As the state housing market adjusts to years of predatory lending, Tennessee’s Department of Financial Institutions is in the process of stepping up its mortgage law enforcement capabilities.
The department has ramped up from a staff of 14 auditors in 2004 to 35 currently, and though no plans are in place to request funding for additional staff, assistant compliance commissioner Mike Igney says more would “be welcome.”
“Mortgage examination — the examination of brokers and lenders — has been a focus of the department, really, since 2004, when the Mortgage Act was amended,” Igney said. “We’ve been, I would say, pretty aggressive in the regulation of that industry.”
The TDFI is the state agency charged with enforcement of regulations affecting the mortgage industry.
Of its 35 examiners, approximately 20 are devoted to on-site investigation of mortgage loans and brokers. The compliance division regulates more than 6,500 different industry members, including about 1,000 of which are headquartered out of state. Officials with the TDFI say they believe conditions in the state housing market are on an improvement track.
Charged with enforcing laws affecting state-certified lenders, the TDFI’s authority includes investigative and subpoena powers as well as civil penalties up to $10,000, revoking of licenses as well as emergency cease-and-desist control over suspicious lending by a business or individual.
In 2006, the General Assembly enacted the Tennessee Home Loan Protection Act, which puts extra protections and prohibitions in place on high-value loans. Several years before that, the Assembly amended the Mortgage Act to require registration of mortgage loan originators.
Protections provided by the Home Loan Protection Act include requirements that brokers establish that customers can afford payments before loans are made; that lenders give borrowers warning before closing, suggest seeking other credit sources, and recommend credit counseling prior to closing; and prohibition of “bait and switch” loans, in which lenders present borrowers with higher-cost loans at closing without advance disclosure.
Calls for more legislation?
Considering the magnitude of the current housing market problems, some mortgage brokers say they’re concerned there will be calls for more legislation, at both the state and federal levels, to regulate the industry.
The legislature is not currently in session, but concern about increased state regulation heightened among industry members last month when the TDFI issued a guidance on sub-prime lending — the agency’s second guidance since the beginning of 2007.
David Axford, an attorney with the TDFI, said it is not unusual for the agency to avail itself of the opportunity to issue “best practices” guidance or clarification of industry regulations. These documents don’t have the power of law, he said. But the TDFI does have the authority to check state-certified lenders for compliance with the content of guidance, and to “possibly take some action.”
The September sub-prime lending guidance, he said, is parallel to a guidance issued recently by federal regulatory agencies.
“When the residential mortgage industry began to experience problems in the fall of last year, the federal agencies issued a guidance to the entities that they regulate suggesting best practices, if you will, for these kinds of nontraditional mortgage loans, and then later on a sub-prime statement,” Axford said.
No simple solution
While there are disagreements among local mortgage brokers as to what kinds of regulatory changes would be effective in preventing the predatory lending that contributed to the current market, most brokers can agree on one point — solutions won’t be simple.
Steve Curnutte, a Nashville-based mortgage broker licensed in both Tennessee and Florida, said he believes logical regulatory changes include reform of federal RESPA guidelines and measures to improve transparency for consumers.
Curnutte describes the Florida licensure process as being “much more onerous” than Tennessee’s — requirements include fingerprinting, mandatory tests and continuing education specifications.
“The results are bogus classes that teach only how to take the test — a test with no relation to the real world — and continuing education classes done online with a 10-minute click-and-pay-and-diploma process,” Curnutte said. “Even with all that regulation, Florida still has a far higher instance of mortgage fraud and abuse than Tennessee. Anytime hard walls are placed in highly complex systems, people figure out ways to sidestep.”