It will help root out the ‘bad actors’ who have harmed consumers and have unfairly gained market share at the expense of honest lenders. It will not ban any products, and it will not restrict consumers’ access to credit."
Miller led the nationwide, multi-state settlements with Household Finance and Ameriquest Mortgage Company which are resulting in $800 million in payments for consumers, including about $3.5 million to Iowans - the largest consumer restitution cases in Iowa history.
"We learned a lot in those cases about how borrowers can be short-changed," Miller said. "And we’ve learned a lot about how to protect borrowers from predatory mortgage lending."
Miller said the legislation tackles several problems, including:
* Risky loan products - especially loans with artificially low "teaser rates" that only apply for a short time. Lenders eager to make a loan may approve a loan based only on the borrower’s ability to pay the low teaser rate, and not the much higher monthly payment that soon kicks in.
* False "stated-income" loans - inducing borrowers to inflate their purported incomes and qualifying borrowers without verification of income. "We learned that stated-income loans are commonly called ‘liar loans’ in the industry," Miller said. "The problem is, they get people in over their heads with loans people can’t repay."
* Fraud and other deception - including things like forged signatures, altered bank statements, and re-dated documents.
* Mortgage broker abuses - selling inappropriate or unaffordable loans for their own benefit and at the expense of the borrower. (Mortgage brokers do not work for a particular lender and may claim that they are getting the best loan available for borrowers.)
"This is a crucial area crying for better consumer protection," Miller said. "A mortgage is the most important financial transaction most families will ever make - and predatory mortgage lending may be the worst form of consumer fraud because people often lose their homes," he said.
Details of Miller’s Proposals
To fight predatory lending, the Attorney General’s bill asks the Legislature to:
1. Fight unfair lending practices by lenders, mortgage bankers or mortgage brokers:
* "Flipping" consumers - refinancing their loan without a net tangible benefit.
* Advertising loan terms that are not available to a reasonable number of qualified applicants.
* Fabricating a consumer’s income to qualify the consumer for a loan.
* Misrepresenting a consumer’s credit rating or status.
* Promising to refinance a consumer at a later date on better terms (unless the promise is put in writing.)
* Imposing anti-free-market contract terms that make borrowers responsible for origination costs even if the loan does not close.
* Making loans without verifying the borrower’s ability to repay the loan.
2. Improve Standards for Mortgage Bankers and Mortgage Brokers. The bill specifies certain standards of conduct for mortgage bankers and mortgage brokers by requiring them to:
* Safeguard and account for the borrower’s money.
* Affirmatively disclose facts that materially affect the borrower’s rights and interests.
* Follow reasonable instructions from the borrower.
* For mortgage brokers, the proposal specifies additional requirements that mirror the representations already made by mortgage brokers, by requiring them to:
* Make reasonable efforts to comparison-shop for a loan that is reasonably advantageous to the borrower.
* Put the borrower in a loan that is in the borrower’s best interests.
3. Limit Discount Points: The bill builds on current Iowa law that makes it unlawful to impose discount points that do not buy down mortgage interest rates, by barring imposition of discount points in loans which include a "yield-spread premium." (A yield-spread premium is an amount of interest that is above the rate the borrower actually qualifies for. That difference is then paid in whole or in part to a mortgage broker as part of the compensation for the loan. Example: A borrower who qualifies for a 7% interest rate, but is charged 8%; the difference of 1% is the yield-spread premium.) It is inherently unfair to tell a consumer he or she is paying a discount point to buy down a loan interest rate when, in fact, the broker receives a yield-spread premium resulting in a higher interest rate for the consumer.
4. Establish a Mortgage Lending Fraud Prosecution Fund: The fund would be administered by the Attorney General for investigation and prosecution of frauds related to mortgage lending. The funding source would be a surcharge imposed by the county recorder at the time of recording of each mortgage. The recorder could retain up to 5% of the funds for administration costs, with the remainder being transmitted monthly to the State Treasurer for deposit into the fund. The funding would support personnel, expert witness fees, and other costs related to civil and criminal prosecutions of mortgage lending fraud.
5. Provide Remedies: Violations of the statute would be enforced by the Attorney General under the Consumer Fraud Act, and by the Iowa Division of Banking under its regulatory authority. Private remedies for consumers also are included in the bill.
Background on Trends in Mortgage Lending:
Miller said the mortgage lending market has undergone tremendous change in the last decade. What used to be a simple choice between a fixed-rate loan and an adjustable-rate loan has been replaced by an explosion of complex and risky products. While these new products have increased opportunities for borrowers, they have also greatly increased the opportunity for fraud.
The biggest change is the advent of the secondary market. Because mortgage loans are now bundled and sold as securities on Wall Street, lenders’ incentives have greatly changed. Selling the bundled mortgages as securities allows lenders to pass on to someone else the risks of a bad loan. Thus, lending standards have become much more lax.
The Household Finance and Ameriquest Mortgage Company Settlements:
Household: Miller was the lead attorney general in a nationwide case in which states alleged that Household International, Inc., misrepresented loan terms and failed to disclose key information to borrowers. In late 2002, Household agreed to pay $484 million in consumer restitution nationwide, the largest direct restitution amount ever in a state or federal consumer case. Checks totaling $1,511,142.98 were sent to 2,886 Iowa households as part of the state’s settlement
The states alleged Household charged far higher interest rates than promised, charged costly prepayment penalties, or deceived consumers about insurance policies. The states alleged that some consumers were trapped in costly loans by some of the practices.
Ameriquest Mortgage: Miller also led the group of state Attorneys General and financial regulators in the Ameriquest matter. Last year, Ameriquest agreed to pay $295 million to consumers and to make sweeping reforms of practices the states alleged amounted to predatory lending. The states alleged that Ameriquest employees deceived consumers as part of high-pressure tactics to sell mortgage refinances. Iowa consumers were estimated to be eligible for about $2 million in the settlement, the largest consumer restitution in state history.
The Hispanic National Mortgage Association (HNMA), a for-profit organization focused on increasing homeownership opportunities within the Hispanic market, and Deutsche Bank have launched a new national correspondent lending operation, HNMA Funding Company, which offers innovative loan programs for Hispanic and other immigrant borrowers.
There are only two economic reports worth watching this week that are likely to affect mortgage rates. Both of them are scheduled for release the same day, meaning we may see a relatively calm week for mortgage rates. The financial markets are closed tomorrow in observance of the President’s Day Holiday and will reopen Tuesday morning. You may find some lenders to be open for business tomorrow, but I would not expect to see new rates issued until Tuesday.
