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Typically, Sugarman gets the mortgage lender to rework the loan, lowering the homeowner's payments and sparing the home from foreclosure. He says he seldom goes after brokers because they have little legal responsibility to the homeowner.
"I don't think the law as it stands is able to punish the people the way that they need to be punished," Sugarman says.
Georgia is more fortunate. With a new predatory lending statute considered one of the strongest consumer protection laws in the nation, it will become more difficult for brokers to get away with false loan applications. That's because the law makes it harder for lenders to approve them.
Prior to the new law, which went into effect Oct. 1, lawyers suing over fraudulent loans often had to fall back on a statute that says it's illegal to loan with the intent to foreclose. According to Brennan, it's extremely difficult to pin intent on lenders.
The new law has replaced the "intent to foreclose" provision with one that makes it illegal, in certain circumstances, to approve a mortgage for someone who is unable to make the payments. A borrower's inability to pay is much easier to prove, Brennan says.
But the success of the law depends on the ferocity of the Department of Banking and Finance in enforcing it. The department was formed nine years ago to regulate and license brokers and lenders -- partly in response to an increase in abusive loans. The department renews licenses yearly and is supposed to conduct a random inspection of brokers' and lenders' files every two years.
Yet the department has been criticized for failing to crack down on mortgage fraud and other forms of predatory lending. With just two fraud inspectors to scour the entire state, it's not hard to see why the department has fallen behind.
"The most I can tell you is examiners are constantly going out to licensees to examine," says department spokeswoman Leslie Lechtel. "With the staff we have, we can't examine everyone every year, so it's on a rotating basis."
Only half of the 2,115 brokers and lenders due for inspections in 1999 and 2000 received one, according to a 2001 report by state auditors. Nearly a fourth had never been inspected at all.
Those numbers raise concern among predatory lending experts who wonder whether the department can handle the task of enforcing the new law.
"We've got a strong bill in place, but it's not enough," says Sen. Vincent Fort, D-Atlanta, author of the legislation. "The Department of Banking and Finance does not have the experience and in the past has not had the inclination to be consumer-oriented."
There's yet another, unavoidable hang-up with the new law. It applies only to loans made after Oct. 1. So there is still limited help for the thousands of homeowners who already fell victim to abusive loans -- among them Anthony, Darrisaw and Bryant.
Under the law, Bryant's loan clearly would be problematic -- regardless of fraud.
The new law makes it illegal for a lender to grant a loan to a borrower who can't afford the payments -- so long as the loan is what's called a "high-cost" one, with a percentage rate above 13.5 percent. (The "high-cost" distinction was made to appease brokers and real estate lobbyists, who fought the legislation.) The law says mortgage payments mustn't exceed half the borrower's monthly income.
Bryant, who had a salary of about $1,400 per month at the time she bought her house, got a loan with payments of $1,200. (Although her husband contributed to the mortgage payments, his name and income are not included on the loan application.) Bryant's interest rate is 13.85 percent.
Decades ago, no bank or lender would have dreamed of making such a loan -- simply based on the math. And banks, to ensure they weren't being defrauded, would have diligently verified the buyer's income to be sure it was correct. It takes only a phone call to the borrower, his or her employer and the IRS to verify the numbers.
Today, it will take a tough law to force banks and lenders to loan money responsibly, Brennan says. He blames the explosion of mortgage fraud on a decade-old trend of selling and reselling bundles of mortgages.
The bundles are sold as security to lenders, banks, pension funds and insurance companies. It allows one mortgage lender to reap immediate profits from the sale of the bundle, while another lender counts on the long-term payoff.
It's an attorney's nightmare.
Because the bundles can be sold repeatedly, the burden of responsibility for the loan shifts from a broker to a lender to another bank or lender -- one that had nothing to do with approving the original, possibly fraudulent loan. As a result, individual mortgages matter less than the success of the bundle as a whole. If one loan in the bundle should go bad, there are plenty to make up for it.
Yup, next to the li-barry.
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