NAR joins effort against unfair, deceptive lending

The financial markets are struggling with the results of abusive lending practices in the subprime market, including the collapse of several investment funds and the failure of more than 100 subprime lenders, noted the National Association of REALTORS® in a letter to the Federal Reserve System Board of Governors.

NAR urged the Board, based on the authority given to it by the Home Ownership and Equity Protection Act of 1994 (HOEPA), to adopt regulations that combat unfair, deceptive and abusive mortgage lending acts and practices. “A rule has the potential to reassure investors and borrowers and could help mitigate overreactions that could deny mortgage loans to families who are willing and able to meet their obligations,” said NAR President Pat V. Combs, vice president of Coldwell Banker-AJS-Schmidt in Grand Rapids, Mich.

Earlier this year, NAR released its enhanced Responsible Lending Principles and has consistently encouraged federal banking agencies and their state counterparts to address abusive practices. “The Fed must act responsibly to protect consumers, and NAR pledges its support,” Combs said.

“We champion the principle that all mortgage originators should act in ‘good faith and with fair dealings’ in all transactions, just as REALTORS® are required by NAR’s Code of Ethics to treat all parties in the transaction honestly.”

NAR asked the Fed to eliminate prepayment penalties for all categories of mortgages, and if that is not feasible, to bar prepayment penalties for subprime mortgages and other mortgages where abuses are found.

“Borrowers and their families are often trapped in abusive loans when they can’t afford to refinance because of high prepayment penalties. Too often they do not understand that a loan with a prepayment penalty, which is supposedly saving them money, may actually turn around and haunt them when they try to refinance,” said Combs.

Asks that Subprime Lenders Mandate Escrow Reserve

NAR urged the Board to require that subprime lenders mandate an escrow reserve for taxes and insurance. “This again will protect borrowers from large payments they can’t afford and help insure they understand the total cost of their monthly mortgage,” Combs said.

NAR also believes that “stated income” or “low-doc” subprime loans should only be used sparingly and carefully in cases where there are mitigating factors. NAR called on the Board to establish and implement strong underwriting standards that would require all mortgage originators, not just subprime lenders, to verify a borrower’s ability to repay the loan. “Lenders should have the flexibility to consider all relevant facts, including a borrower’s income, credit history, future income potential and other life circumstances,” said Combs.

NAR issued the following additional recommendations: adopt anti-mortgage flipping regulations that require lenders to verify that the new loan provides a significant benefit to the borrower; encourage lenders to use alternative credit histories for borrowers with little or no credit histories; require all institutional lenders to periodically report borrowers’ payment histories to at least three national credit bureaus; require lenders to offer borrowers mortgage choices with interest rates and fees that reflect the borrower’s credit risk; and, working with HUD, improve consumer mortgage disclosure under the Real Estate Settlement Procedures Act (RESPA).

“NAR believes that existing guidelines are not enough to protect consumers and is pleased that the Board has made the first step toward this rulemaking. However, we still believe that each state should retain the authority to adopt its own high standards. Fighting abusive lending is an important issue to REALTORS® . We not only want to help people achieve the dream of homeownership, we want to make sure they can continue to live it,” Combs said.