Colorado Mortgage Brokers Under Increased Scrutiny

Colorado State Senator Chris Romer has been waiting two years for the mortgage industry to address what he calls the “insanity” of Colorado’s foreclosure crisis, the Denver Post reports.

Now, it’s his turn.

In the coming weeks, he and other members of the General Assembly are most likely going to do to the home loan business what the home loan business has not done to itself:

Clamp down on mortgage brokers.

The most telling sign that they must act was something Romer heard in last week’s roundtable session between legislators and lenders was this: “Third-party mortgage brokers have no fiduciary responsibility.”

Those fancy words mean the guy or gal arranging your home loan doesn’t have to make sure you can afford the home payments you’re about to incur. He or she doesn’t have to make sure you know what’s in the fine print.

When the folks who arrange a Colorado mortgage must also bear the financial responsibility if it fails, they behave a lot differently. With unlicensed third-party mortgage brokers setting up 70 percent of new home loans, said Romer, there is “a license for abuse.”

Others agree. While some industry representatives talked down the value of government regulation, the Legislature talked up the number of complaints of mortgage fraud received by the Colorado attorney general, state prosecutors and the FBI.

“The number of complaints suggest unscrupulous behavior,” said one state legislator, who cited The Denver Post’s ongoing series called “Foreclosing on the American Dream” for exposing mortgage lender and broker improprieties.

Ample evidence exists of the industry’s inability to police itself, and can be summed up by beyond the ample foreclosure filings in the state. Roughly 6,400 calls have been placed to a state foreclosure hotline since it was established in mid-October.

“I represent an area with the highest number of foreclosures in the city,” said Denver Council President Michael Hancock. “The highest growth in foreclosures is among the immigrant population. Some stories are horrific. Foreclosures have an unbelievable impact on the entire community.”

So the pleas of industry officials not to be subjected to more regulation and licensing of the home loans fueling the Colorado housing market will not fall on deaf ears. But they will be taken in context.

That context includes people dangling no-money-down loans, adjustable-rate or interest-only mortgage loans that don’t (or only) cover the interest, and puffed-up prices with kickbacks in front of folks desperate to realize the American dream.

Personal responsibility?

You’re preachin’ to the choir.

Buyer beware?

You betcha.

As Kathi Williams of the Colorado Division of Housing said so poignantly: “Not everyone is cut out to be a homeowner.”

At the same time, naivete, poverty or ignorance should not make people fair game for brokers, real estate agents, appraisers and bankers who exploit them to collect fees, then transfer the risk and misery to someone else.

The lending industry supports greater enforcement of existing laws. It supports letting the attorney general take civil action, as well as criminal action, against unscrupulous providers of Colorado home loans.

Enforcement is a good start. But as lawyer Jerry Stevens told the ongoing round table, criminal home loan fraud is very hard to prove, and if you can get a hearing for a civil case before 2012, count your blessings.

What it comes back to is regulation.