Mortgages and Misdemeanors: Criminal Enforcement of State Mortgage Lending License Requirements and Homeowner Protection
Steelman, Christopher N., American Criminal Law Review
INTRODUCTION I. FIRST AND SECOND LIEN MORTGAGE LENDING--RESIDENTIAL REAL ESTATE A. Scope of State Licensing Statutes B. Comparison of State Licensing Requirements IX. CRIMINAL SANCTIONS A. Costs and Benefits of Criminal Enforcement 1. Direct and Indirect Costs 2. Other Procedures in Conjunction with Criminal Sanction B. Consumer Protection by the State III. CRIMINAL ENFORCEMENT COMPARED TO OTHER METHODS A. Civil, Administrative, Regulatory and Other Actions B. Costs of Lender Misconduct Compared to Enforcement Methods IV. CONCLUSION APPENDIX A: REPRESENTATIVE ENFORCEMENT STATUTES FOR FIRST AND SECOND LIEN RESIDENTIAL MORTGAGE LENDERS
During the past year the United States economy has faced a serious decline in the housing market--the proverbial "popping" of the "housing bubble." State and federal lawmakers have reacted, passing new legislation attempting to remedy the situation and to prevent future mishaps. However, it is clear that state regulation of non-depository mortgage lending institution conduct has existed in some form for decades. What is somewhat less clear, however, is the manner in which then-existing legislative and regulatory schemes dealt with the factors contributing to this problem. More importantly, the question arises as to whether these conduct-regulating schemes at the state level, which contained criminal penalties for lender misconduct, adequately protected consumers.
Home foreclosure rates are at unprecedented levels, spurred by mortgage interest rate resets and lower home values. (1) In addressing the situation, Congress has noted that "[m]any American families are facing or are at risk of foreclosure." (2) More and more legislation is being introduced and regulations promulgated at the state and federal levels to attempt to address the rising foreclosure rates as well as related issues such as subprime and predatory lending. (3) This additional legislation and regulation of the mortgage lending industry, and particularly the consumer or residential mortgage lending industry, is being made against the backdrop of the recent collapse of the private equity market--including the inability of lenders to engage in the securitization of mortgage loans--and the subprime mortgage lending crisis.
Some see the decline of the private equity market and the subprime mortgage lending crisis as proceeding hand in hand, and some suggest that lenders were willing and able to engage in subprime lending due in part to their ability to quickly and easily securitize these mortgage loans in the private equity market, thereby reducing their own exposure to the increased credit risk associated with subprime borrowers. (4) Additionally, hybrid mortgage products such as "2/28" or "3/27" Adjustable Rate Mortgages ("ARM" or "ARMs") have greatly inflated this problem by offering homeowners the opportunity to refinance their homes with a "teaser" or introductory rate that is set at a fixed percentage, (5) followed by a "reset" period in which the borrower will pay a variable rate pegged to a market rate, for example, the London Interbank Offered Rate ("LIBOR") plus some preset fixed percentage rate. (6)
Although many of the mortgage lending practices developed over the past decade are coming under increased scrutiny, (7) many lenders engaged in such conduct in literal compliance with the statutes as they existed. As a result of this incongruity, states have recently begun adding increased compliance standards to their licensing statute schemes requiring, among other things, that lenders not "[k]nowingly or intentionally make a home loan ... to a borrower, including ... 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. …