HB4050: LEGISLATIVE REDLINING? THIS IS ONE LAW THAT IS HEADED FOR THE ILLINOIS SUPREME COURT.
If you are involved in real estate or mortgage lending, it is hard to imagine that you haven’t heard of HB 4050 by now, as it has been a controversial law to say the least. Officially known as the “Illinois Predatory Lending Database Act,” commonly referred to as HB4050, the law was signed by Governor Blagojevich last year and took effect January 1, 2006. The Act confers upon the Department of Professional Regulation, Banking Division (“Banking Division”) the responsibility of implementing the Act. This officially took place on September 1, 2006, and thus the Act has now been in operation for three months. By its terms, the Act is a four-year “pilot program.”
Briefly, here is what the law requires. First, it requires the Banking Division to create a “Predatory Lending Database.” All mortgage brokers and loan originators licensed by the Banking Division must enter mortgage loan application information into the Database whenever the property is located in one of ten designated Cook County zip codes (all on the Southwest side of the County).
In addition, and more importantly, the Act requires that borrowers whose FICO scores fall below 620 must receive financial counseling from a HUD-approved counselor before entering into a mortgage transaction. Likewise if the borrower’s FICO score is between 621 and 650, and any of the following apply:
a. the mortgage loan in question is interest only;
b. the mortgage loan is adjustable within three years or less;
c. the mortgage loan carries a prepayment penalty;
d. the mortgage loan is negatively amortized;
e. closing costs exceed five percent of the purchase price;
f. the borrower has financed the same property within the past twelve months;
g. the borrower is putting down less than five percent to close.
Some lenders and some types of property are exempt. For example, federally licensed lenders, who have an “N.A.” at the end of their name, are exempt. Transactions relative to commercial and investment properties that are not owner-occupied are also exempt, for example.
If a loan proceeds to closing for which the Act required counseling, the title company or closing agent must report additional information to the Database.
The Cook County Recorder of Deeds will record no mortgage on a property located within the ten zip codes unless the mortgage is accompanied by a certificate of compliance with the Act or a certificate of exemption from the Act.
Further, in the event of a foreclosure of an affected mortgage, the lis pendens must be recorded with a statement that the lis pendens was served upon the mortgagee, or it is of no effect.
The Act states that failure to comply with its terms is a violation of the Illinois Consumer Fraud Act.
Lenders, real estate brokers, mortgage brokers and others have raised howls of opposition to the this law and have collectively published volumes of objections. Statements by supporters have been harder to find, but strong support for the Act is proven by its passage of both houses of the Illinois Legislature.
Supporters assert that foreclosures in the affected areas are twice the state-wide average, that many of these foreclosures result from predatory lending practices, and often the borrower never understood the risky and expensive features of the loan in the first place. Obviously, the Act’s reporting requirement is intended to facilitate quantifying and measuring this premise. Proponents might be expected to further argue that it is the affected communities as a whole that suffer from predatory lending practices, and not just the individual borrowers.
From the chorus of industry objections to this law, some common themes have emerged. Many predict the Act will have negative effects on a practical level: First, will affected lenders and brokers abandon the ten zip codes in significant numbers? If so, that will reduce the number of options available to affected borrowers and raise their costs, it is argued. Second, will there be enough counselors to do the job? It is estimated that there are hundreds of thousands of residential properties located in th affected zip codes. Third, will all affected closings be dry? Many title companies have stated that they will not disburse until they have received certificates of compliance with the Act, and those certificates come from the Banking Division.
Finally, many argue that all of the above create barriers that, collectively, will slow home sales in the affected areas, making it harder for affected residents to sell or obtain the highest possible price for their property. The effect could be to solidify blight.
From a legal perspective, serious issues loom regarding the viability of the Act. First, the Act is arguably “special legislation,” which is prohibited by the Illinois Constitution. Article 4, Section 13 states in part “[t]he General Assembly shall pass no special or local law.” In People ex rel. Vermilion County Consv. Dist. v. Lenover, 43 Ill.2d 209 (1969), the Illinois Supreme Court, interpreting Article 4, Section 13, held that a law must operate uniformly throughout the state in all localities and on all persons in like circumstances and conditions.
The state constitutional ban on special legislation flows from the principle of equal protection under the law. Therefore, the Act may violate the equal protection clauses of both the Illinois and United States Constitutions for the same reasons it may constitute impermissible special legislation.
Second, some community activists, noting the racial makeup of the affected zip codes, have deemed the Act an example of “legislative redlining.” Redlining, of course, is the illegal practice of marking off certain areas on a map and, as a matter of policy, doing no business within those areas or doing business only on unfavorable terms. In response, State Senator Jaqueline Collins, who is Chair of the Senate Financial Institutions Committee and a sponsor of the Act, has reportedly stated that any lender who refuses to do business in the affected zip codes will be guilty of redlining and should be prosecuted. At least two law suits attempting to block the Act have already been filed. Others are sure to follow soon.
In the end, HB 4050 seems to be intended to protect potential borrowers not just from predatory lenders but also from themselves. Whether that legislative justification can withstand equal protection scrutiny will probably determine whether HB 4050 lives or dies. Given the strong legislative support that made the Act law and the vociferous opposition to it, it is almost certain that the courts will resolve the debate.
Prepared by: Douglas Oliver © 2006. Staff Attorney
Freedman, Anselmo, Lindberg & Rappe, LLC.
Thomas Anselmo, Real Estate Practice Partner