An Audit Report on the Department of Savings and Mortgage Lending's Protection of Consumers from Predatory Mortgage Lending Practices
March 2007
Report Number 07-023
Overall Conclusion
The Department of Savings and Mortgage Lending (Department) conducts an effective licensee application approval process, meeting the requirements specified in Texas Finance Code, Chapter 156, which is also known as the Mortgage Broker License Act.
The scope of the Department's mortgage broker inspection procedures and current staffing levels are not adequate to protect consumers from predatory mortgage lending practices. Specifically:
- The Department is not inspecting mortgage brokers with sufficient frequency; at its current pace, the Department will not complete initial inspections of all licensed mortgage brokers until fiscal year 2009, more than six years after it began inspections.
- The Department's inspections focus on whether mortgage brokers and loan officers comply with current state and federal laws. The Department does not take the extra step of looking for evidence of all predatory mortgage lending practices, such as a broker arranging loans without regard to the borrowers ability to repay.
- The Department is not able to take advantage of contingency appropriations available to it to hire additional mortgage broker examiners because it has reached the statutory limit on the amount of licensing fees it can charge mortgage brokers and loan officers.
- It is important to note that the Department regulates only a part of the mortgage process; it does not inspect or license most lenders.
Closer monitoring of the state's 24,027 licensed mortgage brokers and loan officers, such as adding steps to detect predatory lending practices during inspections, would allow the Department to provide more information regarding the extent of predatory mortgage lending in Texas.
To finance the cost of additional examiners, the Department would have to raise licensing fees paid by mortgage brokers and loan officers. The Department's licensing fees, however, are currently set at the maximum allowed under the Mortgage Broker License Act. Therefore, the Legislature would have to increase or eliminate this cap on the license fees before the Department could hire additional examiners.
Applying additional appropriated resources toward inspections of mortgage brokers would allow the Department to improve its protection of consumers. For example, adding 10 examiners would allow the Department to complete initial inspections of all licensed mortgage brokers and loan officers about one year earlier than at current staffing levels.
The Legislature should consider eliminating or suspending the $20 Mortgage Broker Recovery Fund fee currently collected from licensed mortgage brokers and loan officers. Fees and penalties deposited into the Mortgage Broker Recovery Fund surpass the amount needed to pay claims filed against the fund. As a result, the fund will exceed its statutory cap of $3.5 million by the end of calendar year 2007. Once the fund reaches $3.5 million, the fees collected will transfer into the State's General Revenue Fund.
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