In a move hailed by lawmakers as a victory for consumer rights, the Nevada legislature recently passed Assembly Bill 440. This bill makes mortgage fraud a felony in the state of Nevada and increases the liability of lenders who make home loans in the state by requiring them to investigate and judge the ability of borrowers to repay their mortgage. Assembling in Carson City to hear tear-filled accounts of homeowners in the midst of foreclosure, the state government stepped in to "protect consumers" by enacting a law that will effectively eliminate most stated income loans in Nevada.
Effective October 1st, 2007, AB 440 amends NRS 598D.100, in part, to make it an unfair lending practice for a lender to: “knowingly or intentionally make a home loan, other than a reverse mortgage, to a borrower, including, without limitation, a low-document home loan, no-document home loan or stated-document home loan, without determining, using any commercially
reasonable means or mechanism, that the borrower has the ability to repay the home loan.”
To read the entire bill, click here: Nevada State Legislature
With implementation of the bill looming nearer, the mortgage industry has been thrown into confusion with lenders questioning just exactly what a “commercially reasonable means or mechanism” might be. The office of the Commissioner of the Mortgage Lending Division issued a statement to lenders on September 13th attempting to clarify this ambiguous phrase.
He stated in part, “The Division is unaware of any specific legal definition of the term ‘commercially reasonable means or mechanism’. In the absence of such a specific definition, the Division believes it means that licensees must inquire into a borrower’s current and future income and financial status, but without dictating what specific methods must be utilized as long as they are reasonable and frequently used within the lending community.”
He goes on to list methods that lenders might use in order to attempt to fulfill this regulation without saying that such methods would be either recommended or approved.
He says, “Licensees should meet with their borrowers [that means all borrowers obligated on the particular loan] in person, over the telephone, or in other ways where personal contact is achieved, and discuss their economic situation, including their employment, credit history, current sources and amounts of income and assets, and the likelihood of any of these items changing [up or down] in the reasonably foreseeable future…
Licensees must verify the information that the borrowers provide. The Division recognizes that there are some general sources, such as Salary.com or the Department of
Labor, which may be utilized to verify income in those situations where verification of employment, pay stubs or tax returns are not utilized. The Division will not recommend any particular source(s), only that it be generally utilized by the lending community and that its or their usage is properly documented in the loan file.”
To read a complete copy of the Commissioner’s letter, click here: Comissioner's Letter
The lending community has had mixed responses to date regarding the bill. Some brokers have praised the new restrictions as precautions that lenders should have already been taking before making no doc loans. These individuals have touted 440 as a bill whose time has come and have speculated that those who "should" be able to qualify for a particular loan will still be able to do so. They have also expressed hope that national lenders will embrace the new guidelines and not view them as threatening.
The reality so far, has been much more grim. Several major national lending institutions including Wells Fargo, TB&W, and others have issued statements that regardless of the “clarifications” attempted by the Nevada Mortgage Lending Division they will be ceasing to fund ANY stated income loans without Full Documentation in the State of Nevada effective October 1st. In a state where the majority of workers are employed in the service industry and where tips remain largely unreported, these changes should make it nearly impossible for thousands of Nevadans to purchase homes. Unless this bill is revised or repealed, I would expect the already struggling Las Vegas housing market to continue its nose dive.
Some may remember that years ago, North Carolina enacted similar legislation aimed at “protecting the consumer” from “predatory lenders.” After all of those “predatory lenders” pulled out of the state as a result of the bill, North Carolina’s housing market ground to a halt while the rest of the country was appreciating. Ultimately, the legislature repealed the bill and business went back to normal.
In the meantime, the coming months should provide some interesting investment opportunities in Las Vegas. As the pool of qualified buyers shrinks drastically, it will be a good time to purchase rental properties that can positive cash flow. Population in the valley continues to grow and as the demand for rental housing rises, with more and more buyers failing to qualify for loans, we should see rents rise steadily over the next year or two.
Tamara Bostrom
NARREIA Staff
www.NARREIA.com
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Disclaimer: These reports reflect the views and opinions of the Advisors and are not necessarily the views and opinions of NARREIA.
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