Congress to Outlaw Stated Income Loans

The 110th Congress has put forward a bill entitled “H.R. 3081: To amend the Truth in Lending Act to protect consumers.” The intention of the bill is to protect Consumers from getting into loans that they can’t pay. Of specific concern is the desire of certain members of congress to deny consumers access to stated income loans. A stated income loan is one where the consumer simply states what their income is with providing any documentation to prove it. At this point you may be thinking, “Are stated income loans a good thing?” Like so many other products in the mortgage world this product isn’t a good thing or a bad thing its simply a tool. A good tool can save the day….or wreck the day if it is abused. The same is true with mortgage products.

Stated income loans were created specifically for people who had a good income but had difficulty proving that income; people like business owners, contractors, people who work on commission or for tips, etc. Without these products a great many people wouldn’t be able to buy homes, despite their income or credit history. Should business owners and sales people be unable to buy homes? Or should they be denied access to refinancing options once they are in their homes? If they have shown a record of responsible borrowing why would we deny them access to a mortgage? This is what the congress wants to do.

The following excerpts show a clear intention to deny access to Stated Income Loans;

`(C) VERIFICATION OF CONSUMER INCOME AND FINANCIAL RESOURCES- In the case of any consumer credit transaction secured by a consumer’s principal dwelling, the income and financial resources of the consumer shall be verified for purposes of this paragraph by tax returns, payroll receipts, bank records, or other similarly reliable documents.

And…

`(E) CONSUMER STATEMENT IS INSUFFICIENT PROOF- A statement by a consumer of the consumer’s income or financial resources shall not be sufficient to establish the existence of any income or financial resources when verifying the reasonable ability of the consumer to repay any consumer credit transaction secured by the consumer’s principal dwelling, for purposes of this paragraph.

Again, the intention is to protect consumers from getting into loans that they can’t pay off. Its a noble intention. What it fails to realize, however, is that the lending industry also has a very keen interest in avoiding mortgage defaults. Lenders have no desire to give people money who are incapable of repaying. Those lenders who do so are punished by the market. And we can see this taking place now as many lenders who were overly aggressive are no longer in the business. The market has a way of taking care of itself.

In recent years the mortgage industry was experiencing such a boom that lending guidelines were too loose. Rates were so low that sellers were able to charge more to sell their homes since financing charges were so cheap. The result was that housing prices rose at record rates while consumers with any credit profile would get financing. The pendulum had swung wide…..too wide. Now that pendulum is swinging back. Prices are dropping and financing options are disappearing. This is a natural fluctuation of the market. And it is the lenders and the secondary markets that are demanding more documentation and higher credit standards from borrowers.

It is no doubt that the Mortgage industry, and in fact all credit industries right now, are in a state of flux. The situation appears nasty but it is a natural market cycle. If you really want to see things get ugly let the government intervene! It is in that spirit that I ask that you forward this post to all mortgage industry professionals that you know. Call or write your elected representatives. Tell them to keep their hands off of stated income loans and to let the market decide what are or are not viable loan products.