Will state mortgage law invade privacy, discriminate?

StoryImage( ‘/Images/Story//Auto-img-114305555310744.jpg’, ”, ‘Rod Blagojevich’);
StoryImage( ‘/Images/Story//Auto-img-114305556910744.jpg’, ”, ‘Michael Madigan’);

Law will be tested in Chicago market, and possibly expand to other areas within four years

A new lending law signed by Illinois Gov. Rod Blagojevich is on the horizon. House Bill 4050 was passed to aid those wishing to obtain home financing and avoid abusive lending tactics.

The law is scheduled to be enforced by July 2006, and has mortgage professionals reeling to keep the financial information of their clients private. Brokers are concerned, citing privacy as a principle on which the financial services industry was built.

Blagojevich and House Speaker Michael J. Madigan (D-Chicago) pushed the passage of the law. They say ample evidence exists that predatory lending practices by mortgage brokers are the cause of high rates of foreclosures in Illinois.

By implementing the new law, regulators aim to crack down on dishonest brokers by requiring mandatory credit counseling for applicants with properties in select Cook County ZIP codes. To enforce the legislation, the Illinois Department of Professional Regulation will be directed to establish and administer a database that will require mortgage brokers and title insurance companies to submit information about loan applicants, including consumer debt obligations and salary information. Once in the database, the information will be compared with credit counseling standards that have yet to be determined by the state. Loan applicants will then be notified if the Department feels the loans may be too risky, while all of their information will remain in the database.

Originally set to begin Jan. 1, the law has been delayed while the state does beta testing and finishes constructing the database. When enforcement begins, properties in ZIP codes 60620, 60621, 60623, 60628, 60629, 60632, 60636, 60638, 60643 and 60652 will serve as the pilot areas, which will determine if the law needs to expand its coverage to other areas of Illinois. An expansion of the law could happen in four years.

Although his company does not solicit a great deal of business from the Chicago markets, John Johnson, manager of Allied Mortgage in Rockford, suggested the state should stay out of such matters.

“This may create the inability of consumers to determine their own futures if the government gets involved in personal financial decisions,” Johnson said.

The privacy issue is only one in a possible series of red flags. In a letter to consumers, Blagojevich stated that foreclosure rates are climbing in the test areas. Most mortgage brokers disagree.

A study done by the Illinois Association of Mortgage Brokers (IAMB) shows foreclosure rates in those areas have dropped 65 percent since 2002, not to mention a large number of citizens residing in those ZIP codes are mostly African-American.

Marv Stockert, executive director of the IAMB, said the ZIP codes in question are composed of 58 percent African-Americans while the state percentage of African-Americans is 12.7.

“We are very concerned about the disparity of the racial makeup of the pilot ZIP codes, and how and why they were selected,” Stockert said.

Citing possible institutional racism, many mortgage originators operating in the test areas, such as Madeline Sanders, an African-American business owner, feel the government may be placing undue blame on African-American homeowners.

Sanders said: “The law is ridiculous. There is no other way to look at this other than the test areas to start this off are where mostly black people live and work. Blacks don’t get foreclosed on because we need credit counseling or because of predatory lending. We have the same issues as everyone else, but sometimes our resources are not the same as the majority of the population, and this is not helping.”

The new law also places title insurance companies and wholesale mortgage lenders at risk of having to avoid doing business in the HB-4050 areas. A borrower completing the mandatory credit counseling will be required to provide a title company with evidence the counseling has been completed. If that proof fails to be recorded with the mortgage and a real estate loan is made, the lender could not legally foreclose if the borrower defaults. Such an instance would shift the responsibility of repaying the loan from the homeowner to the title company.

So far, all Illinois title insurers are not willing to take that risk, which some say will force lenders to cease doing business with brokers who originate loans in the HB-4050 ZIP codes.

Illinois now joins 27 other states with strong reforms on predatory mortgage lending. States with the toughest laws, such as Massachusetts and New Jersey, have shown the largest decline in foreclosures and loans with excessive price tags. Illinois, however, is the only state that will require credit counseling to select loan applicants.

Whether HB-4050 will include Rockford has not been decided. Originally, 64 ZIP codes, including areas in and surrounding Rockford, were flagged, but the coverage was later scaled down to 10.

From the March 22-28, 2006, issue

Enjoy The Rock River Times? Help spread the word!