Minnesota adopts new laws addressing mortgage abuses

With the help of the Minnesota legislature, Attorney General Lori Swanson made good on her promise to address concerns over predatory lending. The legislature passed two bills designed to help home-buyers get a fair deal on their mortgages. Gov. Tim Pawlenty signed the first bill April 20 and was

Predatory lending has been a Swanson hot button since she was elected last fall. In meetings with the banking industry in early February, she pledged to address the issue. (See the March 1-14 NorttfWestem Financial Review.)

House File 1004 requires mortgage originators to verify a borrower's "reasonable ability" to make scheduled payments, including real estate taxes, insurance and other assessments. Mortgage originators will be required under the new law, which becomes effective August 1, to verify a borrower's income; and financial resources with tax returns, payrolls receipts, bank records and other documents.

The legislation also outlaws "churning,'' which lawmakers defined as offering credit which provides no "reasonable, tangible net benefit" to the borrower.

Mortgage originators also art; required to include information about property taxes and insurance when discussing finance options with firstlien residential mortgage customers. The measure is designed to eliminate problems which reportedly arose after originators would market a mortgage revealing only principal and interest costs. Borrowers in these cases would be shocked when it came time to make payments which ended up being much higher than advertised because of the taxes and interest expenses added.

These new requirement do not apply to mortgage originators working at a bank, savings and loan association or credit union. The law is aimed primarily at mortgage companies.

The law makes the duties of a mortgage broker clear. "Mortgage brokers shall act in the borrower's best interest and in the utmost good faith toward borrowers," the law states. "A mortgage broker shall not accept, give, or charge any undisclosed compensation or realize any undisclosed remuneration. . .that inures to the benefit of the mortgage broker on an expenditure made for the borrower."

The Minnesota legislature put teeth into the law by following up with a separate bill which defines residential mortgage fraud as a crime. Prison sentences of up to two years were authorized in Senate File 988, with harsher penalties prescribed for frauds committed against particularly vulnerable groups of people, such as senior citizens.

The second bill also makes it illegal to assess a prepayment penalty on subprime mortgages. Conventional mortgages can continue to include pre payment penalties, as long as they are disclosed.

"Predatory lending has turned the American dream into the America bad dream for too many Minnesotans, and passage of this legislation sends a strong message that such egregious conduct will not be tolerated in this state," Swanson said.

Sen. Linda Higgins and Rep. Jim Davnie were the primary authors of the legislation. "We are seeing foreclosures mushroom throughout the state," Higgins said on April 11. "Unfortunately, there are a few bad mortgage lenders out there who pray on those who don' understand the process."

The legislation was drafted according to recommendations made by a predatory lending study group established by Swanson prior to the legislative session. The study group contained representatives from the banking industry and the mortgage brokers association, as well as consumer advocates from organizations such as Ilegal Aid and ACORX.

"The big thing is that something was done to regulate the unregulated," said Rodger Bense of Lake Country Bank in Long Prairie, Minn., a member of the study group.

The study group was chaired by Prentiss Cox, a University of Minnesota law professor and a former assistant at torney general. He credited the diverse viewpoints of the study group in the development of a group re}K>rt and ultimately good law.