Delinquency Rates

[Ken Rishel]

The State of Illinois recently passed a statute into law that allows regulators to examine and publicly report on delinquency rates, as well as take action against lenders whose rates are too high. While the statute specifically identifies "mortgage loans" other Federal and Illinois law includes chattel lending on manufactured homes into this definition for this purpose.

Synopsis 

Amends the Residential Mortgage Licensing Act of 1987. Provides that the Secretary of Financial and Professional Regulation shall conduct an examination of each licensee that engages in brokering and lending activities, the scope of which shall address the delinquency rate of the licensee's loan portfolio. Provides that licenses shall be renewed every year using the common renewal date of the Nationwide Mortgage Licensing System and Registry as adopted by the Director of the Division of Banking of the Department of Financial and Professional Regulation. Provides that properly completed renewal application forms and filing fees must be received by the Secretary 30 (was 60) days prior to the license expiration (was renewal) date to be timely received. Removes a provision providing that a license which was not renewed within one year of becoming inactive shall expire. Provides that the Secretary may share with the Residential Mortgage Board non-confidential delinquency rate related information, including any public disciplinary orders against licensees that result from the delinquency rate related examination findings. Removes a provision requiring the publication of a specified notice in the Illinois Register. Makes other changes in provisions concerning licensee names and the application process.

This is obviously a new trend for regulators. What is now law in Illinois will likely become law in other states as well. The CFPB is already taking an active interest in the issue and is finding ways to fine and penalize for this on the Federal level.

The solution is a robust Loan Policy and Procedure Manual that can explain and defend higher deficiency rates. Bear in mind that whatever a higher deficiency rate is, it is not defined in federal law yet. That is not a good thing, because it allows regulators to define it as they see fit. In regulatory law definitions can originate from other sources so consider this:

Under current federal law, there is a prohibition against overcharging consumers for goods and services (other than professional services). Overcharging is defined as charging three or more times the current market price. The accepted standard for determining current market price is to survey the market area with considerations for quantity and quality for a "going price" of the goods and services in question.

In a widely cited case, the FTC went after a Baltimore roofing contractor in the early 1970s successfully alleging the contractor was overcharging consumers to reroof their homes. This case law has been used over and over again successfully to prosecute many different types of companies successfully. Interestingly, a Virginia based aluminum siding contractor was so charged in the same manner and successfully defended their prices by utilizing several defenses:

One, they were working in lower income areas where theft was common and they built the cost of shrinkage into every job they did in those areas. (Risk based pricing?)

Two, the quality of materials was higher and more costly than what was included in the FTC market survey and their survey was flawed. Apparently the aluminum siding was considerably thicker and more damage resistant and the coating that provided the color and graining to the panels was more costly and had a longer lifespan.

The FTC lost that case. All of this case law could be applied (at the Federal level) in considering what constitutes an unacceptable delinquency rate for loans made on primary residences if the courts agree.

Any operator, no matter how small, should be prepared to defend their delinquency rates, and to work smarter and more effectively at decreasing them. This is going to make the current practices of "churning" through rent to own or lease to own or similar practices even more fraught with peril.