A new state law requiring some Chicago home buyers to receive financial counseling in order to get a mortgage is under fire from critics who say the rules are pushing lenders out of inner-city areas.
“It’s discrimination,” said Bishop William Jordan of St. Mark Missionary Baptist Church Cathedral in Harvey, who has spoken publicly in opposition to the law. He says members of his church live in the 10 predominantly black and Hispanic ZIP codes where home buyers meeting certain credit and income criteria now must get the counseling before they can close on mortgage loans.
“It seems like redlining to me,” he said, referring to a practice in which companies refuse to lend in certain areas regardless of the individual’s qualifications. “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?”
The Predatory Lending Database Pilot Program law, popularly referred to as House Bill 4050, was designed to prevent predatory lending and help in areas that have high foreclosure rates, not to discriminate, according to a spokeswoman for the state.
“Because it’s a pilot program, it will be re-evaluated at the end of four years,” said Susan Hofer, a spokeswoman for the Illinois Department of Financial and Professional Regulation, which oversees mortgage licensees and which selected the 10 ZIP codes.
She said it is too soon to predict whether, as its critics say, it could effectively shut off the flow of mortgage loans in the affected neighborhoods. And, she said, the program’s requirements could change.
Hofer said she was not aware of any problems the law created for either borrowers or lenders since it went into effect Sept. 1.
But the Illinois Association of Mortgage Brokers circulated to its membership a list of about two dozen lenders that have curtailed practices in the affected areas. Some stopped giving loans there altogether, according to the trade group.
“I’m aware of a growing number of lenders that are beginning to shut down their lending practices in those ZIP codes,” said Darren Weisberg, president of the trade group.
“While I don’t condone the practice of just stopping lending, that is the reality that 4050 has brought on us,” Weisberg said.
Numerous lenders on the list did not return phone calls from the Tribune seeking comment.
But, at the very least, obtaining a mortgage in the affected areas became more complicated this month for some Chicago consumers, who complained that the new law had created confusion.
Deal is lost
“I am perplexed, I am confused and I am disappointed,” said Robert Cordero, who says that lender apprehensiveness and misunderstandings about administering HB 4050 indirectly cost him a loan on a property in the Brighton Park neighborhood.
Cordero said he was told, in error, by his mortgage broker just three days before he was to close on the Southwest Side three-flat that he and his business partner, Alex Pellicano, would need to hurriedly arrange the counseling. The building was in one of the affected ZIP codes and the parties were applying for an interest-only mortgage, two provisions in the law that led to counseling.
Then the broker called back with a good news-bad news report: They were exempt from the counseling because the program excludes investment properties, he said. However, his lender had withdrawn the mortgage offer because it was concerned the partners’ financial circumstances did not meet its requirements for the potentially risky, interest-only loan, according to his mortgage broker.
And because of HB 4050, it appeared unlikely they would find another lender, according to the broker, Kim Burke of Mobium Mortgage Group in Chicago. A couple of other firms might have found them acceptable interest-only loan candidates, but they stopped making mortgages in the area, Burke said.
“We’re frustrated that the deal fell through, but more importantly, what does this mean for the families that live in the communities? That they won’t be able to buy their American Dream?” Cordero said.
Potential liability
Burke and others in the industry say lenders are balking at loans in the 10 ZIP codes because the burden of ensuring that each loan complies with the counseling requirement creates potential liability problems.
“The lenders who bundle their mortgages and sell them off to Wall Street investors, their concern is that Cook County is going to come back and say that the mortgage wasn’t properly recorded and they don’t have a proper lien,” Burke said.
Critics of the loans also say administrative costs will exceed the $300 fee that lenders must pay for each counseling session–additional expenses that will be passed to consumers in the form of higher closing costs.
But Hofer said the fees would not prohibitively increase the cost of home ownership in the affected areas.
“It’s a minimal cost to ensure that a family can afford what they are being sold,” she said. “The cost of the counseling is going to be less than the cost of a foreclosure.”
Hofer said the law was created to help neighborhoods seeing high levels of foreclosures on complex, adjustable-rate loans whose monthly payments had shot up to unaffordable levels.
Her department selected the 10 areas because its research showed them to have a high proportion of predatory loans, higher than average foreclosure rates and an unusually high number of mortgages for individual properties.
“It was felt that providing counseling to people before they signed the mortgage would ensure that the family knew what it was getting into,” she said.
Hofer said that, so far, comparatively few loan applicants are eligible for counseling.
“As of Sept. 8 there were 501 certificates of exemption issued [for the ZIP codes] and 135 loan applications were in process,” she said. “Of those, 44 triggered the requirements for housing counseling.” The state issues certificates of exemption to the title company as proof that the borrower is exempt from the requirements of the law.
Jim Wheaton, deputy director of programs and strategies for Neighborhood Housing Services of Chicago, said his organization’s HUD-certified offices has had few counseling sessions. And the group’s lending arm had received half a dozen mortgage applications within the targeted area, none of which met the counseling criteria.
He says the intent of the legislation is commendable: to provide an extra resource for people who, based on their credit history or risk profile, might be more vulnerable to imprudent loan choices.
“We’re seeing a huge increase in foreclosures of people who had adjustable rates,” he said. “Their payments went up hundreds of dollars and they can’t pay it. They’re in foreclosure.”
But he said it’s too soon to know whether the counseling is a boon or burden.
“I think people at this point are perhaps overreacting to something that really hasn’t been tried,” he said.
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Who is affected
Home buyers in 10 Chicago ZIP codes–60620, 60621, 60623, 60628, 60629, 60632, 60636, 60638, 60643 and 60652–who meet certain requirements now must have a credit-counseling certificate from a HUD-approved counselor in order for Cook County to record their property deed.
The counseling is not required if the loan is obtained through a state or federally chartered bank. The county also requires a certificate of exemption for borrowers in those areas whose loans do not meet the counseling criteria.
Various financial circumstances trigger the counseling requirement: All mortgage applicants who are buying in those areas and have credit scores lower than 620 (regarded as low in the lending industry) must have the sessions.
Counseling involves one-on-one meetings with HUD-certified counselors to review individual finances and the terms of the loan.
Borrowers in those areas whose credit scores are between 621 and 650 must have the counseling if:
– They are applying for interest-only loans.
– Their loan applications are based on stated income rather than verified income.
– The property has been previously financed within the last year.
– Or the interest rate will adjust within three years.
All purchasers in the affected ZIP codes must have counseling if their loans have any of the following criteria: prepayment penalties, the possibility that the borrower could end up owing more than the original principal and interest of the loan, or the loan’s closing costs exceed 5 percent.
More information is available by calling 866-266-4120 or at www.HB4050info.com.
–Mary Umberger
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mumberger@tribune.com
