Group urges tougher lending laws

by Conrad Defiebre and Jim Buchta of Star Tribune
Published: January 18, 2007

The panel of officials and bankers called for laws to help keep home buyers
from getting loans they can't repay.

Responding to recent spikes in mortgage foreclosures, a study group convened by state Attorney General Lori Swanson called Thursday for new laws to rein in lending practices that victimize home buyers and secondary mortgage financiers.

"These are surprisingly common-sense proposals, what any reliable, prudent lender would do," said the group's chairman, University of Minnesota Law School Professor Prentiss Cox. "But it's not happening on a consistent basis in the marketplace."

The panel urged new state felony penalties of up to two years in prison and a $75,000 fine for knowingly making "grossly unsuitable" loans to consumers, with additional sanctions when the victims are disabled or elderly.

The proposed law would cover loans that borrowers show no ability to repay and those based on false statements of borrowers' financial means.

Other recommendations would require lenders to give borrowers more complete information upfront and force borrowers to get loan counseling before refinancing certain subsidized mortgages.

Action is needed because Twin Cities foreclosure rates have tripled from historic levels in the past two years, the report said.

And a growing prevalence of nontraditional mortgages -- adjustable-rate, interest-only, subprime and equity-based, to name a few -- indicates the problem may worsen as more homeowners struggle to meet their payments, it added.

Who's to blame?

The panel, dominated by DFL public officials and bankers, blamed many of the woes on lax enforcement by Republican Gov. Tim Pawlenty's Commerce Department and weaker oversight of independent mortgage brokers than of banks.

Commerce spokesman Bill Walsh denied the allegations and criticized Swanson, also a DFLer, for not including the department in the study group.

"It's illogical that we weren't asked to participate," he said. "We disagree with their charges and we've got the enforcement actions to back it up."

He said the agency has shifted resources to mortgage industry regulation as foreclosures have mounted and added: "The problem is new and government is always behind the market. But we're reacting."

Pat Martyn, executive director of the Minnesota Association of Mortgage Brokers, said his group also was not involved in the Cox report and he criticized what he called its omissions.

He said he is wary of eliminating mortgage products that make home ownership available to so-called "emerging markets," particularly immigrants and rural Minnesotans.

In search of accountability

Despite his reservations about Thursday's report, Martyn said mortgage brokers will support legislation to make the industry more accountable.

"The Minnesota mortgage market has to be above reproach," he said. "We are heartbroken to see the amount of fraud that exists within the industry and we are absolutely committed to making sure that the Minnesotans retain their credibility in the face of a real estate transaction."

Kris Wilson, senior loan officer with Summit Mortgage in Bloomington, urged
Swanson to involve mortgage lenders in drafting legislation to ensure that
marginal borrowers don't lose access to home ownership.

"Legislation alone won't solve the problem," Swanson said. "But self-regulation has clearly failed in this industry."

Legislators on the panel said bills reflecting the proposals will be introduced soon.

Group Urges Tougher Lending Laws