The Minnesota Model to Rein in Predatory Lending. Representative Jim Davnie Minneapolis, Minnesota

Transcription

1 The Minnesota Model to Rein in Predatory Lending Representative Jim Davnie Minneapolis, Minnesota 1

2 Presentation overview Exploration of problem nationally, and in Minnesota. Review of Minnesota efforts. Looking forward in Minnesota and nationally. 2

3 Foreclosure hotspots 3

4 National mortgage delinquency rates ARM & FRM Delinquency Rates (percent) 18 Prime Fixed Prime ARM Subprime Fixed Subprime ARM Q1/1998 Q1/1999 Q1/2000 Q1/2001 Q1/2002 Q1/2003 Q1/2004 Q1/2005 Q1/2006 Q1/1998 Q1/1999 Q1/2000 Q1/2001 Q1/2002 Q1/2003 Q1/2004 Q1/2005 Q1/2006 4

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8 Roots of the crisis I Loosening of underwriting standards since 2005 Tax law changes making rental property ownership more inviting (Minnesota) Securitization and disconnect between brokers and borrowers interests Fraud 8

9 Roots of the crisis II Rapid escalation of housing values placing higher demands on borrowers Sophistication of mortgages outstripping sophistication of borrowers Betting on appreciation Fraud 9

10 Supply side yield hunger and ample investment capital drove the subprime lending push. It was not consumer driven. Tom Bengston, Editor North-Western Financial review Lawmakers magazine 10

11 Rise in subprime mortgage lending Not all subprime loans are predatory, but nearly all predatory loans are subprime Professor Jeff Crump, University of Minnesota 11

12 Unequal impact Lenders on average made subprime loans to higher-qualified African- Americans 54% of the time, compared to 23% for Caucasians. National Community Reinvestment Coalition 12

13 The Minnesota experience 400% in foreclosures in Twin Cities metro area % Increase in foreclosures in Greater Minnesota (outside the Minneapolis-St. Paul metro area). 100% increase in foreclosures in Minneapolis in 2006 from

14 Minneapolis 2,152 housing units went to public auction in Minneapolis in the first three quarters of

15 Timeline Summer 2006: Minneapolis and Hennepin County identify up tick in foreclosures December 2006: Attorney General-elect Lori Swanson convenes Predatory Lending Study Group January 2007: Study Group issues report February 2007: Legislation introduced April 2007: Signed by Governor August 2007: Effective date of legislation 15

16 Predatory Lending Study Group Created by Attorney General-elect Lori Swanson Chaired by University of Minnesota Law Professor Membership included representatives of the business community, Legal Aid, ACORN, community bankers, non-profit developers, legislators, and the Council Presidents from both central cities city councils. 16

17 Elements of the legislation Lenders and brokers must verify a borrower s ability to repay the loan Lenders may use criteria other than traditional documentation to justify making the loan but must document alternative criteria through reliable methods For ARMs, lender must verify that borrower can qualify for fully indexed rate, not just teaser rate 17

18 Brokers Must Act in Client s Best Interest Brokers now have a legal duty to act in the best interest of the borrower. Brokers cannot accept compensation that is undisclosed to the borrower. Payments from lender to broker must be included in calculation of lender fees. Lender fees are capped at 5% of loan amount. Side payments from lender to broker ( yield spread premiums ) count toward 5%. 18

19 Negative Amortization Loans Prohibited Lenders can no longer make loans that are structured so monthly payments don t cover all the interest that is accruing on the loan. 19

20 Other Prohibitions Churning refinancing that doesn t benefit the borrower Prepayment penalties for subprime loans Refinancing special mortgages without loan counseling Partial payment quotes (without taxes and insurance) without telling borrower must be able to compare accurately 20

21 Victims have new remedies Borrowers who are harmed by violations of the standards set forth for brokers, lenders, and appraisers now have a right to sue for damages, costs, and attorney fees Does not apply to loans originated by a state or federally chartered bank, savings bank, or credit union 21

22 A new crime-mortgage fraud Anyone who falsifies information on mortgage application, or anyone who facilitates the use of such information in connection with getting a mortgage with the knowledge that the information is false, can be prosecuted for the crime of mortgage fraud 22

23 Some Lenders Exempt Some provisions (verify ability to repay, churning, negative amortization, disclosing P&I) do not apply to a state or federally chartered bank, savings bank, or credit union, or to a loan originated or purchased by a state agency or tribal or local unit of government 23

24 Looking forward in Minnesota Five work groups created Foreclosure modernization Municipal impacts and tools Tenant/condo concerns Data requirements Foreclosure prevention assistance Broad stakeholder participation 24

25 Looking Forward I Median average home sales price down 4.6% over past 12 months. 25

26 Looking forward nationally II 26

27 Looking forward nationally III Increased stress on consumers Rising gasoline prices National average $3.08/gal regular Rising heating costs Natural gas prices projected 41% higher than 06!.2 million utility consumers disconnected nationally Rising grocery costs Grocery prices projected to rise 7.5% for 2007, roughly triple core inflation rate Increased revolving credit debt Card issuers seeing increased delinquency rates 27

28 Acknowledgements Senator Linda Higgins Dr. Michael Grover, Minneapolis Federal Reserve Board Greater Minnesota Housing Fund Housing Link Cara Letofsky, City of Minneapolis Amber Hawkins, Foreclosure Relief Law Project 28

29 Representative Jim Davnie District 62A South Minneapolis. 545 State Office Building, St. Paul, MN