Kentucky Mortgages

The State of Kentucky has been proactive in an ongoing effort to create the Residential Mortgage Licensing System being developed by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators. Kentucky's Office of Financial Institutions announced the state's participation and explained what the national effort entails. There are currently 28 states and the District of Columbia committed to participating. The overall purpose of this data management system is to make it easier for lenders to register and be licensed with multiple jurisdictions, and to create a system that makes it easier to track individuals and organizations who engage in mortgage fraud and predatory lending.

Uniform regulatory practices are a good idea if the regulating bodies put the force of the law behind their rules. Recently the best that the FDIC and the Federal Reserve Board could do is issue "guidelines" with regard to the "nontraditional loan products" and the surge of defaults that is rising as a result of those products. Those guidelines were for federally chartered lending institutions, so Kentucky adopted a similar set of guidelines that calls for aboveboard action in the industry.

Specific practices that were cited are interest only and option ARMs; 100% financing and/or equity refinancing; loans with minimal documentation requirements for the borrower; and poor explanation of loan terms and conditions by the seller or agent. Kentucky's regulators put out a memorandum informing lenders and brokers that they were "expected to follow" the guidelines and provided details on their website.

Kentucky apparently intends to put some teeth into this assortment of guidelines in their licensing renewal process with state chartered institutions. According to the State, "At upcoming regulatory examinations, agency examiners will be requesting specific information in addition to regular documentation requests."

"For example, one of the items to be requested will be a listing of all loans generated that have single premium credit insurance financed...If a large volume of loans with this type of financing are identified, bank management will be responsible for articulating why this type of product was beneficial to the borrower, and what other alternative products were considered but not utilized. Other regulatory requests may be developed...to ensure that no predatory lending practices are prevalent in the banking industry...This agency will also be using the directives from the OCC as a baseline in approaching regulatory supervision in this area. Bank Management should become familiar with the contents of these directives."

Kentucky consumers should be aware of the ongoing interest in shoddy banking practices and mortgage fraud that emanates from professionals in the industry. If a potential borrower encounters agents or brokers that suggest such things as inflated appraisals, the state's regulatory structure seems prepared to respond to mortgage related complaints. For additional information, visit http://www.kfi.ky.gov/consumerinfo/alerts.htm.