A new law that requires some Chicago residents in 10 ZIP codes to get counseling before obtaining a mortgage loan is scaring lenders away from those areas, critics claim.

A spokesman for one of the law’s sponsors, Illinois Speaker of the House Mike Madigan, said the allegations are part of a continuing campaign against the new regulations by “predatory lenders and their allies.”

The Predatory Lending Database Pilot Program — commonly referred to after the legislation that created it, House Bill 4050 — took effect Sept. 1. It requires residents who fall short of certain credit and income thresholds to get financial counseling. The 10 ZIP codes where the four-year pilot program is being implemented were chosen because of above-average foreclosure rates and a high proportion of predatory loans.

The Illinois Association of Mortgage Brokers has circulated a list of about two dozen lenders that have curtailed business in the affected ZIP codes, and says some have stopped lending there altogether, the Chicago Tribune reported today.

“While I don’t condone the practice of just stopping lending, that is the reality that 4050 has brought on us,” IAMB President Darren Weisberg told the Tribune.

But Steve Brown, the press secretary for Rep. Madigan, D-Chicago, dismissed criticism of House Bill 4050 as part of a continuing campaign to scuttle it.

“There are lists being circulated, but I don’t know if people seeking financing are actually being turned away,” Brown told Inman News. “This whole thing was fought tooth and nail by the predatory lenders and their allies. My guess is once the program gets going, it will be expanded into other areas of Illinois until these people (predatory lenders) are run out of town, and it will be a model for other states.”

The bill’s critics also include Bishop William Jordan of St. Mark Missionary Baptist Church Cathedral, who told the Tribune that it seems like redlining to him.

“How in the world are you going to take one side of the street and decide they are sophisticated enough to make their own financial decisions but people on the other side are not?” Jordan told the Tribune.

The 10 ZIP codes chosen for the pilot program are predominantly African American and Hispanic. But Brown said Madigan and some of the bill’s other supporters would have preferred that it apply statewide. The bill was scaled back to just 10 ZIP codes to overcome political opposition, he said.

Weisberg told Inman News that the Illinois Association of Mortgage Brokers “would have rather seen 4050 be statewide in a heartbeat, and our association would have supported it if applied to all mortgage practitioners in the state.”

Instead, Weisberg said, the legislation “gives a pass to lenders who develop and market the products” that often lead to foreclosures, such as interest-only and payment option adjustable-rate mortgages, instead unfairly singling out “mortgage brokers who for the most part are small mom-and-pop” businesses.

“It’s not the products that are evil, but the unsavory business practices” of bankers, brokers and credit unions who push products regardless of their suitability to customers’ needs, Weisberg said, adding that the state has done little to police unscrupulous lenders.

Susan Hofer, a spokeswoman for the Illinois Department of Financial and Professional Regulation, said most people who have applied for loans in the 10 ZIP codes since the law went into effect have been exempt from counseling.

The state has issued 501 exemptions from counseling, with 44 of the 135 loan applications being processed as of Sept. 8 requiring counseling.

The Tribune noted that the program creates confusion and extra paperwork for mortgage brokers, and talked to one applicant who was unable to obtain a loan after mistakenly being told he needed to get counseling.

The regulations also create administrative costs, including a $300 fee for each counseling session, that are passed on to borrowers, critics say. The counseling requirement may also complicate the process of bundling mortgages and selling them to investors, the Tribune reported.


Send tips or a Letter to the Editor to matt@inman.com or call (510) 658-9252, ext. 150.

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