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Legislators consider bills to monitor mortgage broker disclosure
 

TALLAHASSEE – April 23, 2007 – Cynthia Cariseo said she trusted her mortgage broker to find her a suitable home loan.

But after a few months of making very low monthly payments, she looked closely at her statement and realized something was wrong.

“Instead of owing $202,000, I owed $206,000,” said Cariseo, 60. Cariseo learned she was stuck in an adjustable rate mortgage with a teaser rate that added more to her principal balance each month. Plus, the loan had a hefty refinance penalty.

“I was totally misinformed,” Cariseo said, “I would have never taken that kind of mortgage out. I’m not stupid.”

Lawmakers in Tallahassee are considering bills this session to prevent similar borrower misunderstandings and broker malpractice, as foreclosures increase statewide.

The measures would require a mortgage broker to more fully disclose the risks associated with adjustable rate mortgages, which often bring payment shock to homeowners when monthly payments unexpectedly rise. Part of this would be accomplished by supplying a borrower with a government pamphlet on the features and risks of such loans.

It also would require a mortgage broker to alert a prospective borrower when the loan terms originally quoted change within three days, or three days before closing.

Mortgage brokers, who match borrowers with lenders, originate more than 70 percent of U.S. home loans yet often are not subject to the same rules and regulations as traditional banks and other lenders.

The Office of Financial Regulation (OFR) initiated the legislation after receiving numerous complaints from borrowers about dubious dealings. Many have complained of their mortgages being switched at closing, said Andrea Moreland, legislative director for the OFR.

Profit revealed

If the bill passes, brokers would be required to also tell borrowers in advance how much they expect to earn from the lender.

Some consumer advocates said the measure does too little, too late for the thousands of homeowners like Cariseo and provides little real protection against the lending abuses responsible for today’s widespread homeowner troubles.

“Should disclosures be in more plain English and more timely, of course they should, but they aren’t going to get to the real problem,” said Uriah King, a policy associate for the Center For Responsible Lending based in Durham, N.C.

Federal disclosure requirements did little to keep people out of bad loans, nor will state disclosure requirements of brokers, King said.

Irrational methods

The heart of the problem lies in the way mortgage companies qualify borrowers for loans, he said. Many will approve a loan application based on the borrower’s ability to make initial monthly payments, which are sometimes less than a full interest payment.

Over the last year, for instance, Cariseo’s monthly payment on her option ARM has risen from $800 to about $1,975. The lender could have approved her based on her ability to pay $800.

In September, federal agencies, including the Federal Reserve, issued guidelines for federally chartered banks that offer nontraditional or “exotic” mortgages. They are now required to consider a borrower’s ability to make a fully adjusted payment.

Congress has also talked of mandating “suitability standards” for mortgage lenders similar to those in place for securities brokers. Generally, the mortgage banking industry has opposed the idea.

King pointed out that the federal guidelines apply only to federally chartered banks, not state banks or non-bank lenders like Ameriquest.

Several states are considering legislation that would require brokers and loan officers to make a reasonable attempt to match borrowers with appropriate mortgages.

A good start

Moreland defended the OFR’s bill as a good start and said it had a lot of very good consumer protections.

It gives the OFR the authority to enforce federal disclosure requirements and penalize anyone who violates the rules, something they did not have the power to do before, she said.

The bill was also amended to expand the powers of law enforcement officials to prosecute mortgage fraud.

“This is going to be an ongoing issue,” Moreland said, “This is not the end of legislation we’re going to consider.”

The House Policy and Budget Council will take up HB 1125 today, when the Senate version is also scheduled for debate.
 

Copyright © 2007 The Miami Herald, Monica Hatcher. Distributed by McClatchy-Tribune Business News.