Currently there is much debate and finger-pointing regarding the Sub-Prime Mortgage Meltdown. According to Bankrate.com, the Meltdown was something that many saw coming, but no one -- not the industry, not the secondary market, not the regulators, or the media --did anything to prevent it.
The Issue:
Subprime mortgage lenders make it possible for many borrowers with flawed credit to obtain mortgage loans, many of which could not afford those loans. While this concept aligned with the American Dream of Home Ownership, many mortgage companies failed to realize one important facet of this concept – RISK!!! It appears that many of the mortgage lenders capitalized on the millions of dollars of inflating interest rates in a low interest market but failed to implement the controls that mitigated the risk of surging federal interest rates, foreclosures, loan defaults, and over extended credit.
Should Sarbanes Oxley Be Extended to the Mortgage Industry?
In my opinion, this is an unconditional yes and if you research the section 13a or section 15d of the Securities and Exchange Act of 1934, some mortgage lenders may be obligated to comply with SOX but are not. Here’s the deal according to the law: Companies that issue asset-backed securities are must report under section 13a or 15d. All sub-prime loans are issued as asset-backed or mortgage-backed securities. If a mortgage company issues asset-backed securities on the open market and remains the master-servicer of the loan pool, the company's reporting obligation under sections 13a or 15d of the Securities and Exchange Act of 1934 is not suspended — it continues. So you see that many subprime lenders should already be accountable to Sarbanes Oxley.
My Conclusive Analysis:
In order to minimize the risk of mortgage meltdown in the primary markets, Sarbanes Oxley should be extended to the Mortgage Industry. Furthermore:
- Congress should ultimately enforce the SEC laws as well as force mortgage executives to retrain their loan officers to pitch programs that are better suited to their customer’s unique financial situation.
- Mortgage companies must implement controls and key systems that automatically detect an over-extension of credit as well as implement thresholds that minimize business risks.
- The industry should quickly come to the conclusion that Sarbanes Oxley applies and would make mortgage lenders document, test, assert, and attest to the effectiveness of their internal controls according to Section 404.
- Similar to the insurance industry, mortgage lenders should do a better job of assessing risks when extending credit to subprime borrowers.
Thank you
James Sayles
MBA, BS, CISSP, CISA, CISM
Vice President, Chief Risk and Compliance Officer
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