April 2, 2007
COMMENTARY: Won't get fooled again | Why Maine bankers are calling for more regulation of non-bank mortgage lenders
By Chris Pinkham, President
Maine Association of Community Banks, Portland
Maine's banking industry has one common standard: banks are part of their communities, and they're here for the long haul. They aren't likely to abandon the state and its consumers, because it is Maine's consumers and Maine's businesses that boost local economic development ˆ including the housing market.
That's just part of the reason why Maine banks do not make predatory housing loans. This month, financial headlines nationwide have been dominated by news of predatory practices by some sub-prime lenders, and the impact those practices have had on the secondary mortgage market ˆ the banking equivalent of March Madness. Now consumers and elected officials are focused on understanding the difference between sub-prime lending and predatory lending.
For several years now, Maine bankers have been frustrated by the types of loans being made by non-bank lenders ˆ simply put, bankers were losing market share. Banks would deny a customer a mortgage loan because, by industry standards, the customer could not afford the loan; within days, though, the customer would call the bank to let them know they got the loan from the "supervised lender" down the street. Most people think of a "supervised lender" as a regulated financial institution, but that's not true. A "supervised lender" can be anyone not associated with a financial institution but licensed by Maine's Office of Consumer Credit Regulation. So are the "supervised lenders" to blame for the predatory lending that's gone on in Maine? Most are very careful to help consumers successfully finance their home, but others aren't so careful.
The American dream is to own a home, but a lot of Mainers don't have the incomes that would qualify them for a conventional mortgage, or a loan through the Maine State Housing Authority. So they find lenders who offer mortgage products to fit their needs. Thus the birth of negative amortized loans, no-income-verification loans, 2-28 loans, no-down-payment loans and more. All of these loans are risky, by design, and lenders attach a higher interest rate and points to these products. However, some unscrupulous lenders take advantage of the opportunity to gouge consumers with excessive fees and points. So are these exotic mortgages the reason for predatory lending? No, but they did create an opportunity for lightly regulated lenders to take advantage of consumers in Maine and across the country.
Maine banks believe that solving the problem of predatory lending can be achieved by limiting exotic mortgages to only those who truly qualify, insuring that all lenders abide by the same disclosures and underwriting standards, and creating an examination program for "supervised lenders" in Maine ˆ oversight similar to the examinations that banks and credit unions are subject to. But it's a tricky balance; too little change will bring about a continuation of marketing of these products, while too much regulation may dry up credit for a significant group of borrowers. Neither situation will benefit the local economy or the financial institutions that fund the economic engine of our state.
In Maine, House Speaker Glenn Cummings joined State Senator Dana Dow last summer to announce a joint effort to address growing concerns that predatory activity was rampant in Maine. While the speaker has acknowledged that Maine banks are not in the business of predatory lending, he has sought the opinions of bank lenders, advocates and consumers to create legislation that lawmakers will consider this spring. Also, Congress has begun the process of determining if federal regulators failed to protect consumers from unscrupulous non-bank mortgage lenders. They have challenged Alan Greenspan, former chair of the Federal Reserve, for encouraging alternatives to fixed-rate mortgages, and they have criticized federal regulators for lax examinations and the late arrival of regulatory "guidance" on exotic mortgages. Federal legislation is viewed by many as likely.
Is this too little, too late for consumers? For some, yes. For others, the state has an outreach staff to help consumers who have been wronged during the lending process. The Office of Consumer Credit Protection, which regulates all "supervised lenders," is an excellent resource for consumers. Some situations may be compounded by debt consolidation or lifestyle and income changes, but many losses incurred through predatory loans may be recoverable.
Our state is fortunate to have many qualified lenders in our banks, credit unions, mortgage banking and mortgage broker firms. However, with tougher examination guidelines for "supervised lenders" and comprehensive legislation to adequately address predatory practices, Maine will be better prepared to deal with unscrupulous lenders in the future.
Maine's banking industry has one common standard: banks are part of their communities, and they're here for the long haul. They aren't likely to abandon the state and its consumers, because it is Maine's consumers and Maine's businesses that boost local economic development ˆ including the housing market.
That's just part of the reason why Maine banks do not make predatory housing loans. This month, financial headlines nationwide have been dominated by news of predatory practices by some sub-prime lenders, and the impact those practices have had on the secondary mortgage market ˆ the banking equivalent of March Madness. Now consumers and elected officials are focused on understanding the difference between sub-prime lending and predatory lending.
For several years now, Maine bankers have been frustrated by the types of loans being made by non-bank lenders ˆ simply put, bankers were losing market share. Banks would deny a customer a mortgage loan because, by industry standards, the customer could not afford the loan; within days, though, the customer would call the bank to let them know they got the loan from the "supervised lender" down the street. Most people think of a "supervised lender" as a regulated financial institution, but that's not true. A "supervised lender" can be anyone not associated with a financial institution but licensed by Maine's Office of Consumer Credit Regulation. So are the "supervised lenders" to blame for the predatory lending that's gone on in Maine? Most are very careful to help consumers successfully finance their home, but others aren't so careful.
The American dream is to own a home, but a lot of Mainers don't have the incomes that would qualify them for a conventional mortgage, or a loan through the Maine State Housing Authority. So they find lenders who offer mortgage products to fit their needs. Thus the birth of negative amortized loans, no-income-verification loans, 2-28 loans, no-down-payment loans and more. All of these loans are risky, by design, and lenders attach a higher interest rate and points to these products. However, some unscrupulous lenders take advantage of the opportunity to gouge consumers with excessive fees and points. So are these exotic mortgages the reason for predatory lending? No, but they did create an opportunity for lightly regulated lenders to take advantage of consumers in Maine and across the country.
Maine banks believe that solving the problem of predatory lending can be achieved by limiting exotic mortgages to only those who truly qualify, insuring that all lenders abide by the same disclosures and underwriting standards, and creating an examination program for "supervised lenders" in Maine ˆ oversight similar to the examinations that banks and credit unions are subject to. But it's a tricky balance; too little change will bring about a continuation of marketing of these products, while too much regulation may dry up credit for a significant group of borrowers. Neither situation will benefit the local economy or the financial institutions that fund the economic engine of our state.
In Maine, House Speaker Glenn Cummings joined State Senator Dana Dow last summer to announce a joint effort to address growing concerns that predatory activity was rampant in Maine. While the speaker has acknowledged that Maine banks are not in the business of predatory lending, he has sought the opinions of bank lenders, advocates and consumers to create legislation that lawmakers will consider this spring. Also, Congress has begun the process of determining if federal regulators failed to protect consumers from unscrupulous non-bank mortgage lenders. They have challenged Alan Greenspan, former chair of the Federal Reserve, for encouraging alternatives to fixed-rate mortgages, and they have criticized federal regulators for lax examinations and the late arrival of regulatory "guidance" on exotic mortgages. Federal legislation is viewed by many as likely.
Is this too little, too late for consumers? For some, yes. For others, the state has an outreach staff to help consumers who have been wronged during the lending process. The Office of Consumer Credit Protection, which regulates all "supervised lenders," is an excellent resource for consumers. Some situations may be compounded by debt consolidation or lifestyle and income changes, but many losses incurred through predatory loans may be recoverable.
Our state is fortunate to have many qualified lenders in our banks, credit unions, mortgage banking and mortgage broker firms. However, with tougher examination guidelines for "supervised lenders" and comprehensive legislation to adequately address predatory practices, Maine will be better prepared to deal with unscrupulous lenders in the future.
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