Guest Post: Less choice for self-employed borrowers

Define "reasonable." That's the task put upon the legal teams of the nation's largest lenders in response to new legislation in Colorado. In an effort to curb the improper use of non-traditional mortgages (stated income, alternative documentation or no income verification programs) Colorado Senate Bill 07-216 was recently passed into law.

The law better defines many deceptive practices as a violation of the Colorado Consumer Protection Act. These practices include intentional flipping, transacting a loan with the knowledge there is no probability of repayment, or promoting a loan with no tangible benefit to the borrower. Overall, it's a sound reinforcement of what most would think was already law. However, one section has created a giant red flag for the nation's lenders, and may result in less choices for consumers...

12-61-904.5 - Section B - The duty to make a reasonable inquiry concerning the borrower's current and prospective income, existing debts and other obligations, and any other information known ... read it all here

The keyword is reasonable. Is asking the borrower to state their income reasonable? Does offering a no-doc loan that doesn't even ask for any income information a clear violation of this act?

The result is that some industry leaders have decided to eliminate many of their alternative documentation programs. This news might make some say, "It's about time." However, the lenders we are talking about include Wells Fargo, GMAC and other A-Paper, conforming loan providers. As these programs dry up, self-employed borrowers will be forced to seek out subprime lenders for their financing needs.

There is no doubt that stated-income loans have been terribly abused in the last few years. But their creation was for a legitimate class of borrowers, those who can't hide their tax deductions behind a W2. It’s disappointing to think these hard working people will have less buying power in thanks to it's the buyers, loan originators, real estate agents and lenders who abused these products for short-term gain. Whether or not the situation in Colorado becomes a trend or remains an anomaly will largely depend on the thoughtful wording of future legislation.

--Todd Carpenter - lenderama

All rights reserved. This content may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this content without permission is a violation of federal copyright law.