Illinois mistake, The

Northwestern Financial Review, Feb 15-Feb 28, 2007 by Bengtson, Tom

Every state legislature that is working to curb predatory lending should take a lesson from Illinois about how not to approach the problem. The Illinois legislature last year passed a predatory lending law that was so ill-conceived that the state's governor has put the effort on hold only five months after the law became effective.

Illinois lawmakers passed HB 4050 last year, which required state officials to run a pilot program to collect credit and mortgage information in areas where predatory lending was suspected to be taking place. In 10 ZIP codes on the southwest side of Chicago, lenders were required to direct homebuyers with poor credit scores to HUD-approved credit counselors. (The counseling reportedly costs $300, an expense which undoubtedly gets passed onto the borrower.) Lenders who don't follow the letter of the law lose their right to foreclose on a non-paying borrower.

So what happened since the law became effective Sept. 1? Nearly all lending has dried up. No lenders will service the area. University professors studied the impact and found that home sales in the pilot area dropped by 50 percent compared to general housing slowdowns elsewhere of about 20 percent. So Gov. Rod Blagojevich abruptly put a halt to the pilot program on Jan. 19. "Even though this law was designed to fight predatory loans, it is clear that the program may be negatively affecting the communities it was design to protect," Blagojevich said.

Homeowners in the affected area were finding themselves trapped because they couldn't sell their homes, and buyers where frustrated because no lenders would write mortgages for homes in the area. In a press release, the Governor summarized in understated fashion: "Enforcement of HB 4050 has created uncertainty for lenders, limiting their interest in offering products to consumers."

Everyone with eyes eaw this coming. Last fall, a public meeting conducted on the program featured overwhelming opposition from community groups, lenders and real estate professionals. (It's got to be very clear for these three groups to agree!) Clearly, if you create additional regulatory burden to service some areas, lenders won't bother to serve those areas any more. There are simply too many opportunities elsewhere.

Gov. Blagojevich said he wants to come up with an alternate program. I wish him luck. My advice is to move away from efforts which target specific neighborhoods. Take steps that will encourage competition, not scare it away. If a government reduces burden rather than increases it, it will find more than enough players ready to offer worthy services to consumers, no matter where they live.

By Tom Bengtson, Publisher