Monday, September 17, 2007

House Banking Committee to examine mortgage lending

cross-posted at Michigan Messenger

Legislators are taking on predatory lending in Michigan, but can they eliminate questionable practices that pervade the mortgage industry and laid the foundation for the subprime mortgage crisis? A house committee will hear testimony Tuesday from representatives of the agency that oversees mortgage regulation in Michigan.

House Banking and Financial Services Committee Chair, Rep. Andy Coulouris said, "Tuesday's hearing will lay the groundwork for the debate on how we deal with foreclosures and predatory lending practices in Michigan. We're going to get the lay of the land from state regulators. We want to know what is happening--what regulations are working or not working and what do we need to do to step up enforcement."

House Democrats announced late in August that they would be crafting new legislation to address predatory lending in Michigan. As part of that process, the House Banking and Financial Services Committee will hear testimony from Michigan's Office of Financial and Insurance Services (OFIS) Commissioner Linda Watters, Chief Deputy Commissioner Fran Wallace and Kirt Gundry, Director of Mortgage Examinations and Investigations.

OFIS's work is vast and its effectiveness frustrated by an insufficient number of examiners; unclear jurisdiction; and the lack of education standards, practice standards and licensing for loan officers. Industry standards are so lax you could be a janitor one day and a loan officer the next.

According to OFIS, there are over 3200 companies making mortgages in Michigan. OFIS has 13 full time examiners. Prior to last year, it had only 6.

Depending on a lender's corporate structure, OFIS may not have jurisdiction over an institution creating mortgages. This April, in Watters v. Wachovia the U.S. Supreme Court ruled that state-chartered subsidiaries of national banks are exempt from state regulation. OFIS Commissioner Watters had advocated for state regulation of state-chartered subsidiaries. Numerous organizations filed amicus briefs, as well as every state attorney general in the nation (including Washington D.C. and Puerto Rico). Unfortunately, for consumers, the Court ruled against the state.

OFIS licenses entities--companies or sole proprietors, usually LLCs or corporations, due to liability issues. Loan officers work for licensees; there are no standards for loan officers.

Many in the industry blame unscrupulous loan officers for pushing expensive mortgages onto unqualified borrowers. But companies share some of the blame having created incentives like "yield spread premiums" that reward loan officers for getting well qualified borrowers into unnecessarily expensive loans. As far back as 2004, the Center for Responsible Lending estimated that yield spread premiums cost borrowers $2.9 billion per year nationally.

With ample blame to go around, complicated laws and regulation in flux at the federal level, Michigan's lawmakers will need to take extra care crafting effective legislation to curb predatory lending.