CMPS Policy Statement on Mortgage Industry Reform (CA)

CMPS Institute has prepared the following comments in response to some of the proposed sub-prime and mortgage reform legislation that is being evaluated by the California Legislature. For further information and comments, please contact the CMPS professional whose contact info is listed at the bottom of this policy statement.

Prepayment penalties:

• Should not be banned outright as that would limit the choices available to consumers. Pre-payment penalties allow lenders to count on receiving a certain income stream for a period of time. This certainty reduces their interest rate risk and enables lenders to charge less in terms of interest rate and upfront points. Eliminating pre-payment penalties would drive up the upfront costs that consumers pay when getting a mortgage – either in terms of the initial mortgage rate or the points that consumers pay up front. Consumers are never forced to accept pre-payment penalties, and they can always choose loans without pre-payment penalties in exchange for higher interest rate or upfront costs. Eliminating prepayment penalties would reduce the choices available to home owners and buyers and force all consumers to accept higher interest rates and/or upfront costs.
• Requiring a pre-payment penalty to expire 6 months prior to a rate reset is an interesting idea that does have some merit. This proposal could bridge the gap and provide the necessary compromise of not completely eliminating pre-payment penalties but making the terms of the penalty more consumer-friendly.

Anti-steering provision:

• This will result in higher financing costs for home owners and buyers and unnecessarily complicate the way that loans are priced from the secondary market down to the loan originator. Mortgage brokers make their living through commissions they earn from the wholesale lenders to whom they broker loans. These commissions are called yield spread premiums (YSPs) and are in most cases fully consistent with the commission schedules that are used by bank loan officers. However, brokers tend to have more latitude than bank loan officers in pricing their loans. This can be very beneficial to consumers as brokers can sometimes be more flexible than bankers in terms of pricing out various point and interest rate scenarios on many loan programs. One loan program that would be virtually outlawed under this proposal would be the no-cost refinance where the broker uses their YSP to pay the borrower’s closing costs. The very clause that is intended to protect consumers would result in harming them and increasing their refinancing costs. Consumers should be able to choose among different loan programs and closing cost scenarios without government interference.
• Rather than imposing this onerous provision, it is a smarter strategy to require disclosure of all fees, commissions and other forms of remuneration received by the loan originator. Also, any duties imposed on mortgage brokers to disclose fees should also be imposed on mortgage bankers and lenders. If a broker is required to disclose that they make more income on Loan Option A vs. Loan Option B, a banker should also be required to disclose the same. Both brokers and bankers are paid commissions on the loans they originate and should therefore be held to the same standard of disclosure when it comes to fees, commissions and other forms of remuneration.

Restriction / Elimination of Stated Income Loans:

• This severely limits consumer choice and imposes unnecessary burdens on borrowers with fluctuating and/or multiple sources of income.
• Instead of restricting / eliminating stated income loans, a smarter alternative would be a requirement for:
  • Borrowers to sign an affidavit saying that the income stated on the loan application is their best representation of their income
  • Originators to sign an affidavit saying that they did not coerce or otherwise encourage the borrower to overstate their income for qualifying purposes
    • A violation of this clause by originators should result in fines and loss of their license to originate loans.

Elimination of Loans with Negative Amortization:

• This severely limits consumer choice – especially for borrowers with fluctuating sources of income. When used properly, Option ARMs are great financial tools for many borrowers who experience either temporary or ongoing cash flow fluctuations. These include:
  • Business owners
  • Individuals undergoing cash flow adjustments due to giving temporary or ongoing financial support to elderly parents
  • Individuals making cash flow adjustments during or after a divorce
  • Individuals making cash flow adjustments due a family illness or career change
• Instead of eliminating loans with negative amortization, loan originators should be prosecuted, fined and jailed for making false or misleading statements to borrowers about these products.

Fiduciary Standards

A fiduciary standard for mortgage originators or “net tangible benefit” requirements for mortgage loans are impractical for the most part and will result in costly and unnecessary litigation within the mortgage industry. Under what conditions can a borrower sue a broker? Who is to say that an interest only mortgage is more suitable for a borrower than a 15 yr mortgage or vice versa? Fiduciary requirements will result in unlimited legal liability for mortgage recommendations and would leave a borrower’s “best interest” to be determined by the court system.

Secondary market investors would refuse to buy and securitize loans, bankers would refuse to issue loans, and brokers would refuse to originate loans – all out of fear that the consumer will come back and say, “You shouldn’t have sold me the loan in the first place.”

It is smarter to hold both brokers and bankers liable for fraud and misrepresentations they make to consumers. This is where most of the sub-prime and other problems could have been avoided – the government should enforce anti-fraud rules with fines, license revocations and jail time for these common practices:

• Knowingly overstating income on loan applications (already a federal offense)
• Deceiving people into thinking their rates are fixed when in reality they are adjustable
• Deceiving people about their monthly payments

This can be enforced by having the state require mandatory education and certification for all loan originators (both bankers and brokers).

• The state would approve various private sector certification providers
• Certification providers would be charged with policing their members and reporting violations to the state
• The state would have the power to revoke licenses, levy fines and jail the violators

This simple process would effectively shift the cost of enforcement to the private sector while the state retains control of the standard-setting process by approving the certification providers. Borrowers would be left to choose which originator they want to work with based on the certifications, standards and financial philosophies to which the originator adheres. Consumers would remain in the driver’s seat and everyone avoids the expense and confusion of having courts and legislatures decide for consumers which financial strategies are most suitable for them.

About CMPS Institute

CMPS is a training, examination and certification program for mortgage originators. The CMPS Institute was formed as a joint effort by leaders in the mortgage and financial planning industries to raise professional standards among mortgage professionals and integrate sound financial planning advice into the mortgage process. The standards espoused by the Institute have been embraced by thousands of the top mortgage lending professionals in the country.