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February 21, 2012

Consumer advocates decry lending proposal

Industry players are calling it a technical clarification. Consumer advocates contend it's a much bigger and badder deal, weakening protections for mortgage borrowers.

What they're arguing over is legislation in the General Assembly about "table funding," a little-known -- and in Maryland, little-used -- type of mortgage lending.

Table-funded loans are made by mortgage-broker companies in their own name, rather than in the name of a lender, but are immediately sold to a lender who will provide the actual funding, according to HUD. That's different than typical mortgage brokering, where the loan is closed in the lender's name, and from cases where borrowers work directly with lenders that fund the loans themselves but sell them on the secondary market to Fannie Mae, Freddie Mac or others in the mortgage-backed securities business.

Marceline White, executive director of the Maryland Consumer Rights Coalition, said the state has long banned the practice of getting a mortgage broker "finder's fee" for table-funded loans. But legislation proposed in both the House and Senate would change that, she said.

Here's the Senate version, SB 451, and the House version, HB 674

"As a broker, you get a certain fee for finding a lender for the loan," White said. "But in this case, you're the lender. You shouldn't get a fee for finding yourself. ... There's an inherent conflict of interest if you're acting both as a broker and a lender. But the more alarming part is that it opens Maryland back up to table-funded mortgages, which really have not been happening as much in Maryland and have been really strongly linked to predatory lending."

She contends that table funding allows companies to "skirt" Real Estate Settlement Procedures Act and Truth in Lending Act protections for borrowers, meaning less disclosure and potentially worse loans.

The proposed legislation would also reduce the statute of limitations for suits from 12 years to three and make all the changes retroactive, affecting current lawsuits, White said.

Tom Shaner, executive director of the Maryland Association of Mortgage Professionals, a trade group that includes mortgage brokers and others in the industry, said mortgage firms simply wanted clarification in the law about what exactly constitutes table funding and how they should be compensated if they do it.

"Part of the concern was back to the questions of law and how it should be interpreted -- and how some plaintiff attorneys are seeking cases where nobody feels there was anything wrong, but there's a technical glitch in the law," Shaner said. "So we'd like to get it resolved." 

His group asked for the legislation last year, but this year the request came from the Maryland Bankers Association.

As of Monday afternoon, the legislation's future was uncertain. Shaner's group heard from the Senate finance committee that officials want an AOK from the state commissioner of financial regulation before passing such a bill, and he's not sure whether that could be done in time. Shaner was also getting signals that the Maryland Bankers Association would ask to have the bill withdrawn, possibly to try again next year.

Kathleen Murphy, president and chief executive of the bankers association, said by email that withdrawal would be up to legislators.

"The MBA requested that these bills be introduced to make it clear that a person who originates a mortgage loan in a 'table funded transaction' does not violate the Finder's Fee law when the person collects a fee for services rendered," she wrote. "The Finders Fee law says that you can only receive a fee as a lender or a broker -- not both -- in the same transaction. The bill would clarify what we believe is the law -- that a person who originates a 'table funded transaction' may collect a fee (not two fees, but one fee) for the work involved with originating a loan. The bill addresses what we believe was an incorrect court decision."

Shaner said table funding has been used to make predatory loans, just like other types of lending, but he said that's not its purpose.

"The use of the table funding was really to help expedite mortgages, expedite the whole process," he said. "It just has to get interpreted so everybody's clear on 'this is what you can do.' Many, many brokers are no longer involved in table funding. Look, why take a risk if it's not clear on how this law is going to be interpreted?"

Posted by Jamie Smith Hopkins at 6:00 AM | | Comments (5)
Categories: Mortgages


The national Mortgage Bankers Association website says: "A mortgage broker is legally defined as "a person (not an employee or exclusive agent of a lender) who brings a borrower and lender together." How can a broker be entitiled to a brokers' fee for bringing a borrower to itself?

Marceline White needs to get better information. RESPA and Truth-in-Lending already treat table funding as brokerage and prohibit being paid both by the borrower and the lender. All this does is allow the borrower to buy down their rate by paying points. Kind of silly to deny borrowers that privilege.

What we really need is for the legislature to adopt the Vermont approach, in which mortgage brokers and lenders have a fiduciary duty to the borrower to get him the best deal possible and refuse to make a loan to him if it is not objectively in the borrower's best interest. Mortgage brokers and lenders can be held liable if the borrower defaults and they breached their duty. Unhappy, turned-down, would-be homeowners are usually referred to other agencies or non-profits to clean up their credit scores (usually by paying down credit cards and other debts) so that they can qualify in the future. This is why Vermont has one of the lowest foreclosure rates in the nation.

Table funded loans allow brokers to claim that the loan is a secondary market transaction which would enable them to skirt important consumer protection provisions such as RESPA, TILA, as well as the other important disclosures in the Finder’s Fee Act. Moreover, table-funded loans are strongly linked in Maryland to predatory flipping and equity-stripping loans. Maryland courts have ruled that neither a broker nor lender may collect a fee at a table funded loan because of an inherent conflict of interest.

Simply the lowering of the statute of limitations from 12 to 3 years tells you that something is amiss. We just had our mortgage debacle in which legislators left statutes of limitations for private lawsuits at 5 years and awards topped at $1,000 (in the midst of massive fraud) leaving business lawsuits at 10 and then entering national fraud settlement negotiations for the public so late that most of the fraud time-limited at the time of agreement.

I think it safe to say that this is a credible sign that this legislation will be ill-used.

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About Jamie Smith Hopkins
Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
Baltimore Sun articles by Jamie

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