Colorado Mortgage Lenders Scale Back No-Doc Loans
A handful of Colorado mortgage lenders are scaling back the type of loans they provide to consumers through mortgage brokers, prompted by a regulatory change aimed at reining in unscrupulous brokers.
Some lenders operating in Colorado are no longer offering so-called no-documentation loans, which allow consumers to take on mortgages without having to provide extensive documentation proving their income levels.
Such loans are sometimes useful for the self-employed or people who generate much of their income through investments, but other people use the loans to qualify for Colorado mortgage options that are larger than they could normally obtain.
Mortgage lenders are financial entities that have enough capital to provide loans directly to consumers, while mortgage brokers act as intermediaries between lenders and consumers.
The move by the lenders is partly in response to Senate Bill 216, which made home mortgage brokers potentially liable for selling loans to people who might not be able to afford them. The law, which took effect July 1, requires brokers to “make a reasonable inquiry concerning the borrower’s current and prospective income” and to act with “good faith and fair dealing” when selling mortgages.
The bill was part of a comprehensive package of bills aimed at regulating the mortgage industry and stemming the state’s ongoing wave of foreclosures.
While the law at issue suggests that brokers, not the lenders, are liable if the loans violate that good-faith standard, some lenders have decided to pull back anyway on the use of no-documentation loans, industry officials said.
“The result of (SB 216) is that there is uncertainty on whether lenders can make these loans,” said Chris Holbert, president of the Colorado Mortgage Lenders Association. “We hope we can find a remedy next legislative session.”
Holbert noted that federally chartered financial institutions such as banks and credit unions still offer no-documentation loans, although some such financial entities have recently tightened lending standards in response to a shaky Colorado housing market and concerns about loan defaults.
He said some independently operated mortgage brokers are at a disadvantage, in part because the brokers cannot offer the array of mortgage products that some lenders can.
“It creates a market inequality,” Holbert said.
Hoping to allay concerns for home loan lenders, the Colorado Division of Real Estate on July 3 issued a statement indicating that lenders would not be held liable if brokers fail to make a reasonable effort to verify the borrower’s income.
In the statement, the division wrote that SB 216 “does not prohibit specific mortgage products or documentation types” and that it is the “responsibility of the mortgage broker to recommend appropriate products.”
Even so, some lenders remain concerned that they could become snarled in a lawsuit if they provide lending to brokers who sell no-documentation mortgage loans, but neglect to verify the borrower’s income, said Jim Lewis, president of Clarion Mortgage Capital Inc. in Denver.
Lewis said lenders must interpret the law on their own, even if that means missing out on business or limiting choices for consumers.
“Confusion causes paralysis,” said Lewis, whose mortgage lending company has scaled back the use of no-documentation loans. “There are still concerns for lenders, and that could impact the availability of credit and exclude certain borrowers.”
SOURCE: Denver Post