Minnesota Mortgage Lenders, Consumer Advocates Debate Proposed Regulations

The Minneapolis Star-Tribune reported Thursday that a rapid rise in foreclosure rates in Minnesota has state lawmakers looking for ways to crack down on abusive lending practices.

But some mortgage brokers argue that the proposed new guidelines, expected to be introduced in the State Legislature in several weeks, are overly restrictive.

The brokers say measures to tighten rules on subprime [or bad credit home loans] would cripple efforts by ethical lenders to serve new immigrants, low-income residents or other non-traditional borrowers.

“The proposals about to be hatched are going to regulate the market instead of eliminating the criminals,” said Andriy Karkos, a mortgage broker with Bell Mortgage in Minneapolis.

“It’s not predatory lending that’s the problem. It’s a bad loan officer using a loan program inappropriately to rip off a consumer.”

The Minnesota home ownership rate, 78 percent, is the nation’s highest - but its foreclosure rate jumped 46 percent last year, according to RealtyTrac.

More than 2,000 homes in Minneapolis and St. Paul went into foreclosure last year, according to sheriff’s records. Cities and counties across the state are seeing record increases in Minnesota mortgage problems.

In response, Attorney General Lori Swanson has called for legislation that, among other things, would prohibit mortgage loans that result in negative amortization, a situation in which the mortgage payment is smaller than the interest due, causing the loan balance to increase.

Swanson’s proposal also would force lenders to verify consumers’ ability to pay and would slap those who provide “unsuitable” loans with a penalty of up to $75,000 or two years in prison.

The Minnesota Department of Commerce, which regulates the industry, also plans to introduce legislation to hold the place of loan origination more accountable. And state Rep. Karen Clark, DFL-Minneapolis, introduced a separate bill on predatory lending in late January.

“State officials ought to step up,” Swanson said. “You look at abuses and fraud we’ve seen in Minnesota and what it does to individual people involved, what it does to the communities involved, and what it does to people’s confidence in the integrity of the market… A destabilization of the mortgage market can have a huge impact on our economy.”

Much of the concern centers on bad credit mortgage loans, which allow those with poor or no credit to get access to loans. They offer higher interest to compensate the lender for the greater risk of default.

Housing advocates and lenders agree that such loans can be legitimate for certain consumers, but that they’re ripe for deceptive practices, including hidden fees and exorbitant penalties for mortgage prepayments.

The Center for Responsible Lending estimates that one in five subprime home loans goes into foreclosure at least once. Consumer advocates say that it’s possible to ratchet up enforcement while still allowing low-income people to gain access to credit.

“Study after study shows this type of regulation is not only good for the consumer, but good for the market,” said Elliot Ginsburg of Minnesota ACORN, a housing advocate for low- and moderate-income families.

“[Opponents] like to say regulation restricts competition,” he added. “What’s going on isn’t competition. It’s essentially cheating.

SOURCE: Minneapolis Star-Tribune