Carnell, a self-employed 64 year old single man with no dependents, applied to KMC Mortgage Co. (KMC) to refinance a first and second mortgage and get cash to buy tools for his small business. Besides what he earned as a general handyman, he received Supplemental Security Income (SSI) for a disability. At application he talked loudly to himself, had questionable personal hygiene and wore slightly ragged clothing. He boasted loudly how he “took care of himself,” doing his own cooking, etc. The broker determined that – subject to the appraisal – there was sufficient equity to pay off the underlying mortgages, cover loan costs, and leave about fifteen hundred dollars, but warned him that his monthly payment was likely to be much higher than his current payment. Carnell advised KMC to go ahead with the deal because he “needed the money.”
The appraisal was sufficient but noted that the home’s interior was so filled with personal items, books, magazines and debris that the owner had made high narrow lanes in order to use the rooms. A preliminary title report showed a junior lien in favor of King County Public Assistance securing a loan that was used to assist in purchasing the property. The loan terms required no monthly payments with interest at 4% per annum to accumulate as long as Carnell occupied the home as his principal residence. Upon sale of the home, the entire principal balance was payable. There was a property tax abatement certificate on the home as long as Carnell used it as his principal residence.
The credit report showed 1×30 and 2×60 in the last two years and the credit score was within the guidelines of KMC’s investor. His use of credit was sparse and included one very small balance, never exceeding three hundred dollars. An old pickup truck used in the business was paid for and the business was run on a cash basis. His tax returns showed an average combined monthly income for the last three years of $1,066. and the current monthly payment on the first mortgage was $454. He had little cash reserves with an average bank balance in the high threes.
The broker contacted CALFUND (the investor) by phone to discuss “how we can put this together.” The investor advised that this was a case where the underwriting theory of attributable income could be used. Because Carnell’s SSI income was not taxable, and the property tax abatement lowers even more tax liability, it would allow KMC to “gross up” the SSI income “to an appropriate amount.” KMC adjusted Carnell’s income by 25%. The investor subsequently indicated by phone that the loan would be approved provided there were no debts other than the new mortgage; and he paid an additional 1% of the loan amount because of the increased risk.
The broker telephoned Carnell with the loan approval and informed him of the new monthly payment, then asked if he had any questions. He responded that he was quite happy and had no questions. KMC did not notify him of the additional cost at this time, explaining that they prepared a new GFE and mailed it to his residence as required by regulation. Carnell claims he never received the notice.
In preparation to close the loan, final payoff statements were ordered from the holders of the first and second mortgages. King County P.A. responded with a final principal amount that included all of the accumulated interest and a per diem charge.
Examination of the loan documents showed that KMC changed its initial GFE and final Settlement Statement to include an additional two percent with one percent going to the investor and an additional percent listed on line 808 of the closing statement as a brokerage fee. A brokerage fee had already been combined with the investor’s fee and reported on line 801 of the closing statement. Carnell signed all final documents without comment or question and the investor wired the funds to escrow.
Seven months later, failing to cure payment delinquencies, Carnell defaulted on the loan. The file showed that he had difficulty meeting monthly payments. The investor demanded that the broker buy the loan back. KMC responded that the investor itself had helped put the loan together. When asked for proof of this, KMC revealed the phone conversations it had with an employee of the investor. The investor found no record of the conversation. The issue between KMC and the investor remained unresolved.
Several months later, the property was foreclosed upon and Carnell lost his home. A lawsuit was brought against both KMC and the investor to recover damages and rescind the entire transaction, seeking to put Carnell in the position he was before applying to refinance. Several violations of state and federal law were claimed in the suit.
KMC’s position was that it did nothing wrong, claiming that a customer had applied to refinance his home; the company followed usual and customary lending procedures and gained loan approval. It was not unusual for details to have been discussed with the investor. It followed all regular procedures of loan brokerage and complied with disclosure rules. After learning that the final loan costs were greater than estimated they acted in good faith by re-disclosing. They further pointed out that the final settlement statement revealed all of these charges but were not challenged at closing.
The investor claimed that it dealt with KMC at arms length and could find no record of offering “extraordinary assistance” in qualifying Carnell. It was against their policy to offer step-by-step procedures to brokers in order to customize a loan to fit corporate matrixes, “A loan either fit our program or it didn’t,” according to their testimony. Further, the contract between KMC and the investor contained a provision with regard to early defaults, which they chose to exercise.
_____________________________________________________________________________________
Questions.
A broker must use reasonable care in managing a file from application through closing to assure a standard of care commensurate with the duties of agency and brokerage. Some courts have even held licensed brokers to a higher than reasonable standards because the general public considers them experts. In considering how this case was handled, what would have caused you concern if it were given to you for review? Be prepared to discuss the following:
1. What kind of a borrower does Carnell look like on paper? Does an applicant’s conduct and demeanor at application have relevance to the case or should they be overlooked? After all, they have nothing to do with credit – by law the only basis on which we are to judge credit worthiness.
2. Documentation. Are there any inquiries you would have made or any additional documents/exhibits you would have required before continuing to process and submit this case for approval? Explain what and why you would order more documentation.
3. Customer Service. Consider the position of the borrower before and after dealing with KMC Mortgage Company. Did the broker help the borrower achieve what he wanted? Was the borrower well served?
4. Verdict. If you were on the jury would you find in favor of Carnell or the broker/lender?
These questions are very difficult for me to answer. I have no part in the underwriting or approval department at my company. I simply take an application. I am also discouraged from trying to field underwrite, in fact it is against company compliance and prohibited. So even if the client looks and acts weird or like a bum I still have to take and submit the application. Besides who’s to say he isn’t capable of paying on a loan just because he acts different?
I do believe the investor and broker messed up when inflating the borrowers income and should be held accountable. Like I have said in previous comments people will always find loop holes to get what they want.
On paper Carnell is a marginal borrower with limited verifiable income and limited assets/reserves. However it is appropiate to increase ss income because it is tax free and we use gross income in determining debt ratios. As long as the client fit the guidelines of the lender, I don’t believe the broker did anything wrong. He obtained the loan for the borrower that he desired and the lender approved. I do not agree with the increase of fees from 1% to 2% however.
The borrower was told what his new payments would be and the terms of the contract. There has to be responsibility on the part of the borrower to know what they are signing, as well as the disclosure from both the broker and the lender.
Our friend Mr Carnell seems to me like a very big risk his advanced age combined with his limited earning ability SSI plus doing odd jobs shows me someone who in their declining years should not be taking on more debt and with a combined monthly income of 1,066. (is that including SSI) if so his earning power is not too encourageing.I work mainly in marketing and have little contact with loan Origination and processing but I wonder if Mr Carnell would have qualified for and been better off with a Home Equity Conversion Morotgage. A HECEM Reverse Mortgage where he would receive tax free funds not affecting his SSI and insured by the US Government and not have any monthly payments to make until he departs his home. In total I do not think that Mr C. was exposed to all the options that might have been available
On paper I see the borrower as being a marginal borrower, he shows little debt, some lates and little cash reserves. He did however fit into the lenders criteria. I do not that his actions or demeanor would have caused me concern as they do not come into effect whether or not he can repay a loan.
I do not believe that the broker did anything wrong, they disclosed the terms of the loan and the borrower accepted them. I see that borrower getting what he wanted out of the loan and the broker got it for him.
If I were on the jury, based on what I have read, I would find in favor of the broker/lender.
correction… I do see due to the fact that the borrower was charged excessive fees and that he lost his home, that he was not properly served. Since multiple state and federal laws were violated then Carnell does deserve to have the court find in his favor.
Carnell,s actions and demeanor are not a problem but his limited financial circumstances should have raised a red flag. His income pedrmitted a day to day existence with little margin for unexpected cash needs (read that “increased mortgage payment amounts”) The broker should have been more thoughtful in ensuring that Carnell completely understood the settlemnt numbers, or better yet, he (the broker) should have looked into the possibility of a reverse mortgage. On paper it might not have worked but at least it would have shown his interest in genuinely trying to help his client and not simply collecting a commission.Under the circumstances as we see them, I would have to side with Carnell. Hopefully he learned a lesson.
Mr. Carnell would be considered a very marginal borrower. His appearance at application could have been because he just finished a job. Reviewing the entire application (if complete!) with regard to assets and liabilities, I would question the longevity of Mr. Carnell’s vehicle as this asset is necessary for his business. Without available assets to replace and an increase in housing expense, Mr. Carnell appears to have no room for an additional liability, should he need to replace his vehicle. I have no problem going over a transaction with an investor if their guidelines are unclear. However, it is the LO’s responsibility to document compensating factors relevant to obtaining investor approval. If KMC documented appropriately based on the conversation with the investor, then I feel KMC did nothing wrong during the approval process. When an Investor conditioned the loan for an additional 1% fee due to the “risk”; by raising the loan amount to accomodate the additional fee, doesn’t that constitute “additional risk?” Since the Investor approved and allowed the closing of Mr. Cornell’s transaction, regarless of the “buy back” agreement between the broker and investor, the Investor is, in my opinion, liable for any legal action. KMC must have met the Investors guidelines or they would not have received an approval and the loan would not have closed. Finally, I would have taken into consideration the residual method in addition to the DTI. The remaing residual would show any room for additional debt, should any emergency arise. With the lack of sufficient residual, payment shock and minimal reserve, this transaction would have been declined. KMC and the Investor placed this borrower in a compromising situation all for $1500 for tools. Mr. Carnell would have been better served by going to Sears for his tools. I would side with Mr. Carnell.
First each application/borrower loan must be proven to be beneficial and clearly defined in 1 or 2 ways. First: rate and term how long will it take for the borrower to earn back the closing cost must be determined. We work on a 36 month of return. This does not include pre-paids. 2nd if cash out we will examine the total monthly savings from the debt consolidation even if the monthly mortgage amount exceeds the current payment. We show examples of using their monthly savings to better their position by simple principal reduction eliminating time and additional interest. We make sure they walk away with the tools to better themselves. When sending disclosures we always recommend the client review each page with us leaving no line left unexplained. This is why we send our initial disclosures electronically to review them with our client together. We also tell the client to bring their GFE to closing because we are present at every closing to be kept accountable. The only item a LO should not be able to guarantee at the time of the initial GFE is pre-paid interest and pre-paid Insurance Premiums. Why these 2? Because at the time of application you do not know exactly when you will close or do most clients know the month the insurance premium is due for properly establishing their new escrow account. But every line item should be exact and true. We tell our clients anything exceeding these amounts we pay out of our pockets and not there’s. A properly taken GFE should never change. Plus what’s more in excusable is a new GFE which is not signed off prior to signing final closing documents. As I said previously are 1 Rule is to protect the BIG FOUR 4. 1. Client 2. Underwriter 3.Investor and 4. The Program. By doing this it keeps everyone safe and secured.
You have more than a couple of issues here dealing with Mr. Carnell, 1. If you take his overal disposition (not taking care of his personal hygiene, talking loudly to himself and wore slightly ragged clothing)one would think that he was not competent to handle his own affairs, but then he lives alone and takes care of himself. If you raised a red flag based on that and his age and denied him a loan based on that then you may face a lawsuit because of age discrimination. However, after taking the loan application and he had 1066.00 over three years (standard is two years tax returns) so the red flag here is that his current years tax return did not show sufficient income to even get him at the $1066. If you just take the $1066.00 monthly income with his present mortgage payment you already have a front end debt ratio of 43% if the LO/Broker was indeed trying to help him to get his required cash out and pay off his small debts, why not see if his 4% 2nd could be subordinated since he did not have to make payments until he sold the property? (one thing that is unclear is how much the loan was for)If I take his payment and use 6% interest I have a loan amount at about $54,874.00 with his payment at $454.00 (not sure if that includes taxes or insurance or not) the article does not give you all of the information. Lets assume it does and using $329.00 for P&I and $125.00 for taxes and insurance if he received a loan even increasing his payment of $500.00 per month he could get a new loan that included his taxes and insurance at $62,546.00 if they are charging an extra 1% for risk for a total of 2% he still should have had enough money to cover his closing costs, prepaids, title and escrow get his $1,500.00 cash out and pay off his debts with a 47% debt ratio. So based on all of the alternatives for Mr. Carnell, I do hold the loan officer liable because by doing the calculations he put the client at risk for not being able to repay the loan. I do not feel however, he should have to buy the loan back from the investor. The investor is at fault and probably more so than the loan officer. When they received the file reviewed the credit report, title report and the appraisal (again, you can not judge how a person as well as the investor. I would have also asked for an updated P&L, talk to the borrower, received a letter of explanation on how he receives his additional money etc. Having underwritten in the past, I would have denied the loan based on his ability to repay the loan. It is high risk, even by their own admission. If I was a juror, I would favor for Mr. Carnell. As far as the loan officer is concerned, he/she is coupable but not sure if liable. The only reason is because he asked for guidance and the investor should have told him alternatives to offer the client. I waiver on that issue a bit.
This is a good example of a person meeting the guideline standards, clearly there are some things that should have been looked at a lot closer. His income should have been the main concern for the broker. We have to be able to do what’s right for the client even if it means not closing a loan.
Case study Carnell v. KMC
I believe it was in the best interest of the client to not refi but rather keep his existing leans. The LO is responsible for bending the rules and thus forcing them the client out of his home. I evaluate each client’s unique situation and if the loan make financial since for them then I work at it, if not then I counsel them on that as well. I would require much more documentation in regard to the existing leans. The client was not served well; he was serviced by a greedy LO out for a commission. Carnell just because a client qualifies for a loan does it make it the best for them?…
It’s obvious to me that the Lo should have walked away from this loan. Carnell was financally strapped with limitted income. A big sign, late fees and no credit lines of any value. Also possibly mentally unstable. Living in squalor. Both the LO and the investor took advantage of Mr Carnell by charging excess fees. Where was the ETHICS here. Try and helping this guy instead of linning your pockets. Maybe a reverse mortgage or program that could help him. Where was the compassion?
I am unclear if the 1066 includes the SSI which I am assuming it does not. If the 1066 includes SSI that is of much greater concern. Even debt to income ratios if with in guidelines dont tell the story. If the borrower has $1066 and has a proposed payment of $454 that only leavs $512 left for insurance gas, food etc. . If the borrower is showing possible signs of dementia or senelity, then a confernce with living kin, preferably his children would be something I would do. He is also showing signs of being a hoarder so its possible that he might have a disorder where he wants money to buy tools with out a real need. I would bring in his family, wife,kids or what ever and make them bring in a copy of his utilities for the last 6 months and look at a 6 month average of his monthly living expenses. I would put that all together and confer with his family. In addition, a reverse mortgage might be a better tool but at the same time, it is still good to involve his family incase he has mental issues like possible hoarding or gambling etc.
This is a tough one but the red flag for me would be the SSI income, (how was this man disabled) is the SSI income due to a mental disability? Did the man have to ability to understand what he was signing? Did he understand that his income was being grossed up? Did he understand how much he was paying in additional fees? Is his disability physicial? Would he be able to continue working to make the new payment? The appraisal noted the homes living conditions yet another red flag, showing the man’s judgement might not all be there. To me this is was a marginal borrower, with some shaky credit and perhaps a loan better left undone.
Thre are several red flags on this loan starting with the man being on SSI (this is disability income, so if he is disabled HOW can he work?)! His income is marginal, he lives a marginal life style (based on the appraiser comments). He already has a junior lien on the property which required no payments. There are more red flags, like if you have to gross up the income to qualify someone are they really qualified?
Did the borrow get what he wanted? Hmm he got his money but lost his home.
we’re never to judge the “appearance” of someone when they walk in. That is why we perform the C.I.A. part of our job. Credit, Income, and Assets. My first problem with this loan isn’t the dilligence portion, that seemed to be handled rather well. It was the overall integrity of the transaction. Granted it’s a fine line to walk between customer service which means “doing it because he needed the money” and also looking out for someone’s best interests over the course of the loan. But we can never assume to know much about someone given their appearance.
The documentation portion would be hard to prove given that a new GFE was sent out but never received according to the borrower. I would have that examined as well. The lien for King County would have caused me to want to see a copy of the note and so forth. This way I can accurately determine DTI.
The Customer service question is hard, you can’t always protect someone from themselves and in this case I believe the borrower was NOT well served. As soon as the statement of “needed the money” was made I would have wanted to know for what, and then determined the overall chances of this loan performing and preserving his chances of continued payments.
As a Juror I would reluctantly rule in favor for Carnell only because the red flags of receiving disability income while being self employed and the lower average monthly income weren’t a consideration. So in the end he didn’t “need the money” as badly as he thought.
Fiduciary responsibility on behalf of the broker. Based on the information presented the broker had a understanding that by meeting his clients monetary need this would increase his mortgage payment and present a higher and possible uncomfortable mortgage payment.
Once the lender raised the loan another point this should have raised a red flag for the broker who should had the borrowers best interest in mind. This was a deal killer and should have been relayed to the borrower immediately.
At some point it looks like the mortgage professional was only looking out for himself.
Finally, regardless if all disclosures where sent out in a timely manner. There was a apparent lack of fiduciary resposiblity or care for the clients economic state.
Based on the information received the loan should have not been made under the new laon terms. A increase in loan means a increase in payment. With past payment history this loan should not have been made. With all this the client had very little or no reserves.
Verdict: Hung Jury
Harold, you argue in favor of Carnell….so why the hung jury?
Hey Chris: “we’re never to judge the “appearance” of someone when they walk in.”
Really? I think it’s very, very difficult to NOT come to some stereotypical conclusion when we meet people for the first time, face to face. Humans do this naturally without even knowing it.
I think what you meant was that after we take everything in, we are suppose to ignore certain characteristics about a person when making a credit decision (the protected classes listed in the Fair Housing laws and the Equal Credit Opportunity Act.)
So is dressing in a disheveled way a protected class? Is not taking a shower a protected class? Is talking to yourself a protected class?
No.
An average, random person would likely NOT ignore these things. Same with a loan originator.
I do not think Mr. Carnell was well served by the lender/broker. He was scraping by and to add the cost of a re-finance for a small cash payout to buy tools for his business seems like the wrong strategy. Regardless of the “rules” and “qualifiers” followed; and subsequent misinterpretation between the investor and broker as to who did what, there may have been better options available for Mr. Carnell to meet his needs. He is on SSI for Disability and got a junior lien in favor of King County Public Assistance securing a loan that was used to assist in purchasing the property, he may also have qualified for assistance from the SBA or some other agency for assistance in supporting his business needs. I believe an opportunistic $$$ intention got in the way of what was best for the customer overall and I would side with Mr. Carnell if on a jury.
Hey Jillayne,
you’re right it’s difficult not to use a demographic mode of thinking, that is why we have dilligence of course.
so if the comment I made wasn’t specific enough to address that point then fine, but “protected class”???? not sure I understand that but in any event whether dirty, or talking to yourself, I’d still do the the same tasks in an effort to guarantee both good customer service and good financial service.
I hope this helps clarify my earlier response.
Thanks!
Hi Chris,
Here’s a link to ECOA:
http://www.justice.gov/crt/housing/documents/ecoafulltext_5-1-06.php
See section 701 Prohibited Discrimination.
Here’s a link to Fair Housing’s protected classes:
http://portal.hud.gov/portal/page/portal/HUD/topics/fair_lending
read the first paragraph.
So we are to make sure we treat people the same when making credit decisions and grant the loan based on their ability to repay and not on one of these classes of people.
Many folks assume that we must ignore Carnell’s dishevelled appearance but adding these facts to the other facts from the case would lead us to believe that Carnell may have had limited capacity to understand the documents he signed.
As far as Mr. Carnell’s appearance/attitude that is complete irrelavent to me or the transaction. What does raise a flag is the income and ability to pay the loan. He is a marginal borrower at best and I would go over with him in detail what his payment would be etc. I would also disclose in person or on the phone the new additional fees being charged prior to just mailing them. I like to be upfront about all that so it does not come back to bite me in the end. I side in favor of the lender on all issues except for just mailing the GFE with the higher fee
This is very typical of greed what’s in it for the Originator not the customer,also I would venture to say that Carnell was told on every question he may of had what he wanted to hear an not what he should of professional should of been actually told. The grossing up of his income in some sectors is predictible but of all he was on a coarse of financial demise. The broker showed no compassion and put the blame on the leder for offering the product.In summary we need to grant credti to customers on there ability to pay and not on the groups of people whom can be groomed for failure to to greed.
I’m new on this business; it seems for me the broker did right thing; however, at the end the two percents should not be added;”…additional two percent with one percent going to the investor and an additional percent listed on line 808 of the closing statement as a brokerage fee.” since it was already ” combined with the investor’s fee and reported on line 801 of the closing statement…”, poor Carnell was just like most of people and so trustful in those greedy people, signed paper and finally lost his house. It’s very typical of an example of forclosures.
1. What kind of a borrower does Carnell look like on paper? Does an applicant’s conduct and demeanor at application have relevance to the case or should they be overlooked? After all, they have nothing to do with credit – by law the only basis on which we are to judge credit worthiness.
A: Mr Carnell is clearly a marginal borrower in terms of credit worthiness and financially. Having to gross up his income is a clear indicator that this individual is stretching his means. Add to this his conduct and the way he keeps his home (the collateral) and I would have had serious concerns even though it appears he qualifies by stretching his income. I would question whether he truly understands what he is about to do.
2. Documentation. Are there any inquiries you would have made or any additional documents/exhibits you would have required before continuing to process and submit this case for approval? Explain what and why you would order more documentation.
A: I would have probably requested a budget letter from the borrower asking how he would account for the higher payment and misc expenditures througout the month. Making him put thought into the budgetary aspects of this would probalby have had clearly shown he lacked the mental capacity to understand the full extent of what he was about to do.
3. Customer Service. Consider the position of the borrower before and after dealing with KMC Mortgage Company. Did the broker help the borrower achieve what he wanted? Was the borrower well served?
A: Clearly the borrower was hurt by this. As the lender on this or any similar circumstance, I have a fiduciary duty to do what is best for the client regardless of their wants or demands. Had most other loan officers practiced this in the recent past, we would likely not be in the mess we currently are in now. Option Arms would have never been sold sub-prime loans would be issued at a minimum.
4. Verdict. If you were on the jury would you find in favor of Carnell or the broker/lender?
A: unfortunatley, I would side with buyer here. This loan was a stretch financially with the grossing up of his income (which happen to be a fixed SS income as well). He showed signs of incompetance at the application by talking out loud to himself and kept his home in a cluttered mess. I just don’t think that the lender did enough to prove that the borrower truly understood what he was getting into even though there were clear signs that he may not be able to.
1. What kind of a borrower does Carnell look like on paper? Does an applicant’s conduct and demeanor at application have relevance to the case or should they be overlooked? After all, they have nothing to do with credit – by law the only basis on which we are to judge credit worthiness.
Carnell appears to be a marginal qualifying borrower on paper if he’s has a 1×30 and 2×60 as well as needing to gross up his income.
I do not believe that his demeanor is relevant, especially in a refinance transaction since he is already obligated on this home, especially if the final outcome of the refinance was more favorable such as reducing his monthly obligations.
2. Documentation. Are there any inquiries you would have made or any additional documents/exhibits you would have required before continuing to process and submit this case for approval? Explain what and why you would order more documentation.
I would have wanted to clairify his total monthly deposits from bank statements to ensure his cash flow was sufficient to make his future house payment.
3. Customer Service. Consider the position of the borrower before and after dealing with KMC Mortgage Company. Did the broker help the borrower achieve what he wanted? Was the borrower well served?
Absolutely not, the borrowers house payment increased substancially, because he paid off a 4% loan that had deferred payments while only taking out about %1500 in cash. The loan officer should have encouraged the borrower not to refinance his house and seek consumer credit for the $1,500 needed for tools.
4. Verdict. If you were on the jury would you find in favor of Carnell or the broker/lender?
Carnell for certain. I think the questionable redisclosing of increased fees for a borrower of questionable intelect should have been done face to face with wet signatures, but more importantly this is a classic example of the lender putting thier needs first. To recast a new loan for a higher payment while only liquidating $1,500 was not in the customers best interest.
I feel Carnell was a high risk borrwer and that should have been a sign to the LO as he needed some help to structure the deal. Does the underwriter assume any responsibility for this too? Im curious to know how long Mr. Carnell lived in his home prior to the refinance? I’m in favor of Mr. Carnell as I feel he most likely still be in his home had he never pursued the refinance especailly for $1500 cash back.
1. What kind of a borrower does Carnell look like on paper? Does an applicant’s conduct and demeanor at application have relevance to the case or should they be overlooked? After all, they have nothing to do with credit – by law the only basis on which we are to judge credit worthiness.
A: This seems a classic case of someone trying to do something that is contrary to his best interests. The borrower is not strong as they had to gross his income to qualify and he’s clearly experiencing some dimentia. I can’t say that those things should be over looked as they have a direct bearing on someones ability to qualify for the loan. At this point, I would be proceeding with caution and NOT cutting corners to ensure he qualified.
2. Documentation. Are there any inquiries you would have made or any additional documents/exhibits you would have required before continuing to process and submit this case for approval? Explain what and why you would order more documentation.
A:That’s a fine line. I couldn’t ask for any documenation on mental illness but I think that would have entered my conversation with him in a very round about way. I wouldn’t want to offend him, but simply begin to assertain his true mental capacity. I might also ask for a budget from him to see if he felt he could afford it. That might reveal his true ability to enter legally into the new contract. Finally, I might have taken the time to explore other options with the borrower. Maybe he could have secured the tools another way, without using equity from the home. Maybe he didn’t even need the tools. This is where our moral compass would come into play. Is this loan really what the borrower needs? Should I even write it?
3. Customer Service. Consider the position of the borrower before and after dealing with KMC Mortgage Company. Did the broker help the borrower achieve what he wanted? Was the borrower well served?
A: Obviously, the borrower was not well served and maybe the best proof of that is the response from the two companies invloved who wrote the loan. It’s not about the borrower in their eyes, it’s about covering their own tracks and culpability. When thigs go wrong, as they sometimes do, you can usually tell the guilty party by who they react to the issue. In this case, everybody is pointing fingers and nobody seems especially worried this old gentleman is out of his home . . .
4. Verdict. If you were on the jury would you find in favor of Carnell or the broker/lender?
A: This is a gray area and very much the reason underwriting guidelines are beings tighten across the board. Who is right and who is wrong? I don’t know. I can honestly say I would have more than likely walked away from this one. But the fact that the loan was written and defaulted upon doens’t make who is right and who is worng an easy choice. I think I would need more information on just what was disclosed and how it was disclosed before I could make a decision. But I would be leaning toward the buyer in this case . . .
Carnell looks like a high debt to income ratio borrower with a few late pays in credit history. The appearance of the applicant has no impact and should be overlooked.
Letter of explanation on late pays. Would have looked for clues such as were the late pays related to seasonal work of his employment? Is the income inconsistent. Was the explanation satisfactory? Were there overdrafts in the bank statements? Were bank statements requested and anayliszed?
What were the goals and objectives of the refinance. How much money was needed for tools. Were the cost of tools justified by the increased payment on the mortgage for 30 years. How much was the payment increasing.. the case study says likely to be higher. Did the same refinance scenario still make sense after adding in additional debt ( especially one with no monthly payment and extra costs of loan) could that DPA been subordinated?
I would find only the investory guilty. The Broker didn’t do anything wrong with stating guidelines of how to handle the grossing up of income. Until a underwriter looks at a loan and approves, is the loan actaully approved.
This is a tough one. I would be worried about him since his income was fixed and if on SSI was elderly or disabled and unable to increase his income for the 30 years needed. BUT, you cannot discriminte on what age or “what ifs”. I think I would have asked him more questions getting him a better understanding of the loan. Ultimately, it is his discission and on paper he qualified for the loan. I would take more time to be sure he understood the loan.
As I stated before, I was taught to use budget letters, this is one borrower I would have used this on. I know you can gross up income but if he was already 1 X 30 and 2X60 it already shows he has a tough time making the original payments and now we are going to increase the mortgage. I would be worried for him and again over document and explain this loan. Credit wise he may have been marginal but I would consider him a marginal borrower and taken great care with him.
I believe the client accomplished what he wanted but in this case the only winner was the broker. He got a paycheck and an inflated check in my opinion. If this man was clearly a little lacking, to take advantage and add extra points was incredibly wrong. I do not think he understood what he signed. Truely an unethical broker in my opinion. Legally, they followed guidelines except no making sure he got the GFE. I do not believe a refinance adding in closing costes etc into the loan, increasing his payment was the best option for this man. I would have suggested increasing his credit card limit and putting tools on a short term loan and leaving his home alone.
I would have voted guilty for the broker. I bet they asked questions of the investor to figure how to structure the loan and get past the soft spots in the loan. They may have been fine “on paper” but I believe they mislead and abused the client. They did not suggest other options to him such as a credit card. These are the types of people who have damaged our industry and helped people to lose their home. I say guilty!
Carnell lost his home because he could not afford the new payment, the answer is easy, and of course he was not served properly. I feel the broker and lender are equally responsible. Had the borrower been fully educated on the new charges and the future possibilities his wants might have changed. It is this type of short term thinking that is ethically wrong.