Rules for mortgage brokers

By David Schwab, The Star.

While high home foreclosure rates continue to plague the South Suburbs, state legislators are trying to tighten-up the murky relationship between mortgage brokers and home loan borrowers.

Experts say misleading and sometimes fraudulent behavior by brokers -- combined with the lack of education and information by borrowers -- has been one of the main reasons people in the South Suburbs have signed up for risky, unrealistic loans, which often lead to foreclosure.

Illinois Senate Bill 1167 would define the broker-borrower relationship, effectively mandating that Illinois mortgage brokers have a "fiduciary responsibility" to find the best home loan for a borrower, said Deborah Hagan, chief of the consumer protection division for Attorney General Lisa Madigan's office.

"It's a misconception that mortgage brokers are working on behalf of the borrower," Hagan said.

About 70 percent of all home loans go through mortgage brokers, who act as middle-men between borrowers and the institutions that lend them money.

This legislation may be especially pertinent to the South Suburbs because CNN recently ranked Chicago Heights, Harvey, Calumet City, Dolton and Park Forest ZIP codes among its top 500 ZIP codes for foreclosure filings nationwide.

On a state level, the problem is equally dramatic.

Hagan notes that between 2005 and 2006, Illinois saw a 55 percent increase in home foreclosures.

Hagan said the legislation, as well as some pushes for similar legislation on the federal level, show that governments are ready to tackle this problem head-on -- and that the broker-borrower relationship is a major point of attack.

"Things are so bad in the mortgage market," Hagan said, "that people are moving on the federal and state levels to do something about this."

In the meantime, experts say, borrowers can help protect themselves.

Leonard Rosen who runs The Pit Bull Mortgage School, a training institute for mortgage brokers and real estate professionals in California, said borrowers should understand exactly why they are being matched up with a particular loan, which is commonly known as "loan suitability."

Assets, income and other factors determine how a mortgage broker matches a borrower with a loan. Making sure this is done accurately, and with full disclosure, is essential, he said.

For example, a borrower should make sure net income, and not gross income, is used to calculate the figure used to determine an affordable loan. Borrowers should be sure property values haven't been inflated, which would put them in position for a loan they can't afford, and that their brokers aren't giving a loan based on the assumption that their
credit score will improve in a few years.

Also, Rosen said, borrowers should always ask brokers this simple question: "What would be an exit plan (if the loan can't be repaid)?"

Al Hofeld, a lawyer for a consumer law firm based in Chicago, said the rift between brokers and borrowers is so deep that people should consider bringing an expert with them to the negotiating table when getting a loan through a broker.

Like Hagan, Hofeld said it's important for borrowers to understand the broker may have ulterior motives for securing riskier or more expensive home loans.

"People have to be aware that the mortgage broker is not necessarily working in their interest," Hofeld said, reiterating Hagan's sentiment.

Hofeld said borrowers should never take "oral representations" of the loan terms at face value. Brokers will tell the borrower one thing, write down another, and assume the borrower is too ignorant or lazy to read the fine print, Hofeld said.

As for the state's help in these matters, Hagan said she hopes Senate Bill 1167 will become law in the very near future.

If it were to pass, the attorney general's office, governor's office, or even private firms could prosecute mortgage brokers who don't conform to the standards, Hagan said.