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New State Laws on Lending

New State Laws on Lending

Recent state legislation activity

January 3, 2008

By PATRICK CROWLEY

photo of Patrick Crowley
With the new year comes a rash of new state laws regulating the mortgage industry. Among those affected by the new laws are mortgage brokers, originators of nontraditional and subprime loans, and servicers.

In Nevada, state regulators are now required to draft regulations regarding nontraditional mortgage products. According to the legislation, those products include interest only loans, adjustable-rate loans, reverse mortgages and home equity lines-of-credit other than second mortgages.

“Anyone who has bought a home knows the complexity of the closing process with the huge number of documents to be signed,” Assemblyman David Parks, a Las Vegas Democrat, said in a statement. “It is critical that home buyers understand what they are signing — how much they will actually have to pay now and in the future and how those payments will impact the balance on their loan.

Parks said while federal guidelines have been implemented to require full disclosure of the conditions and qualifications of a nontraditional loan, they did not apply to state financial institutions until the passage of the new law.

“People who are considering a nontraditional loan should fully understand what they are getting into and the potential impact on their finances,” he said. “Those offering these loans must be required to fully disclose that information.”

Two other states — California and Colorado — have also enacted new laws dealing with so-called nontraditional mortgages.

In California, the law also requires that state regulators “enforce the new federal guidance on nontraditional mortgages and subprime loans,” according to a statement from the California Mortgage Association.

Nontraditional loans are defined in the law as “those which permit the deferral of principle or interest, including all interest-only mortgages and those with negative amortization.”

Subprime loans are defined as “adjustable-rate mortgages with the potential for ‘payment shock’, the so-called ‘hybrid ARMs'”, the association said.

The association said it is working with regulators to clarify which loan products are covered.

Under Colorado’s new law, mortgage brokers will not be permitted to provide loans to buyers who can’t afford the payments, according to a statement from Gov. Bill Ritter’s office.

Brokers must make a “reasonable inquiry into the borrower’s financial circumstances and use best efforts to obtain a mortgage loan taking those circumstances into account,” Ritter said in the statement.

The law “imposes on a mortgage broker a statutory duty of good faith and fair dealing toward a broker,” Ritter said.

The borrower should be able to afford the loan they are taking and not just buying the property to quickly flip it in another transaction.

Also, brokers must now be licensed in Colorado and must go through training, testing and continuing education, according to the legislation.

In Illinois, a new law allows homeowners and renters to stay in a property during foreclosure proceedings. Renters will be permitted to remain in the property for 120 days as long as they continue to pay rent, according to the new law.

And finally, a new mortgage law in Minnesota designed to crack down on fraud and foreclosures may be cutting some legitimate borrowers out of the market.

Last year Minnesota lawmakers passed a predatory lending bill that, according to state House backers, provided consumer protections by clamping “down on deceptive lending practices” and eliminating some subprime and nontraditional loans.

“We’ve simply applied common sense standards for Minnesota consumers regarding the underwriting and marketing of home loans,” Rep. Jim Davine, the chief author of the bill, said in a statement.

But mortgage brokers have raised concerns that some borrowers, including those that are self-employed, may have difficultly getting a mortgage loan because of the new law.

“We’re keeping an eye on the law,” Tim Bendel, president of the Minnesota Mortgage Association, told MortgageDaily.com. “We don’t want it to hurt the ability to own a home.”

Bendel said the law has its good points but the industry wants to make sure that the “truly self-employed” with excellent credit and money down can get a mortgage loan.

Because of the tough lending environment Bendel said it is difficult to determine if some legitimate borrowers are being turned down for loans.

“Nobody has been during business as usual compared to six or 12 months ago,” he said. “We don’t know if we are going to see a lot of problems because the volume is down. But we are monitoring the situation … and if brokers see a problem they are going to let us know about it.”

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