Ironically, one of the major arguments for the creation of the Consumer Financial Protection Bureau (CFPB) was to replace the irreconcilable disclosures previously required by HUD and the Federal Reserve with one set of integrated disclosures, which it did. This was a major advance, but it left SIMs entirely out of the picture, for reasons CFPB has never explained.
THE POTENTIAL FOR FRAUD
Mortgage notes that allow borrowers to be charged simple interest offer firms that service loans for others a tempting opportunity: charge the borrower simple interest but credit the lender for a standard mortgage. If the borrower pays a few days late, the servicer could pocket the excess interest, crediting the lender only with the expected monthly interest. Further, the slower pay-down of the SIM loan balance would mean that the borrower would be paying the servicer after the lender had been repaid.
I don't have any evidence that this has ever happened, but given the temptations and the large numbers of players in this market, I would be surprised if it hasn't. In any case, it is one more reason why SIMs should either be made illegal or subject to explicit disclosure rules.
Next week: SIMs at Fannie and Freddie
About The Writer
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com.
(c)2017 Jack Guttentag
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