States Proceed With Own Bad Credit Mortgage Legislation

State lawmakers, faced with a record number of constituents who may lose their homes, are pressing to pass their own laws to halt mortgage abuse, saying they can’t afford to rely on U.S. Congress.

Legislators in some 30 states have introduced about 85 bills to protect borrowers from deceptive practices from mortgage brokers and lenders, as well as foreclosure or fraud.

“The states are going ahead with what they think is in the best interest of their citizens,” said Minnesota Attorney General Lori Swanson.

“Hopefully, the federal government will act, too, but the states aren’t waiting.”

The initiatives are raising the stakes in a long-running battle over who should take the lead in protecting consumers.

U.S. mortgage lender groups want federal law to override state statutes, saying multiple laws interfere with their efficiency. States counter that they often have stronger enforcement.

Lawmakers from Illinois to Maine are proposing rules that would bar lenders from making home loans they don’t believe a borrower can repay and ban penalties for prepayment of loans.

Some want to offer mortgage products to homeowners already on the verge of foreclosure. In the most extreme case, they would jail those who show a pattern of engaging in mortgage fraud.

Meanwhile, congressional action so far has mostly been limited to hearings on the crisis revolving around bad credit home loans, which has forced at least 60 home mortgage companies to halt operations, go bankrupt or seek buyers since the start of 2006.

Troubled by mortgage rate hikes and payments bigger than they can afford, as many as 700,000 homeowners were in the foreclosure process in the first quarter of this year, according to the Mortgage Bankers Association.

Still, the two key congressional committee chairmen haven’t introduced bills addressing the issue.

• Sen. Christopher Dodd, head of the banking committee, is pressing the Federal Reserve to issue rules protecting consumers from predatory lenders.
• Rep. Barney Frank, chairman of the House Financial Services Committee, is drafting a measure to curb predatory mortgage-lending practices.

Banking agencies, criticized for failing to protect consumers, directed mortgage lenders to toughen standards in new guidelines issued June 29.

All bad credit mortgage should verify income levels and consider potential interest rate increases when judging whether homebuyers can pay off loans, the Fed, the FDIC and other regulators said.

North Carolina mortgage laws - and those in many other states - may not change as fast as some would like. That state’s banking commissioner, Joseph Smith, said the federal government has been an obstacle.

About 35 states already have some laws against predatory lending. The state efforts to regulate the subprime market “have been met with resistance or indifference from federal regulators and even Congress,” Smith said at a March hearing of the Senate Banking Committee.

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