With legislation on the horizon, it's time for brokers to demand more accountability

John Long, attorney

As published in Scotsman Guide's Residential Edition, December 2005.

An alarm is sounding in the mortgage-broker industry. Brokers are attempting to avoid or mitigate losses resulting from regulatory audits and civil actions because of inadequate quality controls and accountability.

Few mortgage-brokerage executives recognize the impact of the enormous losses that American homeowners are sustaining from abusive lending practices. U.S. Rep. Emanuel Cleaver (D-Mo.) told a U.S. House of Representatives subcommittee that predatory mortgage lending costs Americans more than $9.1 billion annually. The impact on state and federal politicians and regulators is evident in tougher laws and massive enforcement efforts directed at mortgage brokers.

Mortgage brokers generate most residential loans in America, and the industry is primarily composed of small businesses that are loosely organized and greatly overpowered by the banking industry's influence. It is no wonder that mortgage brokers are singled out as a problem and confronted on all fronts. They are facing civil suits by borrowers, regulatory examinations that scrutinize every aspect of a loan and wholesale lenders' buyback demands under wholesale-contract-warranty clauses that relieve lenders of much responsibility.

Whether or not this is justified is academic. The reality is that mortgage brokers are at the center of the perceived problems that lead to lending abuses, and they will face increased supervision and accountability. To survive, brokers must prepare immediately.

Background on reform

Mortgage-lending-industry reform efforts have been around for years. In the late 1990s, class action suits alleged that yield-spread premiums were a form of illegal kickbacks, which violated Section 8B of the Real Estate Settlement Procedures Act (RESPA). These suits created concerns nationwide about lending practices. The industry faced catastrophic liability until October 2001, when the Department of Housing and Urban Development (HUD) issued its "RESPA Statement of Policy 2001-1." This clarified HUD's position on lender payments to mortgage brokers.

Although the HUD action momentarily took the steam out of class action suits, the need for reform remained in the national spotlight. It seemed that no political body could resist looking at mortgage-lending practices. The call to action quickly centered on the term "predatory lending."

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