Minnesota's new anti-predatory lending laws.
GOOD, BAD, or BOTH?
Saint Paul, MN.: Minnesota has recently passed a trio of laws aimed at the mortgage lending industry designed to "protect" consumers from so called exploitive business practices. Sounds good on the surface, but I am never pleased to see the government act as a nanny to prevent adults from hurting themselves by running with scissors, but this is exactly what you get when seriously uninformed consumer activists groups, consumers, and legislature approve such measures.
I'll be the first to say that unfortunately, there has been what appears to be an explosion of bad lenders, and that better regulatory rules and practices would go a long way to limiting some of these practices. Many of the items now passed into law make sense. For example, tighter licensing requirements, and mandatory approved training of loan officers.
Many of the others sound good to the uninformed, but in reality are not.
One example is banning prepayment penalties. While everyone "hates" prepayment penalties, the economics of why lenders have them makes sense. They are not some ruthless tool lenders impose to rape consumers. Take them away, and lenders will simply raise rates across the board to offset the economic impact of lending money. Simply put, lenders must make a return on their money, or why bother lending it at all. Taking away this tool, and those actually harmed will now be greater that those who will supposedly benefit.
Consumers clearly don't like prepayment penalties, but most recognize the tradeoff for an initial lower rate. Also, just for clarity, probably less than 10% of the loans I write for consumers have prepayment penalties.
Another great example is that Minnesota has now essentially banned nonbank lenders and brokers from providing negative amortization loans (like Option ARMs) and stated income / no documentation loans. These two great loan products have been highly abused by unscrupulous lenders and uninformed consumers across the country. These two loans have also added significantly to the recent high foreclosure rates.
These two loan products have been around for years. The Option ARM was "invented" back in 1981. Both have only recently gotten a black eye. So one must ask why? Simple. Consumers have learned they exist, and are asking for them. Consumers who have mismanaged their finances, maxed out their credit cards, and bought a bigger house than they could afford have BEGGED lenders to help lower payments. Lenders responded with loans that could help short-term, but with huge risk. Sadly for many, the short term gamble hasn't work out.
Furthermore, the stupidity of these law written at the capital in Saint Paul is that Minnesota can NOT override federal banking laws. Therefore any "Bank" (Wells Fargo, US Bank, Countrywide, Chase, etc.) does NOT have to follow these laws and can continue to provide these loan products. All they have done in passing these laws is to take away a huge portion of the competition. Therefore the banks, thanks to the legislature, now have exclusive rights to people needing these loans. This lack of competition will inevitably force rates WAY UP on these products.
Also, you must understand that NO LENDER anywhere in the country has ever sat down at a board meeting to say; "what loan product can we invent that will be abused, and two years later we will suffer huges losses." The industry estimates they suffer a loss of $50,000 on EACH FORECLOSURE. Lenders know how each loan product performs, and started restricting guidelines on these products, making them dramatically harder to get long before our legislatores in Saint Paul stepped in.
Finally, it was interesting to watch Channel 9 last night with another story on foreclosures... It was of course tilted towards "bad lenders", but BOTH PEOPLE highlighted losing their homes ADMITTED that the loan officers clearly explained the details of the loan they were getting.
So much for it always being predatory lenders... How about we focus just a little bit more on personal responsibility. From what I see every single day, I lay 70% of the blame on consumers, and 30% on bad lenders.
NOTE for clarity: Our two companies, Mortgages Unlimited and Great Rivers Mortgage have NEVER practices anything even remotely close to what would be considered predatory and have specific policies and procedures in place to immediately remove Loan Officers caught doing anything wrong. Because of this, we are relatively uneffected by the vast majority of the new Minnesota law changes