Anti-Predatory Lending Act Discriminates Against Small Business Owners

Anti-Predatory Lending Act Discriminates Against Small Business Owners

Lendfast.com - Small business owners make up one the largest parts of America’s economy. As of the 2004 census more than two and a half million small businesses were operating with less than four employees total. The owners of these businesses are building the future Fortune 500 companies of tomorrow yet they seem to be the ones with the most to lose should the Anti-Predatory Lending Act be passed as it is now written.

Self-employed borrowers will be hurt the most should Senate Democrats have their way with the proposed bill HR 3915. In an attempt to protect citizens from what Democrat Congressmen describe as “predatory lending” they have ignored the fact that most self-employed Americans are unable to document their income by the standards put forth in the bill.

When applying for mortgage borrowers must qualify for what lenders refer to as a “conforming” loan to get the lowest rates. This is a conventional mortgage that falls into the guidelines of Fannie Mae, Freddie Mac or FHA. Each of these agencies exists to insure lenders for the mortgages they fund that meet the agency guidelines. This lowers the overall risk of the loan and lower risks equates to lower rates.

Most self-employed small business owners do not pay themselves the same way that wage earners are paid. They usually have to show tax returns to prove their income. The problem with this is that “agency” (Fannie Mae, Freddie Mac or FHA) loans only allow the self-employed borrower to use the difference between what has been written off and what was actually earned as verifiable income. For this reason most banks and lenders offer “stated” income loans that offer comparable rates.

A stated income loan is underwritten exactly the same as every other loan except the income is not verified. This is one of the loans that have been tagged with the label “predatory loan” by Congressman Barney Frank and his contributors. Should this Bill pass the Senate most self employed small business owners will not be able to qualify for conventional mortgages. The bill reads specifically:

HR3915 - “no creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance, and assessments.”

Many in the banking community predict that due to the ambiguity in the bill banks and lenders will cease from lending to any person not able to provide “verified and documented information” about their income. They feel that the Bill opens the door for litigious trial lawyers due to the lack of a well-designed reasonability test. This means that an over-whelming majority of self employed business owners will not be able to qualify for traditional conventional mortgages.

Many lenders we have spoken with do feel that “stated income” loans have been over used in the past and probably need to be better scrutinized. Many of the top investors have already addressed this issue and have stopped funding stated income loans unless the borrowers are self-employed. Furthermore, lenders feel that specific verbiage dictating what is reasonable and what is not will reasonable by law will put an end to many self employed borrowers obtaining mortgages.

Many expect that should this Bill make it through the Senate it will be watered down and these issues will be addressed. However many thought the same back in 2002 when Georgia passed similar legislation with its own predatory lending measures. Georgia saw 60 plus lenders leave the state that year not to return until the law had been rewritten.

Aubrey Clark - Aubrey is a Loan Officer in Atlanta Georgia. He also spends time as an Author and Editor for LendFast.com - Specializing in Home Equity Loan Lending Tree Tips.