An Illinois pilot program aimed at curbing predatory lending in low-income neighborhoods has been so unpopular with borrowers, consumer advocates, and lenders that state regulators have halted it and gone back to the drawing board.
The Illinois Predatory Lending Database program was established by state law in July 2005 and went into effect in September of last year.
But regulators pulled the plug on the program in February after residents of the neighborhoods and community activists complained that the mandatory credit counseling was unfairly singling out minorities and holding up loan closings.
The intent of the program was twofold: to collect data on lenders making mortgage loans in 10 neighborhoods in Chicago's South Side to determine if the loans were predatory; and to make sure borrowers with blemished credit knew what types of loans they were getting into by requiring them to attend credit counseling before receiving loans for which they had been approved.
The Rev. Jesse L. Jackson Sr. said back in December that the mandatory credit counseling was "damaging to the lives of Chicago's African-Americans and Hispanics.
"Though it appears beneficial, in practice the requirement is onerous, resulting in delays to mortgage approval and much greater difficulty in refinancing and selling property. It's one more way the poor pay more for less," Mr. Jackson said in a press release.
Mortgage lenders, too, complained of delays and about the fact that the mandatory credit counseling applied only to customers of mortgage companies, not banks, thrifts, or credit unions.
"In my opinion, this law says that if you go to a mortgage banker or mortgage broker you are not very smart," said Marve Stockert, the executive director of the Illinois Association of Mortgage Brokers. "If you go to a bank, you are very smart and don't need to go through counseling."
Illinois regulators have drafted new rules that are expected to be published in the Illinois Register this week. The public will have 45 days to comment — but Mr. Stockert is already voicing his disapproval.
Under the new rules, mandatory credit counseling would be extended to a wider swath of borrowers, which Mr. Stockert said would cause further delays. He is also unhappy that the new rules would still not apply to customers receiving loans from banks, thrifts, or credit unions.
"If you are an Illinois-chartered bank, thrift, or credit union, you should have the same rules as everyone else in Illinois," Mr. Stockert said.
(Regulators said they have been exempted because banks, thrifts, and credit unions are already heavily regulated.)
Under the previous pilot program, borrowers in the 10 neighborhoods with Fair Isaac Corp. credit scores of less than 620, or in some cases 650, were required to undergo credit counseling at a Department of Housing and Urban Development-approved agency before receiving loans.
The proposed rules would require first-time homebuyers and people refinancing their primary residence to receive counseling from a HUD-approved agency if the loans for which they had applied included such features as interest-only payments, negative amortization, and prepayment penalties or had points and fees that were above 5% of the mortgage. Also, the new rules would cover Cook County, not just certain ZIP codes.
Susan Hofer, a spokeswoman for the Illinois Department of Financial and Professional Regulation, said the old rules put too much emphasis on the borrower and not enough on the kinds of loans being made.
"The new rules focus on specific types of mortgages that are likely to put new homebuyers and people refinancing their primary residence at most risk of foreclosure," Ms. Hofer said.
After the 45-day comment period, the bipartisan Illinois Joint Committee on Administrative Rules will review comments. If it takes no further action, the rules become final.
Mr. Stockert said that though his organization does not oppose counseling, the new rules would require it for too many people. "In my estimation we could be talking up to 100,000 people that have to be counseled" each year, which could delay loan closings, he said.
He also questioned whether there are enough HUD-approved housing counseling agencies in Cook County to meet the demand for counseling. There are 45 such agencies in the county, and not all are required to participate in the program.
Mr. Stockert said he has sent letters, e-mail messages, and faxes encouraging his association's members to comment on their concerns.
Mary Schaefer, a spokeswoman with the Illinois Association of Realtors, said her group is pleased that the state is taking another look at the law, but it would still want to analyze the new rules and make sure they would not slow down the process of buying and selling homes.
Barbara Zajicek, the executive director of the Illinois Mortgage Bankers Association, said she had no comment because the rules had not been published.