As borrower defaults mount, many are considering creative ways to blame the mortgage industry for their predicament. While some such cases have more merit than others, we can at least safely say that judges are now having to sift through a huge spike in caseload as borrowers increasingly hope to leverage a wave of anti-lender public sentiment for their benefit. With that in mind, every broker in the nation should thank the judges of the Fourth Circuit Court of Appeals for late last month upholding an earlier ruling that says brokers are not "lenders" as defined in the Truth in Lending Act. Had the court found differently, we'd be looking at a very, very different world. As in: one without brokers.
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The case pit two consumers, James and Elizabeth Cetto, against a Wilshire Credit trustee who owned their refinanced mortgage --- the Cettos defaulted on their roughly $50K cash-out refi, and promptly sued the broker, Savings First Mortgagage, for failing to warn them of the risks of their loan. The argument was relatively simple: the borrowers argued that had title search and title binder fees charged by the settlement agent at closing been added in to the calculation for the cost of the loan, it would have been considered a "high-cost" loan under the Home Ownership and Equity Protection Act. Much more germane to brokers, however, was an ancillary claim that a broker was actually a "lender," as defined under the Truth in Lending Act and HOEPA. That claim ended up being the focus of the Circuit Court's opinion, and could have absolutely turned an industry even further onto its head. Instead, the judges on the appeal affirmed the lower court's ruling and said that brokers are not, in fact, "lenders" -- at least in the TILA sense of the word, which means brokers don't actually make the decision to extend credit. The borrowers fought hard on this point in the courts, even challenging the validity of Regulation Z on some very technical grounds. The opinion offers some perspective -- and, more importantly, precedent:
To expand the disclosure requirements to persons who are not clearly creditors would be antithetical to the clear, permissible, and authoritative interpretation given by the agency experts in this area and would introduce undefinable instability to an area in which Congress sought to introduce stability. In addition, denying Savings First the ability to rely on the Board’s permissible Regulation Z would lead to widespread confusion. Mortgage brokers would be unsure of their status under lending laws and would be punished for relying on the very regulations on which they have been encouraged by Congress in the statute to rely.
Irrespective of your feeling about the role of brokers in this mess, this is one ruling all industry participants should be happy to see. Stronger regulation -- both and the federal and state levels -- is likely already on its way for the origination side of the mortgage business. Screwing with the definition of "lender," on the other hand, would only have confused our credit markets further. Editor's note: Thanks to Mortgage News Clips for finding the opinion.