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Small borrowers, pot providers and gun dealers need more access to lending

By Jeff Lazerson

9/13/18

What I think: Last week’s column explained what Congress needs to do with Fan and Fred’s “guarantee fee” (which I call a pricing tax), the shell game some builders play with closing costs and design upgrades and my call for allowing five-year balloon payments for hard money loans.

This week is dedicated to four more consumer protections that Congress needs to act on.

1) Ten years ago to the month the mortgage crisis was in full meltdown when Lehman Brothers went belly up and Fannie Mae and Freddie Mac were put into U.S. government conservatorship. Can you think of anyone who went to prison for the housing implosion? Last December, I wrote a column explaining that the Consumer Financial Protection Bureau (mortgage police) could not cite a single case of a mortgage license getting yanked.

Congress should empower all industry regulators to ban bad actors, not just bad licensees or bad companies from the mortgage arena. Much of the egregious behavior was from industry executives who didn’t need a license to be in the business. And, if history is any indication, nobody is going to jail.

2) Dodd-Frank required lenders to charge the same regardless of loan type or loan size — a one-point compensation across the board, for example. It was to encourage fair lending.

One unintended consequence is small-loan borrowers get little attention or inexplicably get denied. Loan originators and their employers would rather get paid one point ($10,000) on a $1 million loan rather doing 10 loans for $100,000 for the same compensation.

The Urban Institute issued a paper in July pointing out the dramatic jump in credit denial rates for small mortgages last year.

Lenders should have more flexibility in determining their compensation. More small balance borrowers will receive loans if, for example, the lender can charge two points instead of one. And big balance borrowers will pay less when lenders can reduce their compensation to compete for their business.

Too many originators and their companies are currently discounting for larger loan sizes. They are no longer afraid of the mortgage police as enforcement of these equal-pricing Dodd-Frank requirements seems to be non-existent.

3) Banks, credit unions, government-sponsored enterprises like Fan-Fred, FHA and the VA, as well as the Small Business Administration should be viewed as utilities. No overlays. No discretion to blackball.

Any business that is legal under state or federal law should have access to these important institutions.

We can’t have legal, yet perhaps politically unpopular businesses getting banned by lenders just because the business might be a political hot potato like a gun dealer or the California marijuana industry.

4) The worst rule in the history of mortgage lending was the Home Valuation Code of Conduct that was rolled up into Dodd-Frank. It needs to be reversed.

Loan originators and mortgage lenders know best when it comes who are the top-tiered appraisers. They should be able to direct business to those best in class.

Todays’ blind round robin system gives equal work to undeserving appraisers, unfairly enriches appraisal management companies at the expense of consumers and appraisers and nullifies countless numbers of loan approvals because properties were unfairly low-balled in value.

Fannie and Freddie have very good data they can use as a pre-funding check and balance to guard against fraudulent or inflated appraisals.