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Fighting Abusive Lending
by J. David Motley, EVP, Colonial National Mortgage
April 9, 2004
The Texas Mortgage Bankers Association is vehemently opposed to abusive lending practices. Bad actors, or the so-called "predatory lenders", hurt both consumers and the mortgage finance industry. Many states, and even cities, have sought to protect consumers from unscrupulous lenders through the adoption of anti-predatory lending legislation. These laws, while well intended, are ill conceived and often hurt the very consumers they seek to protect. The only way to truly eradicate predatory lending involves a four-pronged approach: consumer education, simplification of the mortgage process, vigorous enforcement of current laws, and uniformity of laws and regulations.
Predatory lending is, quite simply, fraud. It is a fraud of the worst sort because it preys most often on those who can least afford it. We have all read the horror stories about the impact that predatory lending has on the lives of their unfortunate victims. And, I can personally attest to the negative impact that these few bad actors have on the relationship of trust between the consumer and the mortgage lender. Further, as states move to enact protective legislation, the very functioning of the sub-prime market is threatened.
While we applaud our state legislators goal of ridding our state of unscrupulous lenders, we would like to offer a word of caution as they consider a spate of new laws. Many states have developed well intended laws that have resulted in unintended consequences. For example: "The North Carolina Anti-Predatory Lending Law" was intended to stop predatory lending practices without affecting credit availability to borrowers from traditional lenders. However, because of the many undefined terms, ambiguities and harsh penalties for violations (intended or unintended), credit options have been notably diminished for certain borrowers.
Any new state laws must realistically take into account the many residents who need non-prime loans, and the value of the mechanisms that make those funds available. Most legislation against terms of a mortgage loan will stop unethical lenders from abusing those specific terms if enforced, but it wont stop fraud. There are better solutions.
As I mentioned earlier, the MBA believes in a four-pronged approach to eradicating abusive lending. First, consumers need financial literacy education. Educational campaigns, such as the Mortgage Bankers Associations Stop Mortgage Fraud program (which can be accessed online at www.stopmortgagefraud.com), helps consumers protect themselves by informing them of their rights as consumers, helping them to identify unscrupulous practices and telling them where to go to report suspicious behavior. An educated consumer is the first line of defense against an unscrupulous lender or broker.
Second, the mortgage process must be simplified. Anyone who has bought a home can verify that closing on a mortgage is a very complicated and confusing process. Ive heard industry leaders, people who originate mortgage loans every day, complain about the difficulty of this process from the consumers side of the table. The many disclosures that the homebuyer is expected to read and sign were created to protect the consumer - yet without a cohesive, overall approach, they were piled on in way that has created an overwhelming stack of papers with unfamiliar legal language. Worst of all, in legal action against abusive lenders, the unscrupulous lender is often able to hide behind these signed disclosures.
Third, predatory lending is nothing more than fraud. There are many laws already on the books that make predatory lending illegal. So what is needed is full enforcement of existing laws.
While the financial industry believes that an integrated approach of consumer education, enforcement of existing laws and simplifying the mortgage process is what consumers need to eradicate unscrupulous lenders, we also believe that without one national consumer protection law the problem will never go away. The current patchwork quilt of state and local laws makes for a very complex, confusing and costly way of doing business. The hardship that differing state and local laws place on the real estate finance industry, which is national in scope, leads to increased compliance costs for the lender, and ultimately increased costs for the borrower. Worse yet, this situation creates an environment conducive for the bad actors to prey on consumers.
In short, arm the consumer through education, decrease the opportunities for fraud by simplifying the process, enforce current regulations to the fullest extent of the law, and ensure an efficient market through uniform, standardized and consistent laws.
J. David Motley is Executive Vice President of Colonial National Mortgage, a division of Fort Worth-based Colonial Savings, and serves on the board of directors of the Texas Mortgage Bankers Association. He can be reached at dave@colonialsavings.com.
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