Dialogue: Predatory lending addressed in new Minnesota law

Northwestern Financial Review, May 15-May 31, 2002 by Murphy, Kevin M

The "Industry Watch" page in your April 1, 2002, North*Western Financial Review sets forth the unfortunate saga of one Jaymie Kelly, a widowed U.S. Postal Service employee who had been victimized by an apparently unscrupulous mortgage company. We concur that banks are typically not involved in so-called predatory lending; however, it does seem to be a significant problem here in Minnesota.

The Commerce Department began licensing mortgage originators in 1999 after the enactment of Chapter 58. The Department's 2002 "banking bill" contains amendments to Chapter 58 designed to combat two of the abuses that we see with frequency in the subprime residential mortgage loan market -- excessive points and fees added to the loan balance at inception (often not understood by the unsuspecting consumer) and heavy prepayment penalties on the back end (likewise not understood or properly disclosed to the consumer). The combined effeet of the two is to trap the unsophisticated consumer in a high rate loan after much of his/her equity has been consumed by the nonrefundable front-end points and fees. A typical situation is where the upfront points and fees are 8 or 9 percent of the loan balance, or $8,000 to $9,000 on a $100,000 loan, with a $6,600 prepayment penalty.

Section 8, subdivision 1 of the Commerce Department's bill prohibits residential mortgage lenders from financing (adding to the loan balance) points and fees to the extent that they exceed 5 percent of the loan amount. This subdivision does not apply to banks or credit unions. Subdivision 2 deals with prepayment penalties on residential mortgage loans. While Minnesota statutes have reasonable limits on the amount and duration of prepayment penalties, most lenders are able to charge heavier prepayment penalties because of a federal preemption of Minnesota law. Subdivision 2 applies to all lenders. When a residential mortgage loan contains a prepayment penalty that exceed the Minnesota limits, the lender must make both a spoken and written disclosure to the consumer concerning the prepayment penalty at the time of application and again within three days before closing. The required disclosure is blunt and simple and replaces an existing, complex disclosure form that is currently provided at the loan closing, which is far too late in the process to enable the consumer to explore other loan alternatives. Both provisions have an effective date of January 1, 2003. The bill (S.F. 2988) is available on the legislature's Web site at www.leg.state.mn.us. Gov. Ventura signed the bill on April 17, 2002.

While these provisions won't remedy all of the objectionable residential mortgage lending practices, they should improve the odds in favor of the consumer without adding undue burdens on lenders.

Kevin M. Murphy

Deputy Commissioner Minnesota Department of Commerce