Focus : Banking & Finance Fresh scrutiny for subprimes By ALEXANDER SOULE

Focus : Banking & Finance
Fresh scrutiny for subprimes
By ALEXANDER SOULE

An early leader in anti-predatory lending law, the Connecticut General Assembly made only minor revisions to state law in 2007 to address the subprime mortgage crisis, but the Rell administration may be planning a more significant revamp next year.

In the wake of the collapse of Mortgage Lenders Network, in early June Gov. M. Jodi Rell signed a law that would give state cease-and-desist orders more teeth.

“We were working with seven other states, and we found that our cease-and-desist powers did not allow us to impose any conditions on the company,” said Howard Pitkin, state commissioner of banking, while testifying in support of the bill. “We simply could issue an order that said you must obey the law. What we would like to do is to be able to include conditions, and a condition might be to prohibit the movement of money out of the company.”

In late May, legislators approved a Rell administration request to hook Connecticut up to a national mortgage-licensing system proposed by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators.

The new system would allow the Connecticut Department of Banking to better conduct background checks.

“I believe next year there will be … a minirecodification of our law concerning mortgage brokers and mortgage banking,” Pitkin said. “We’re trying to prepare our law for the national system and we’re also acquiring a new system that will help us better manage the 26,000 originators and 3,200 mortgage brokers that are out there.”

The Department of Banking can assess a $15,000 penalty for reach violation of state law.

Two listing services on foreclosed properties give different snapshots of the Connecticut market. The state’s foreclosures fell 19 percent between March and April and another 12 percent in May, according to Bargain Network, a listing service run by Norwalk-based Vertrue Inc. While competitor RealtyTrac reported a sharp increase in Connecticut foreclosures this spring, the Irvine, Calif., company indicated its results were likely affected by a change in how it collects information in Connecticut. The two services’ state-to-state statistics can vary widely.

In 1999, North Carolina was the first state in the nation to pass a state law prohibiting predatory state lending, according to Giang Ho, an analyst with the Federal Reserve Bank. Connecticut was in the vanguard of states to follow suit in 2001, along with Massachusetts, Pennsylvania and Texas.

States have had a mixed record in trying to curb abuses. In the first two years of the North Carolina law’s enactment, subprime mortgage originations dropped 36 percent in the North Carolina counties studied by Ho and fellow Fed analyst Anthony Pennington-Cross. In Connecticut, however, subprime mortgages rose 88 percent, with applications increasing and rejection rates decreasing. In Texas, originations rocketed up more than 3,000 percent.

At its most fundamental level, predatory lending relies on the inability of the borrower to understand loan terms and obligations. That makes it difficult to stanch via statute, without the risk of similarly stymieing legitimate loan activity. In a recent speech, Federal Reserve Chairman Ben Bernanke said the Fed needs to tread carefully in order not to suppress responsible mortgage and refinance lending.

The U.S. Department of Housing and Urban Development has identified four primary types of predatory lending practices:

• Loan flipping, in which loans are repeatedly refinanced with high fees attached to the new balances;

• Fee packing, in which fees are added to the financed amount rather than being paid upfront;

• Lack of income verification, making loans impossible to repay; and

• Property values inflated above the market price.

Between 80 percent and 90 percent of the cases reviewed by the Connecticut Fair Housing Center involved adjustable-rate mortgages or some other type of exotic mortgage, said Erin Boggs, an attorney with the Hartford agency. And more often than not, loans are originated by producers elsewhere, complicating enforcement.

“I think there has been a whole change in the landscape of mortgages, with things moving more out of state,” Boggs said. “You’re not working with your local bank.”

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