A trade group representing California mortgage brokers says the best way to protect consumers from the risks associated with nontraditional loans is to license all loan originators — and not place new restrictions on the loans themselves.
In a report released Thursday, the California Association of Mortgage Brokers argued that so-called “exotic” loans such as pay-option and interest-only mortgages are a useful tool for home buyers who might otherwise be priced out of the market. The loans have come under increased scrutiny from regulators and consumer groups because of their potential to default if interest rates rise or home prices don’t appreciate.
Instead of passing new restrictions on the use of the loans themselves, the CAMB report urges California lawmakers to close loopholes that allow loan originators who are not licensed mortgage brokers to pitch such products to consumers without licenses or criminal background checks.
Although some 485,000 mortgage brokers are licensed through the state Department of Real Estate, loan officers who originate loans for banks and investment firms work under the umbrella of about 115,000 licenses granted to their parent companies by the state Department of Corporations, the report said.
There may be as many as 1.2 million people originating loans in California, the CAMB report said, but there is no way of knowing because only mortgage brokers are required to obtain individual licenses. Corporations “can hire a loan originator right off the street and have them originating loans that day without any education, licensing or individual accountability,” the report said.
A spokesman for the California Mortgage Bankers Association, Dustin Hobbs, said that while bank loan officers aren’t individually licensed, the California Department of Corporations maintains strict oversight of their employers’ operations. Banks have a vested interest in employing well trained and ethical loan officers because they stand to lose money if the loans they approve don’t perform, Hobbs said.
“The suggestion that a mortgage bank could just take somebody off the street is just ridiculous,” Hobbs said. “It would be the same as American Airlines taking someone that has two hours of flight training and making them a pilot.”
The CAMB report argues that the use of unlicensed loan originators by Ameriquest Mortgage Co. — which in January agreed to a $325 million nationwide settlement stemming from allegations that its employees deceived borrowers and falsified loan documents — is an argument in favor of individual licensing.
Stepped up consumer education and enforcement of existing laws by state and federal officials is also needed, the group said.
“We can do what’s right for consumers until we are blue in the face, but it’s not going to do any good unless the bad guys are stopped, ” said CAMB board member Ed Smith Jr.
The call by mortgage brokers for state licensing of all loan originators comes at a time when consumer groups and regulators are urging lawmakers to place more restriction on the use of nontraditional mortgages.
On Sept. 29, federal bank regulators issued new guidelines tightening underwriting and disclosure standards for such loans. The guidelines tell banks to analyze a borrower’s ability to repay loans at the fully indexed rate, taking into account not only the initial loan amount but any additional balance that may accrue through negative amortization. Banks were also told to clearly disclose the potential for loan payments to increase over time.
Bankers have complained that the guidelines will create an uneven playing field in the mortgage lending business because they apply only to federally insured banks and not to state-licensed banks or other lenders.
Speaking to community bankers earlier this month, U.S. Comptroller of the Currency John C. Dugan agreed that the federal guidelines “can only be viewed as unfinished business,” and urged states to adopt similar policies for lenders they regulate. Dugan said it is “vital” for states not to water down the federal guidelines.
Nontraditional loans constituted about 30 percent of all mortgages nationwide in 2005, up from 2 percent in 2000, Dugan said in his Oct. 17 address in San Diego to the trade group America’s Community Bankers.
Although the CAMB report does not address the issue of the federal guidelines directly, the group is opposed to restrictions on nontraditional mortgages.
“CAMB strongly believes that focusing on the actions and integrity of individual loan originators and not loan products is the best solution to curbing abusive lending practices and increasing consumer protection,” the report said.
Speaking to reporters in a conference call Thursday, CAMB Government Affairs Chairman Michael Faust said before California lawmakers consider new restrictions on loans — such as the guidelines issued by federal regulators — the state’s first step should be to license all loan originators and step up efforts to educate consumers.
“We would disagree that there is an unlevel playing field,” Faust said, noting that mortgage brokers often work with federally insured banks such as Wells Fargo.
Faust said it’s up to lawmakers to decide the specifics of how to license all loan originators, such as whether the task will be handled by the Department of Real Estate, the Department of Corporations, or both.
No legislation has yet been introduced to further CAMB’s goals, but one state lawmaker who introduced a placeholder bill earlier this year that was to address licensing of mortgage lenders is sympathetic to the CAMB’s stand against new restrictions on exotic mortgages.
“We want to establish that those who work in the mortgage industry are qualified and follow standard ethical practices,” Assemblywoman Mimi Walters, R-Oceanside, said in a statement. “Rather than singling out specific mortgage products for increased bureaucratic intervention and regulation, it would be preferable to focus on consumer education in order to ensure an informed mortgage loan decision.”
In the last five years, the CAMB report said, housing prices have risen to the point where only 14 percent of California families can afford the median-priced home. But the rate of home ownership actually rose over that period, from 57.1 percent in 2000 to 59.7 percent in 2005, largely because of an increase in the use of nontraditional mortgages, the report said.