After suspending a controversial counseling program aimed at reducing predatory lending in some Chicago neighborhoods, Illinois Gov. Rod Blagojevich proposes revamping the program and expanding it to include the entire city and surrounding county.

The Illinois Predatory Lending Database Pilot Program, which took effect Sept. 1, required some residents living in 10 Chicago ZIP codes to obtain financial counseling before obtaining a home loan.

Critics said the program amounted to state-sponsored redlining, because it dampened housing sales in mostly minority neighborhoods. Those allegations were bolstered by an academic study that showed a decline in sales in the affected ZIP codes, and Blagojevich suspended the program on Jan. 19.

The governor’s proposal to resurrect the program attempts to address such criticism by tying counseling requirements to the type of loan sought, rather than a borrower’s income and credit history, and by expanding the program to include all of Cook County instead of just a few neighborhoods.

“It’s critical that we get this right, and the original rules raised enough red flags that it made sense to take a step back and make sure we are not inadvertently hurting the communities where predatory lending has been most prevalent,” Blagojevich said in a statement.

Critics say the new program would require many who don’t need counseling to obtain it, and could strain the network of available counselors.

Under the original program, borrowers with FICO scores of 620 or less were required to obtain counseling regardless of the type of loan they sought. Counseling requirements were also triggered for borrowers with FICO scores of 650 or less if they sought interest-only, stated-income or adjustable-rate mortgages that reset within three years.

All borrowers in the 10 affected ZIP codes seeking loans with prepayment penalties, negative amortization, or points and fees exceeding 5 percent were required to obtain counseling, regardless of their credit scores.

Gov. Blagojevich’s proposed overhaul of the program would do away with counseling requirements based on FICO scores or ZIP codes, shifting the emphasis to first-time home buyers and refinance transactions involving riskier loan types. First-time home buyers in Cook County and those seeking to refinance would be required to obtain counseling before taking out negative-amortization, stated-income or ARM loans. The counseling requirement would also be triggered for first-time buyers and refis involving loans with prepayment penalties, loans with points or fees exceeding 5 percent, or simultaneous 100 percent second-lien loans.

Expanding the program to include all of Cook County — which includes all of Chicago and some outlying suburbs — “casts a very wide net,” said Bill McNamee, president of the Illinois Association of Mortgage Brokers. “People who are very savvy and don’t need counseling or have time for it are going to be forced to do it.”

McNamee said Blagojevich’s proposal also retains a flaw in the original program, in that it applies only to loans offered by mortgage brokers, and not banks and other federally regulated institutions.

“If they are really trying to protect consumers, why don’t you have to get counseling if you are going to a bank?” McNamee said.

Another problem with the original program that hasn’t been addressed is that lenders are required to pay the $300 counseling fee before closing on a loan.

“The counselor in every case is going to recommend that they shop around,” McNamee said. While that’s not a problem in itself, “If they follow that advice (and close on a loan from another lender), the broker has paid $300 for them to go somewhere else.

McNamee said that problem could be fixed by having consumers pay for counseling up front, a cost that would be reimbursed by the lender when a deal closes.

The revised program would retain a requirement that loan originators submit details about each loan to a state predatory-lending database, including the borrower’s credit score, fees charged, yield spread premium, contact information for third-party service providers such as appraisers, title insurance companies and Realtors involved in the transaction, and details about how the originator landed each client, such as the names of referral sources.

The Illinois Association of Mortgage Brokers is working with the Illinois Speaker of the House Mike Madigan, the author of the legislation that created the initial program, on those and other issues, McNamee said.

The governor’s proposed rule changes are subject to at least 90 days of public review, a period that could be extended if a public hearing is requested or if a state committee that rules on proposed changes to administrative rules raises issues.

If the rule changes are adopted as proposed, they could tax the network of HUD-approved counselors who perform the face-to-face sessions, said Bob Palmer, policy director at Housing Action Illinois. Palmer’s group provides training to 11 local groups who employ U.S. Department of Housing and Urban Development certified counselors mandated by the program.

Palmer said the counseling provided to homeowners from September to January “was very valuable, but it did test the capacity of the agencies in those 10 ZIP codes to meet the demand. So we’re concerned about going countywide.”

The program provides no funding to train new counselors. Palmer said the $300 fee covers the cost of providing the service, but doesn’t allow groups to hire staff and expand services. 

If the program is expanded, a dearth of counselors — especially in Chicago’s northern suburbs — “is really going to impact the quality of the counseling that’s available,” Palmer said. “There’s just not currently the capacity for that. We don’t know how the state thinks it can implement this countywide, and have the counseling be meaningful.”

But Palmer believes counseling remains one of the most effective tools with which to combat the impacts of predatory lending, especially given the industry’s opposition to limitations on risky loan products. He said lenders and real estate professionals launched a public relations campaign to portray the Predatory Lending Database Pilot Program as discriminatory.

“It really obscured the more important issues, which was whether the education was providing benefits to the borrowers,” Palmer said. The public relations campaign against the program “didn’t inspire confidence in us that the lending industry is interested in educational reforms.”

McNamee said the industry supports educational efforts, but that they should be voluntary, not mandatory.

The Illinois Association of Mortgage Brokers offers free educational material to consumers, he said.

“I highly recommend they go through our courses before they go through the home-buying process,” McNamee said. “Doing it on a voluntary basis is something I think is going to be more palatable to most consumers.”

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