A pilot program that requires some borrowers in 10 Chicago ZIP codes to receive credit counseling before signing off on a home loan amounts to state-sponsored redlining, according to a lawsuit by residents and real estate professionals.
The lawsuit, filed in U.S. District Court in Chicago, seeks to stop Illinois regulators from enforcing the Predatory Lending Database Pilot Program, commonly referred to as HB 4050 after the state legislation that created it.
The program — which does not apply to federally chartered banks — requires home loan applicants with FICO scores of less than 620 to seek counseling. Borrowers may also be referred to counseling depending on the terms of a loan.
Critics say the regulations create administrative costs, including a $300 fee for each counseling session, that are passed on to borrowers, and that counseling requirements may also complicate the process of bundling mortgages and selling them to investors.
Although the 10 ZIP codes where the program is being implemented were chosen because of above-average foreclosure rates and a high proportion of predatory loans, they also have a high concentration of minority residents.
That’s led to allegations that HB 4050 is having the same impact as illegal redlining, in which lenders turn down loan applicants based on their race, ethnicity or place of residence.
Soon after the four-year program took effect Sept. 1, the Illinois Association of Mortgage Brokers circulated a list of about two dozen lenders that had curtailed or stopped doing business in the affected ZIP codes.
Yaodi Hu, a title company owner who is a plaintiff in the lawsuit, told the Chicago Tribune that he has seen a 60 percent drop in business since the law went into effect. Hu said that since Sept. 1, he has not closed a single loan for which counseling was required.
The Illinois Department of Financial and Professional Regulation, which is charged with implementing the program, maintains that the counseling requirements are not to blame for a slowdown in home sales in the 10 ZIP codes.