Texas Lawmakers Attempt to Counter Bad Credit Home Loan Difficulties

Rising foreclosures and the near-collapse of the Texas mortgage market to those with bad credit have triggered a flood of proposals from state lawmakers.

The suggested reforms range from requiring consumer education to making mortgage fraud easier to prosecute in a state that, according to RealtyTrac, had the fourth-highest rate of foreclosures in 2006.

Although the measures have the momentum of rising home loan defaults and worrisome news out of the subprime market, some still face resistance.

Much of the opposition is from mortgage brokers, those who help borrowers shop for loans, because many of the bills aim to change how they do business in the state. In recent years, mortgage brokers have been responsible for an increasing number of mortgages and today arrange more than 50 percent of loans, according to trade groups.

Lawmakers also are focusing on brokers instead of the banks that make the loans because the state can’t regulate all banks, because some are nationally chartered, state regulators said.

“Based on the bills that are currently in the hopper, it looks like there are some real proactive things being done,” said John Fleming, general counsel for the Texas Department of Savings and Mortgage Lending.

One of the more controversial proposals, House Bill 3762 by Rep. Norma Chavez, D-El Paso, would create a fiduciary duty for brokers toward borrowers, meaning they’d have to ensure any home purchase loan they offer is affordable and make an effort to see that the buyer’s getting the most favorable terms available.

If someone is home mortgage refinancing, the new loans would also have to have a net benefit for the borrower. The bill would force brokers to disclose the best loan terms they find after conducting a search and not, as consumer advocates complain, push the loan that pays the broker the most commission.

“People have been running to them for a long time thinking that’s the brokers’ job, and it wasn’t,” said Robert Doggett, an Austin attorney for the Texas Low-Income Housing Information Service. “Ultimately the broker who may have obtained a better loan for you doesn’t have to tell you about it. Brokers will say they just have to give you a fair deal, not the best deal. This bill changes that.”

The Texas Mortgage Brokers Association says it’s not that simple.

Brokers, the trade group says, should not be held to a higher standard than their competitors — bankers and mortgage bankers.

Brokers also have to comply with contracts they have with lenders, said Everett Ives of the Texas Association of Mortgage Brokers.

Once a home mortgage broker accepts, or “locks in,” a loan offer for a borrower, it triggers a trade on Wall Street. If a better offer comes along and the broker drops the initial lock, lenders will start to think the broker’s unreliable, Ives said, and that would hurt business.

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