Insider Tips
Minnesota here we come
By Dan Smith

           This month I wanted to follow up on the effects of Colorado’s latest legislation to curb predatory lending. Like many laws enacted by legislators, the intention was a fine and noble one. Who wouldn’t want to keep evil predatory lenders from preying upon the generally confused public? But like so many other good intentions, it may end up as road base for a highway no one wants to travel.

Senate bill 7-216 passed by Colorado seeks to govern mortgage lenders in the selling of “non-traditional” mortgages. This means any loan that is not a “fully documented” loan, regarding income and assets. Lenders are charged with the re­sponsibility to act in the borrower’s best interest and provide a “net tangible bene­fit” with their recommendations, with re­gards to the loan products they promote and arrange for the consumer. That sounds good, but who will decide what a “net tangible benefit” is?

Some lenders have spent entire careers promoting the “Option ARM” line of products with its’ incumbent negative amortization. Will consumers who are trapped later upside down in their home (owing more than it is worth and now unable to sell) decide that loan was never really in their best interest after all, and sue the lender responsible for recommending it? That would actually be a good thing, considering this is the number one choice of products sold by actual predatory lenders. But apparently this rule doesn’t apply if that loan was processed with “full documentation”.

Meanwhile similar legislation was passed last year in Minnesota. The effect there has been a mass exodus of lenders and investors who don’t care to be tested in this fashion. But for the self employed borrower the downside has been that even the investors that are left have removed most or all of their “stated income”, “no ratio” and “no documentation” loans from their menus. If this new legislation provokes the same affect here in Colorado, that will surely reek havoc for a wide swath of the borrowing population.

From the early response it appears that might just be the case.  Some investors have already started to pull the availability of some of their product offerings in Colorado. Most notably, Wells Fargo’s wholesale division announced several weeks ago the re­moval of all “no documentation” and “no ratio” pro­grams. Other mortgage companies will inevitably wait and see what case law forms as litigation is brought, and adjust their menu of products accordingly. But if you are self employed and thinking of refinancing or purchasing a home soon, you should probably act sooner rather than later. Otherwise you may just end up across from that high school graduate at the bank, who is trying to decipher your “loss carry forward”, as he plows through your last two years of personal and corporate tax returns.

For expert advice on this or any other aspect of home finance, call the professional. Dan Smith can be reached at 303-674-0201 or visit his web site at www.ColoradoHomeLoans.com anytime!