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Loan products and lender policies also seem to encourage fraud. Programs such as stated-income/stated-asset, no-income-verification and no-income/no-asset loans allow customers who don't otherwise qualify to buy houses. These are great programs when used in the right spirit, and they promote low-income-housing goals and emerging-market growth. But they are often stretched to the extremes -- by originators, not borrowers.
How many borrowers know the guidelines? They learn things such as the amount of income or assets to state, the amount of down payment to "borrow" and how occupancy works from us. We are either directly committing fraud or teaching borrowers how to do it. Both are bad for our industry, and both are illegal.
What to do?
We need to take a close look at why we are here and what we are doing. We also need to think about the long-term consequences of our actions. Consider a market in which all loan applications require upfront fingerprints (banks use them for check-cashing) and thorough background checks. Other things to consider are individual bonding of originators, notarizing initial loan applications and mortgage insurance for nonprime loans and second liens.
Enforcement actions, penalties and government sanctions are somewhat effective, but only in deterring people who are not ethically challenged in the first place. We need to educate the originators and borrowers. Stating an income that is not what you actually earn is fraud. Telling the borrower what to state is fraud, too.
People not only need to know that what they're doing is wrong but also what the consequences are. We need zero tolerance in this industry. Make yourself an expert. Read the regulations, take the classes and participate in the associations.
Tim Frederick is the president of Liberty Home Loan Corp. Liberty is a wholesale lender specializing in nonprime loans. Visit its Web site at www.liberty-wholesale.com. Reach Frederick at firstname.lastname@example.org or (800) 429-0017.
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