Governor Ryan's Sweeping Anti-Predatory Lending Rules Approved by Legislative Panel

SPRINGFIELD -- Governor George H. Ryan today announced the adoption of sweeping reforms to state lending regulations that will extend important new protection to Illinois homeowners by strictly prohibiting predatory mortgage lending practices. The General Assembly's Joint Committee on Administrative Rules (JCAR) approved the Ryan Administration's regulations today.

Governor Ryan met personally with various advocacy groups and was moved by compelling stories of individuals who had lost their homes because of these predatory lending practices. Opponents of the tougher rules were unable to muster enough votes to block Governor Ryan's proposal.

"These rules will help put an end to the ruthless and unscrupulous lending practices that are used to prey upon consumers with less than perfect credit histories and often result in home foreclosures and financial ruin," Governor Ryan said. "I am extremely pleased by JCAR's vote to allow the Department of Financial Institutions (DFI) and the Office of Banks and Real Estate (OBRE) to adopt these important regulations that will protect vulnerable Illinois homeowners."

The new predatory lending regulations establish criteria that define "high cost" mortgages. It is only when these high-cost thresholds are breached that specific lending restrictions are triggered to prevent economic harm to consumers. Under the rules, a high cost mortgage is defined as a loan with exceptionally high interest rates- in today's market -11.68% for a first lien mortgage, or 13.68% for a second mortgage based on a typical 30-year loan. The rules also define a high cost mortgage as one in which total points and fees exceed 5% of the total loan or $800, whichever is greater.

Once any of these thresholds is reached, the regulations:

• require that lenders verify the borrower's ability to repay the loan based on the borrower's income and debt obligations;

• prohibit deceptive refinancing known as loan flipping, where lenders refinance existing loans, charging additional points and fees, without any financial benefit to the consumer;

• prohibit the financing of single premium credit insurance -- optional insurance products that are often rolled into loans unbeknownst to the borrower, significantly increasing the cost to consumers;

• forbid "negative amortization" loans - in which the terms of the loan cause the outstanding balance to actually increase over the course of the loan because the regular payments do not even cover the full amount of the interest due, (unless this is the temporary forbearance sought by the borrower, or in instances of loans secured by reverse mortgages);

• strictly limits "negative equity" loans to the value of the property securing the loan, plus reasonable closing costs that cannot exceed 5% of the total loan amount;

• prohibit the financing of points and fees in excess of 6% of the total loan;

• limit the size and interval of balloon payments, and limit prepayment penalties that can be charged to consumers;

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

• limit direct payments by lenders to home improvement contractors;

• require lenders to notify borrowers of the availability of consumer credit counseling if a loan becomes delinquent by more than 30 days;

• require lenders to inform borrowers of the right to participate in the Mortgage Awareness Program - a counseling and education service provided by the Department of Financial Institutions, prior to making high cost loans;

• upon approval of loan applications, requires lenders to notify borrowers of the opportunity to seek independent third party review of the loan to determine the affordability of the loan.

The new rules apply to all state-licensed financial institutions making residential loans in Illinois, including state-chartered banks and credit unions, savings and loans, savings banks, finance companies, mortgage brokers and bankers. The rules go into effect in 30 days.

"These regulations establish Illinois as a national leader in adopting regulations to protect consumers from predatory lending. The rules written by DFI and OBRE were carefully crafted to strike a delicate balance -- ensuring access to truly fair credit for consumers with imperfect credit histories, while eliminating unscrupulous predatory lending practices that these consumers too often fall victim to," said Sarah D. Vega, Director of the Department of Financial Institutions.

The regulations approved today are the culmination of months of intense negotiations and public hearings regarding abusive practices in the mortgage lending industry. On May 6, 2000, Governor Ryan signed into law SB 355, which expanded the authority of the Illinois Department of Financial Institutions and the Office of Banks and Real Estate to promulgate administrative rules to protect Illinois consumers. The bill-signing ceremony took place at a meeting of the SouthWest Organizing Project (SWOP), an organization in Chicago that has witnessed firsthand the devastating impact of predatory lending on their community. At this meeting Governor Ryan directed these state agencies to draft regulations to strictly prohibit abusive mortgage lending practices that cause financial harm to consumers, lead to foreclosures and often destroy neighborhoods.

"Predatory lending is a multi-faceted issue that requires a multi-faceted response from the legislature, the lending industry and community groups to ensure the protection of Illinois consumers from predators," said William A. Darr, Commissioner of the Office of Banks and Real Estate. "We look forward to continuing to work with these groups as we try to ensure fair access to mortgages for all Illinois consumers."