A bill intended to protect Nevada homeowners by labeling mortgage lending fraud a crime has led to a great deal of confusion and frustration for lenders and mortgage brokers statewide and beyond.
Assemblyman Marcus Conklin, D-Las Vegas, prime sponsor and author of “AB440”, said the bill was intended for consumer protection, not to “slow up the process for qualified people” attempting to purchase homes.
Per the bill, as of October 1, 2007 it will be an “unfair lending practice for a lender to: (b) Knowingly or intentionally make a home loan, other than a reverse mortgage, to a borrower, including, without limitation, a low-document home loan, no-document home loan or stated-document home loan, without determining, using any commercially reasonable means or mechanism, that the borrower has the ability to repay the home loan.”
Unfortunately, because the wording of the bill is somewhat vague, it was misinterpreted by lenders and mortgage brokers, many of whom believe stated income loans in Nevada will soon be illegal.
In fact, some banks and mortgage lenders have already stopped or have said they intend to stop originating “stated income” home loans in Nevada because of the verbiage in AB440.
But the truth is, AB440 was written to ensure homeowners are financially able to repay their mortgages, and simply asks that licensees discuss and document that ability to repay with borrowers before the loan process begins.
The hope is that fewer borrowers will end up in home loans they aren’t qualified for, reducing the number of loan defaults and foreclosure proceedings in the state.
In an effort to clear up the confusion, a letter from Mortgage Lending Division Commissioner Joseph L. Waltuch was addressed to licensed mortgage brokers and bankers on September 13. Here is an excerpt:
“AB 440 does not prohibit specific mortgage products or types of documentation that may be utilized in the making or underwriting of home loans. Instead, AB 440 recognizes, and specifically defines, “low-document”, “stated-document” and “no-document” home loans.”
Many licensees were led to believe that stated income loans would be banished in Nevada, but as this letter states, no loan programs or loan documentation types will be explicitly prohibited.
In fact, the Mortgage Lending Division of Nevada has made it fairly simple for licensees to comply with the new law, by asking that they fill out a worksheet in good faith to ensure they have discussed with homeowners the ability to repay the loan.
“It is also important that licensees document for examination purposes that these discussions and verifications have occurred. One suggested method for doing so would be the completion of a worksheet for each home loan…”
The “Division” said it will also allow other methods of determining a borrower’s ability to repay, “as long as they are reasonable and frequently used within the lending community.”
The new bill should actually protect both homeowners and loan originators, as it will document the fact that a detailed discussion took place to ensure both parties were clear on the terms of the loan, which could prevent homeowners from blaming brokers and loan officers for improper loan disclosure.
However, one downside is that the confusion associated with the bill may drive more lenders away from the state, and could prove to be problematic for the many borrowers in Nevada who earn much of their income from tips, which is often difficult to state and/or document.
Nevada posted the highest foreclosure rate in the United States in July, a whopping one filing per 199 households, three times the national average.
The state reported 5,116 filings during July, an increase of 8% from June.
According to state officials and the Nevada Association of Mortgage Professionals, “Stated income” loans account for a quarter of all home loans in Nevada, and roughly half of the loans in the Las Vegas area.