Monday, April 16, 2007

How will Illinois HB 4050 affect you?

Illinois HB 4050, “The Illinois Predatory Lending Database Law,” was a pilot program designed to protect consumers in certain areas of Cook County Illinois from getting into mortgage programs they do not understand or cannot afford, thus, reducing the number of foreclosures in these zip codes.

This law called for all high risk loan applicants to attend counseling provided by approved counseling companies. High risk applicants were defined as:

1) applicants with a FICO score below 620;
2) applicants with a FICO score between 621 and 650 if they are applying for an interest-only loan, a no-income verification loan, an ARM loan with an initial fixed period of less than 3 years, or if the property had been previously financed in the past 12 months;
3) all applicants who applied for a mortgage with a pre-payment penalty and/or possible negative amortization; and
4) all applicants applying for a mortgage with points and fees that total more than 5% of the loan amount.

While this sounds like a great idea, it was disastrous. There were several reasons for this. First, it only applied to a few zip codes in Cook County. Second, it only covered borrowers who applied for a loan with state-registered loan originators – federally chartered banks were exempt (eg. Chase, Bank of America, Citibank, etc.). There was a lot of opposition to this law from title companies, lenders, the Illinois Association of Mortgage Brokers, Realtors, and consumer right advocates. Still, the law went forward.

In December 2006 a report from the University of Illinois reported that the law was not achieving its goals. It showed that the neighborhoods in which the law was active were negatively impacted. The home sales in the affected zip codes declined by over 50% while other similar zip codes not affected by the law only saw a decline in home sales of 20% in the same time period. It also went on to say, in addition to other things, that the law does not offer borrower’s additional consumer protection. You can read the report in its entirety at http://www.sal.uiuc.edu/sparc/research/working-papers/pdf/bates_vanzandt_revised_0131.pdf.

In response to this report, Gov. Blagojevich issued a press release stating he had ordered the Illinois Department of Financial and Professional Regulations (IDFPR), the state department charged with implementing this law, to “immediately suspend the Illinois Predatory Lending Database Pilot Program, also known as HB 4050. You can read this press release at http://www.idfpr.com/newsrls/011907GOVIDFPR4050SUSP.pdf.

This measure was applauded by many consumer advocates, as well as mortgage lenders, brokers and Realtors. It was thought that this was the death of HB 4050.

On March 21, 2007 another press release was released which announced the new rules of HB 4050 – bringing this law back to life: http://www.idfpr.com/newsrls/032107HB4050PressRelease.asp

This time, it applies to ALL zip codes in Cook County which may affect thousands of borrowers per year. These new rules, although not yet confirmed by the IDFPR, apply to the following classes of borrowers:

1) first time homebuyers;
2) borrowers who have not purchased a home in the past three years; and
3) all refinance borrowers. If a borrower is in one of these classes, they may be subject to counseling if the loan they are applying for have any of the following features:
• Interest-only payment
• Possible negative amortization
• Pre-payment penalty
• No-income verification
• A Loan-to-value (LTV) of 100%
• An ARM that adjusts within the first 5 years
• Has points and fees in excess of 5% of the loan amount

The last time this law was in effect, the affected zip codes were adversely affected – now it will affect all of Cook County. A group called the “Concerned Citizens of Cook County” launched a web site (http://www.nocounseling.com) to try to fight the new proposed rules of HB 4050. It gives you a lot of information on the new rules along with their opinion of the rules. It also gives you an easy way to contact the members of the Joint Committee on Administrative Rules (JCAR) – the people who are responsible for making decisions on HB 4050.

As of this writing, I am not sure who comprises the “Concerned Citizens of Cook County.” They could be anybody, and they do not take credit for their actions but rather have a generic yahoo e-mail address. But, the information I found on the web site seems to be accurate and if this law concerns you, this site makes it very easy for you to voice your opinions to JCAR.

If you are a resident of Cook County, and are concerned that you may be affected as adversely as the residents of the first 10 zip codes were by the old rules, you should be concerned. The current 45 day comment period is when you should be contacting JCAR to give your comments and opinions on the law. The 45 day comment period began April 6, 2007.