Illinois Governor Suspends Predatory Lending Pilot Program
February 15, 2007
John R. Mussman- Chicago
The Illinois Predatory Lending Pilot Program known as HB 4050 was summarily suspended by Illinois Governor Rod Blagoyevich on January 19, 2007. The Governor’s action ended a saga followed closely by mortgage lenders, community groups, and local and state governments across the country. Applauded by some community housing advocates, the Pilot Program had already sparked two lawsuits charging, among other things, that the Program had a discriminatory impact in the communities that were part of the pilot, putting additional roadblocks on borrowings by applicants that tended to be black or Hispanic. The Program engendered heated community and public meetings pitting community groups that backed the measure against opponents, including mortgage brokers, and black and Hispanic civil rights and religious leaders, who charged the measure unfairly impeded credit for poor and nonwhite applicants in the South and West Sides of Chicago.
In his press release, the Governor stated that “even though this law was designed to fight predatory loans, it is clear that the program may be negatively affecting the communities it is designed to protect. I am stopping the program until we can find a system that effectively fights predatory lending and protects homebuyers.” The Governor’s press release also stated that “[e]nforcement of HB 4050 has created uncertainty for lenders, limiting their interest in offering products to consumers.” The Governor’s press release cited a recent report from the University of Illinois Urbana-Champaign that showed housing sales in the HB 4050 zip codes had dropped by nearly half since the Database Program was launched in September 2000, while comparable zip codes had seen a decline of only 20 percent. The report was consistent with anecdotal reports that lenders had started to avoid the designated zip codes and that applicants found the reporting requirements and the mandatory counseling requirements inconvenient, burdensome and sometimes demeaning.
HB 4050 was enacted in the final hours of the regular 2005 Illinois legislative session with little deliberation. The statute established a Predatory Lending Database maintained by the Illinois Department and required that detailed information be entered by brokers or originators, credit counselors and title insurance agents receiving loan applications in the designated zip codes and mandated credit counseling for borrowers with lower credit scores in the Pilot Program area. Although financial institutions such as banks and thrifts were exempted from HB 4050, the Cook County Recorder of Deeds required each mortgage in the designated zip codes to be accompanies by a certificate of compliance with HB 4050 or a certificate of exemption. Although much criticized by mortgage brokers and others in the mortgage industry, it was launched on September 1, 2006, covering 10 Chicago zip codes designated “due to the high rate of foreclosure on residential home mortgages that is primarily the result of predatory lending practices.”
What’s the Point?
The Governor’s suspension of the Pilot Program will not end the debate in Illinois or elsewhere over how to address predatory lending practices. On January 25, a Chicago Tribune editorial commenting on the Governor’s action stated that “the problem it addressed has not gone away. Having suspended the program, the governor has a duty to offer a better solution quickly.” Meanwhile, on a federal level continued action is being taken by the federal regulators (See preceding article titled FDIC Issues Supervisory Policy on Predatory Lending), while Congress is considering national legislation on the subject.
For more information, e-mail John R. Mussman at john.mussman@hklaw.com or call toll free, 1-888-688-8500.