During the lending frenzy of the Millennium Boom, lenders aggressively solicited subprime borrowers unable to obtain conventional financing to accept adjustable rate mortgage (ARM) loans yielding high-interest rates. In the chaos, some loan brokers and unscrupulous mortgage bankers, also called warehousing lenders and wholesale lenders, arranged loans for subprime minority borrowers with higher loan fees than would be arranged for similarly qualified Caucasian subprime applicants. These brokered loans were then fed to other mortgage bankers, as well as commercial banks and thrifts. The lenders funding these defective loans then resold them in bulk to bankers on Wall Street. Wall Street bankers bundled the loans into mortgage-backed bonds (MBBs) for purchase by bond market investors.
As the loan passed from hand to hand, the logical question arose: could the lender who funded a loan packaged and originated by a corrupt mortgage banker or loan broker be liable for their improper conduct?
The United States Justice Department recently made an example of two mortgage banking subsidiaries of the Wall Street investment bank American International Group, Inc. (AIG). Due to a breach of fair lending laws in the arranging and packaging of mortgages they funded, the AIG subsidiaries must pay $6.1 million in restitutions to minority borrowers who were charged excessive loan fees. Both mortgage banking subsidiaries must also pay $1 million towards consumer financial education programs.
The moral of the story: whoever funds the loan is liable for defects in its origination. Mortgage bankers who aggregate loans must ensure the loans are compliant with fair lending laws, otherwise they will be left holding the bag. The hope is that forcing mortgage bankers to be more vigilant about fair housing practices of those who take loan applications, package the documentation and arrange loan terms and charges for the loans they eventually fund will result in less corruption.
However, the precedent set by the Justice Department has inevitably sparked great contention within the mortgage lending community which persists in claiming that mortgage bankers should not be liable for illegal acts performed by others prior to loan funding. The mortgage banking industry expresses fear that this precedent will make the large lenders who ultimately purchase loans, such as Wall Street bankers, unnecessarily paranoid and wary of dealing with loan originators, and thus decrease the number of players competing to make loans within the mortgage market – driving up fees for all who remain involved.
first tuesday take: Perhaps a quick review of how mortgage bankers function in the real estate market would be instructive.
The mortgage banker, who does not need a Department of Real Estate (DRE) license as does a real estate broker, is responsible for processing and reviewing all of the documentation in a loan package. Mortgage bankers have extensive lines of credit which they use to fund the loans transmitted to them by DRE-licensed loan brokers. Brokers are the primary source of the loans funded by mortgage bankers.
However, mortgage bankers are not the permanent lenders of these warehouse-funded loans and have no intention of holding the loan for the long term. Mortgage bankers conduct business by funding and collecting the loans fed to them by loan brokers (and those handled entirely in-house) and selling them in bulk to larger lenders for permanent funding. Typically, the loans are further disbursed into the MBB market, a process called securitization.
Essentially, mortgage bankers sandwich themselves between the originator of a loan (the broker) and the ultimate investor in the Wall Street bond market pool. Thus, mortgage bankers are primarily middlemen who are financially supported by another entity – the Wall Street banks or large lenders who end up purchasing the wholesaled loans, then bundle them for purchase by investors in the MBB market through securitization.
The above situation is precisely what Real Estate Settlement Procedures Act (RESPA) lenders sought to avoid under the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act. The SAFE Act is designed to reduce fraud and enhance consumer protection by pointing the “finger of blame” at loan brokers who solicit and funnel applications and loan packages to mortgage bankers, who must now register with the federal government. The parachute of the SAFE Act is not unfurling as expected, and the registration and endorsement of RESPA loan broker licensees and federal regulations for packaging loan applications has made all real estate brokers and agents the class of victims now tangled in the cords.
In re: “Obama administration adopts get-tough stance on mortgage bias,” from the Los Angeles Times
The SAFE ACT is unnecessary being involved in a real estate I have my DRE License and I do mortgage transactions. They have always been able to trace anyone involved in any mortgage origination transaction if they are licensed through the Department of Real Estate, also the loan origination application (1003) has an area of who is taking the application(Loan Officer).
the price for the SAFE ACT it starts at $500 to $600 if your a Mortgage Brokerage, Loan agents( $300 +60) and a yearly fee($60),
This is another way to charge everyone involved. I say everyone involved should be Licensed but through the DRE , it’s cheaper and it can be traced through Final HUD Settlement Statement.
There is a double charge now for DRE License agent also providing loan origination. Lets call what it is, it’s the Government setting up another entity that will cause more fees to self employed individuals who are already cutting cost.
Hmph. Interesting comments, interesting article. We used to call this “redlining,” and it has been illegal for many years–though technically, I suppose, “redlining” means the property & neighborhood rather than the borrower, and the refusal to lend rather than the charging of higher fees.
Although we were a hard money shop, we never did this. All folks got equal treatment with us. It’s interesting that in all of these wonderful laws, it’s the independent businessperson who gets targeted, and the large institutional lenders seem to always be able to escape–esp. if they are federally chartered banks or thrifts. I would like to see a level playing field for once, where every businessperson gets treated the same. It is probably too much to hope for, but I would like to think it can happen. Unfortunately, the banks have a great lobby, and the individual businessperson does not–can’t afford it.
I suppose the answer is for all of us is to march on Washington–that really worked for the Tea Party people.
In my 30 plus years in the business I have seen discrimination in the non-traditional sense. Of course no one is going to say they are not going to lend to someone because they are black or some other idiotic thing, they have become much more sophisticated. The term is now “disparate impact.” Disparate impact is a legal phrase used to describe when a facially neutral practice that has an unjustified adverse impact on members of a protected class.
As this article points out, I have seen lenders steer loan from various communities towards sub-prime or hybrid lending when the minority consumer could have qualified for a conventional loan. As a particular class of person, sometimes lenders/brokers preyed on them because they were blue collar workers with limited education but had great jobs and great credit scores. The lender/broker could make more money selling them an option arm than a fixed rate loan and they lacked the skill to see that they were being duped. Sorry, but in my view, discrimination is alive and well, just way more sophisticated in its approach.
I have NEVER IN 30yrs. seen any Discrimmination —Period
This is all allot of BS to minipulate the Public all to eager to blame anyone but THE FED-*&* New YORK
Bankers which refuse to be audited.
Thomas Jefferson said thru Inflation and Deflation the Bankers
would “ROB” the Americans of everything of Value and then ENSLAVE = Whether Black-White-Purple
People=You all will be enslave Happy Tidings , Mike