The recent crash and burn of the subprime and non-traditional mortgage loan industry continues to have a ripple effect throughout the state and U.S. economy. And on a personal level, it has left many homeowners holding foreclosure notices and broken dreams.
In an effort to right the industry’s woes, the American Association of Residential Mortgage Regulators (AARMR) and Conference of State Bank Supervisors (CSBS) in late July issued model guidelines for use by state mortgage regulators for the examination of lenders and brokers that offer subprime and non-traditional mortgage loans to consumers.
The Mississippi Department of Banking and Consumer Finance (MDBCF) is a member of both associations, and August 1, MDBCF Commissioner John S. Allison announced his intent to incorporate these guidelines into current state examination procedures.
“The new guidelines look at things that we already address in the current examination process. They are just more in depth,” Allison says. “The Mississippi Mortgage Protection Act has been in place for some six years now. The new guidelines are just more definitive.”
Protection and uniformity
Allison says the model guidelines are designed to enhance consumer protection by providing state regulators with a uniform set of tools for conducting examinations under both the Nontraditional Mortgage Product Risks Guidance released in 2006 and the Subprime Statement, which was released last month, both adopted by MDBCF.
In addition to consumer protection, the guidelines were developed to establish uniform standards applicable for multi-state examinations and enforcement or for review by one state of another state’s report of examination. Allison says this is important since some subprime and non-traditional lenders operate in multiple states. Uniformity of guidelines and examination procedures would eliminate what could be a bewildering and confusing situation of trying to keep up with examination guidelines from state to state.
The guidelines’ development was also aimed at providing consistent and uniform standards for use by lender and broker in-house compliance and audit departments.
Allison says he was not sure how many states had incorporated the new guidelines and statement. But he predicts that eventually all the states would adopt the new standards.
In the coming weeks, the CSBS will conduct nationwide training for examiners in the state system to ensure uniformity and consistency in the approach to these complex products. MDBCF examiners will be among the trainees, and Allison says he expects the new guidelines to be fully incorporated into the licensure process in the fourth quarter of this year. However, he was quick to add that licensing would not be held up until the training is complete.
Over the past year, state regulators have followed federal bank regulators and adopted both the Nontraditional Mortgage Product Risks Guidance and the Subprime Statement. In July, state regulators announced a joint pilot project with the Federal Reserve and the Office of Thrift Supervision to collaboratively examine lenders where there is joint oversight.
State regulators, such as the MDBCF, have oversight authority over state-chartered entities. However, national and federal banks are outside its jurisdiction, and some entities such as savings associations are exempt under the Mississippi Mortgage Protection Act. The pilot project’s aim is to provide uniform guidelines across state- and non-state-regulated financial institutions.
This highlights concerns among state regulators of expanded federal oversight. Allison says there is some talk of creating a federal regulator to oversee all institutions. Allison says he is opposed to the idea.
He did say, however, that federal input would be welcome in other ways. He says he supports the federal government establishing some standardized definitions. What exactly is a subprime loan? What are some of the “misadventures” in this industry? He says then the states should be handed these definitions and let them regulate their own lenders and brokers. He compares this approach to the current Truth in Lending Act, a federal law that has been on the books since 1968 designed to protect consumers in credit transactions by requiring clear disclosure of key terms of the lending arrangement and all costs.
Allison is adamant that clear disclosure is a key to mopping up the mess in the subprime and non-traditional mortgage industry. He says that the woes can be attributed both to lenders/brokers and consumers. There are some unscrupulous brokers who purposely have misled borrowers, sometimes going as far as promising one type of loan only to offer a different type at signing.
Just as troubling, consumers can be shockingly ignorant of exactly the responsibility a mortgage carries. He says too often, prospective borrowers only hear “you’re approved.” Exuberance clouds sound decision making, and planning for tomorrow is ignored.
“My office has received, and continues to receive, phone calls from homeowners who can’t believe that they are facing foreclosure,” Allison says. “They didn’t know that if they don’t pay their loan, they will lose their home.”
Allison is advocating a one-page disclosure, minus the legalese, that discloses to the prospective borrower exactly what type loan he is applying for and his responsibility to meet the loan’s requirements. He says the current multiple-page disclosure document is too long and is not written in language the average consumer can digest.
He says this one-page disclosure could be presented to the borrower at the time of approval. This would be well before the loan’s closing, giving prospective borrowers the opportunity to ask questions and do their homework before signing.
Contact MBJ staff writer Wally Northway at firstname.lastname@example.org.