Gov. Ryan Announces Plan to Combat Predatory Lending

CHICAGO -- Governor George H. Ryan today announced a multi-faceted plan to curb predatory lending in the State of Illinois, including draft regulations to prevent the abusive practices that cost people their homes.

"Home ownership is at an all time high, in part because of a strong economy and less restrictive lending practices which have helped consumers achieve the American Dream. But, at the same time, there has been a disturbing trend--an increase in predatory lending practices where unscrupulous lenders offer loans to people who they know cannot afford to re-pay," Gov. Ryan said. "In the worst cases, predatory lenders deceptively strip the equity value from a home. They foreclose and a family loses their home-that's a tragedy. Predatory practices destroy our neighborhoods with boarded-up properties that are havens for criminals. It is a vicious cycle we must stop."

Gov. Ryan directed the Office of Banks and Real Estate (OBRE) and the Department of Financial Institutions (DFI) to draft regulations to ban predatory lending practices by mortgage lenders licensed by the state. The state regulations will apply to all financial entities making residential loans in Illinois that are regulated by the State--state-chartered banks, savings and loans, savings banks, credit unions, finance companies, mortgage brokers and bankers.

Whenever a high-risk home loan -- defined as having either high interest rates or excessive points and fees -- is made, the rule would:

• require lenders to verify the borrower's ability to repay the loan;

• prohibit the financing of single premium credit insurance, costs which are often rolled into the mortgage, unbeknownst to the borrower. The policy is paid over the life of the mortgage, adding as much as $100 a month to loan payment. Consumers rarely know that the beneficiaries of the policy are the banks and not the owner or family.

"Single-premium life insurance provides little or no value to the homeowner, while raising their costs, Gov. Ryan said. "The banks get paid up front, while all the owner has is increased debt."

The regulations also:

• prohibit fraudulent or deceptive acts or practices, including the use of deceptive marketing and sales efforts by lenders;

• ban "loan flipping," where lenders refinance existing loans, charging additional points and fees, without any financial benefit to the consumer;

• forbid "negative amortization" loans, in which the loan amount exceeds the value of the property securing the loan;

• limit the financing of points and fees;

• set limitations on "balloon payments;"

• ensure that refinancing of an existing loan is in the best economic interest of the borrower;

• require that no lender can make payments solely payable to a contractor;

• provide for independent third party review of "high-risk" loans, if such a program is approved and funded by the General Assembly.

The regulations, to be proposed to the General Assembly's Joint Committee on Administrative Rulemaking, were based on the City of Chicago ordinance proposed by Mayor Daley and passed by the City Council. The City ordinance cracks down on predatory home mortgage lending by requiring financial institutions that want city deposits and other city business to sign a pledge that they and their affiliates do not and will not engage in the practice.

"Mayor Daley and the Chicago City Council paved the way to protect consumers with their ordinance. I commend their leadership and today I hope to build on their actions by proposing these regulations," Gov. Ryan said.

Gov. Ryan has also ordered legislative initiatives, including:

• Directing OBRE to draft legislation to introduce this spring to increase the net worth requirements for mortgage bankers and brokers. The legislation would also clarify that a mortgage broker is an agent for the borrower and has a higher duty to the borrower than to any other party.

• OBRE drafting legislation to license all loan officers, regardless of where they are employed. Currently, only mortgage lending brokers or companies are required to be licensed. Once this legislation becomes law, loan officers would be regulated in much the same way as insurance agents.

Gov. Ryan commended the Federal Reserve Board for proposing their regulations to combat predatory lending on a national basis. The Governor said federal action is needed to protect consumers in order to regulate companies not subject to state regulation.

• This past summer, Gov. Ryan's office hosted a public meeting in Chicago with federal regulators and national organizations responsible for regulating the mortgage lending business to discuss ways to prevent predatory lending. This past August, OBRE Commissioner William Darr testified before the Federal Reserve Board on the importance of strengthening their rules against predatory lending.

• Last month, OBRE Commissioner Darr testified at the request of the New York Banking Department in New York City on the then pending merger between Citigroup and the Associates First Capital Corporation. The Associates has a history of certain predatory lending practices and by moving their operations under a federal charter, they would not be directly regulated by the state of Illinois.

"Unless this problem is eventually addressed on a national basis, consumers will never be completely protected because predatory lenders can evade state regulations," Gov. Ryan said.

OBRE will also submit an emergency rule to the legislative committee requiring mortgage lenders to provide semi-annual reports detailing the company's own default and foreclosure rates. The state would be able to take a variety of actions, including fines, when default and foreclosure rates are found to be excessive.

Gov. Ryan also announced that DFI's Mortgage Awareness Program is in place (www.state.il.us/dfi/ tel. 1-888-298-8089) to educate consumers about the mortgage lending process and alert them to common predatory lending tactics.

As part of the new regulation, all lenders who make high-risk loans will have to make sure the customer is aware of the program. This free loan counseling service will be combined with other consumer education efforts, including the design of a lending curriculum for community colleges and consumer groups.

"The rules that I am introducing today to restrict predatory mortgage lending are an important component of my administration's efforts to put an end to deceptive and ruthless mortgage lending practices in Illinois." Ryan said. "As aggressive as these regulations are, they alone will not eliminate unscrupulous predatory lending tactics. Additional legislative action is needed in Springfield, and federal regulators must adopt similar standards if we are going to be successful in protecting homeowners."