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CEO calls for broker reform

Washington Mutual's chief seeks improved education and standards for those who supply home loans.

August 22, 2007|E. Scott Reckard | Times Staff Writer

The mortgage meltdown has sharpened debate over how to ensure that borrowers don't get stuck with loans they can't afford.

Now the chief executive of the nation's largest savings and loan, saying lending standards became irrationally lax in recent years, is supporting stricter professional requirements for mortgage brokers.

"They should have something like stockbrokers -- licensing, testing, higher standards," Washington Mutual Inc. Chief Executive Kerry Killinger said in a recent interview.

Killinger, whose company is the third-largest U.S. home lender, didn't elaborate on how to improve education and standards for those purveying loans.

Consumer advocates have argued for similar standards.

Regulations governing stockbrokers require that they make reasonable efforts to determine their customers' financial and tax status, investment objectives and other pertinent information before executing a trade. Stockbrokers also must have reasonable grounds to believe that the trades they recommend to individual investors are suitable.

A recent Federal Trade Commission study found that borrowers struggle to understand the terms of even the simplest mortgages. Consumer groups have long argued that real estate professionals, having vastly more knowledge about loans than their clients, should do more than provide borrowers with lengthy written disclosures.

"You need to have some level of accountability for people who essentially are peddling dangerous and complex products," said attorney Kathleen Keest of the Center for Responsible Lending in Durham, N.C., which has joined the Consumer Federation of America and the National Counsel of La Raza in trying to craft a rule that would require that home loans be suitable for borrowers.

"We have safety standards for all kinds of things," Keest said. "And you need a safety standard for your economic well being."

Some leaders in the home-loan business have rejected suitability as an appropriate test, saying loan agents and brokers aren't in a position to gauge which loan is best for a customer.

Angelo Mozilo, chairman of No. 1 mortgage lender Countrywide Financial Corp., recently called such a standard a "terrible idea . . . horribly un-American, intrusive and insulting."

He said a suitability standard would hurt home sales by forcing lenders to set up special reviews that could take months. For lenders, he said, the only question should be whether a borrower can reasonably be expected to repay the debt.

Federal legislative proposals include a bill introduced by Sen. Charles E. Schumer (D-N.Y.), which would give mortgage brokers fiduciary duty.

Ed Smith, vice president of government affairs for the California Assn. of Mortgage Brokers, declined Tuesday to comment on the suitability issue, saying he would need to see the language of any proposed rule.

To be licensed by the state, mortgage brokers must pass a real estate test and every four years take continuing education classes for 45 hours.

Employees of banks and nonbank mortgage lenders don't have to pass the state real estate exam, he said, although they and their companies are subject to regulation by various state and federal agencies.

Smith also said that mortgage brokers, unlike direct employees of mortgage lenders, had a fiduciary relationship to borrowers under state law, meaning that "when we put someone into a loan we have to get them one that's in their best interest."

He said he couldn't recall instances in which state officials had penalized mortgage brokers for breaching this fiduciary duty, although he said it had occurred from time to time.

Killinger didn't say whether the higher standards he advocated for mortgage brokers should also be applied to loan officers at his and other banks, and he couldn't be reached for comment Tuesday.

Killinger said Wall Street's "irrational" demand for mortgages to turn into securities in 2005 and 2006 had led lenders to act irrationally as well, by loosening loan standards. Investors' current refusal to buy anything other than plain-vanilla mortgages is irrational too, he said.

"It's not just sub-prime," Killinger said, noting that it is nearly impossible to sell a variety of nontraditional prime and near-prime loans as well.


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