Regulators seek to curb undocumented loans
NEW YORK -- Martha Aikens was on the verge of losing her home in early 2004. The culprit: a ``stated-income" loan that she had been induced to take out 1 1/2 years earlier but was never able to make a single payment on.
Aikens, a widow in her 70s, sought to refinance the mortgage on her home in Evanston, Ill., near Chicago, in May 2002. However, to qualify her for a higher-rate loan and get the commission, the mortgage broker she came to rely on grossly inflated her income and falsified her employment information to make the overstated income look plausible, according to a complaint later filed against the broker.
Her application then went through as a stated-income loan -- one that discloses income but doesn't require verification.
The case points to a growing concern among consumer advocates and regulators over the home-lending industry's increasing reliance on reduced documentation, particularly unverified income, to speed up the loan-approval process amid the ever-intensifying competition.
``It's just too easy to cheat," says Tom Miller, Iowa's attorney general. He said fraud related to stated-income loans often is initiated by lenders and brokers in pursuit of profits, leaving unsuspecting consumers in the dark.
In a recent multistate investigation led by Iowa, Ameriquest Mortgage Co. was accused of engaging in a variety of improper lending practices, including encouraging borrowers to exaggerate their income to qualify for loans. The subprime lender, a unit of closely held ACC Capital Holdings Corp. in Orange, Calif., in January settled those charges by agreeing to pay $325 million and making sweeping changes to its lending practices.
Loans requiring no income check have been around for many years, with the initial intention of offering convenience, time savings, and financial privacy to self-employed borrowers with high credit quality and large down payments. A qualifying borrower may only need to submit his or her business license, a signed letter from his or her accountant confirming a two-year history of the business, and an IRS form verifying the income source -- not the amount.
But greater competition and the desire to simplify and quicken the loan-origination process has led more lenders to extend stated-income loans to borrowers with lower credit scores, higher loan-to-value and debt-to-income ratios than traditionally allowed.
``The industry is trading risk for convenience," says Larry Goldstone, president and chief operating officer at Thornburg Mortgage Inc. in Santa Fe, N.M.
Industry experts say loans with reduced documentation now account for about 40 percent of the entire mortgage pool. In some cases, to compensate for the increased credit risk, lenders would charge more for stated-income loans, with their rates typically an eighth- to a quarter-point higher than those on a loan with full underwriting requirements.
