Legislation will kill jobs, brokers say

Several bills in the Legislature would change the mortgage lending business
This story has been updated since its original posting

By ZACH FOX - Staff Writer | Monday, March 31, 2008 3:24 PM PDT ∞

Local mortgage brokers are worried that a new package of bills in the state Legislature could put many of them out of business.

A battery of bills would change the way the brokers ---- who compile loan packages for borrowers from dozens of lenders ---- do business.

But the actual effect of the bills is debated. While some brokers say it will eliminate the profession, housing advocates and the author of one bill believe it will simply scrub abuses from the brokerage business.

One major issue of contention is a proposed change in the way brokers earn a profit.

Traditionally, issuers of loans make their money in closing costs and fees. But many brokers make their money by offering "no-cost" refinances, where they eliminate any fees by issuing a loan with a higher interest rate.

For certain loans, one piece of legislation would prohibit the practice.

"By eliminating premiums for brokers, that would effectively put us out of business," said Don Marginson, a mortgage broker in Rancho Bernardo. "So effectively, the only people doing mortgages would be banks. And they would take it to consumers because they would have no competition."

But the bill's author, Assemblywoman Lois Wolk, D-Davis, believes the legislation will have a much narrower impact, said Craig Reynolds, Wolk's chief of staff.

He said the bill, AB 2880, still allows for some no-cost loans and only restricts exorbitant increases in interest rates.

"If there are brokers out there who rely upon these practices, they probably should be put out of business," he said. "The majority of mortgage brokers who perform a good service and are responsible can and should and would like to live with this bill."

Still, the bill draws the ire of the California Association of Mortgage Brokers. While the group does support several bills that increase oversight of brokers, it opposes an increase in brokerage fees and bonds required by some bills, including Wolk's.

"It's just overreaching," said Dustin Hobbs, spokesman for the association. "There's a lot of onerous penalties in there."

And Wolk's bill also requires more transparency on how brokers earn their commissions. That piece alone would reduce some demand for loans as consumers realize the real costs, said Norm Miller, a professor at the University of San Diego's Burnham-Moores Center for Real Estate.

While brokers said elimination of premiums would increase the cost to borrowers by restricting competition, Miller disagreed.

"It's not necessarily going to make it more expensive, but it is going to add to the upfront cash that some people have to have when they do buy a home," he said.

One housing advocacy group, the Center for Responsible Lending, supports several of the bills including Wolk's, said Paul Leonard, director of the California office.

He said brokers should be able to stay profitable without taking commissions from jacked-up interest rates.

"If the only way they can stay in business is by abusing their fiduciary duties to the borrower for their profit, I'm not sure that's a business model we should be supporting," he said.

While some brokers said they oppose the limitations on some loan products, they acknowledged that more oversight is needed. They say brokers need to be allowed to charge higher interest rates to cover closing costs so that borrowers can refinance again if rates drop further without worrying about fees.

Local lawmakers said they would not comment specifically on the bills because they have not come up for vote, but they expressed hesitation about intervening in the market.

"I wouldn't want to do something that would impede the facilitation of a mortgage in this market," said Assemblyman Martin Garrick, R-Vista. "They (borrowers) need right now to be able to access the mortgage market."

Contact staff writer Zach Fox at (760)740-5412 or zfox@nctimes.com.

Correction: Hobbs misidentified

A story in Sunday's Business misidentified Dustin Hobbs, spokesman for the California Mortgage Bankers Association.

We apologize.

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