Predatory Lending Law: Consumer Edition

by Alex Stenback on July 18, 2007

Allow us to be "servicey" for a moment:  On August 1st 2007, just 13 days from now, Minnesota’s revised anti-predatory lending law goes into effect.  The changes, which mostly deal with licensing of mortgage originators and restrictions on non-traditional mortgage products, are very broad and will significantly alter the mortgage lending practices for mortgage originators and the borrowers they serve.

While there has been some press, and lots of hand-wringing in the lending world over these changes to the law, it occurs to us that the average consumer has been mostly left out of the conversation, in a "How will this effect me?" sort of way. 

Here’s the deal: (that will skip most of the boring stuff like licensing requirements, agency relationships, surety bond requirements, etc.)

The first point we must make, is that these changes only impact
licensed mortgage originators and brokers in MN.  Though it is widely expected that there will be similar changes forthcoming from Congress and/or other Federal regulatory bodies that will similarly impact them, Banks who hold a State or Federal charter are exempt.

Second, these changes will primarily impact lenders ability to offer non-traditional mortgage products which reduce or eliminate the need to verify income, such as "Stated Income" "No Documentation" or other such loans.

For the average consumer, regardless of credit quality, the majority of which are able to document income (pay stubs, W2′s, etc.) the impact will be nil.  You likely won’t even notice a change the next time you take out a mortgage.

Borrowers in need of stated income/liar loans, or other such non-traditional financing will find very soon that banks may be the only place to go, that the available products are limited, if not eliminated for all but the perfect borrowers and (you better believe) the banks will charge a premium for this now exclusive domain.

What, if any, impact this will have on the broader real estate market (we’ve seen no recent data on the percentage of home purchases utilizing non-traditional loans in the Twin Cities) remains to be seen.  It may have no effect.  It may add inventory to a saturated market as homeowners try to unload properties they can neither afford nor refinance.  It might cause demand for homes to slip as fewer buyers are able to enter the market.  Rents may spike.  Contracts-for-deed may came back into vogue. Who knows?

But there will be some unintended consequences. There always are. And we will be here to write about it.

{ 2 comments… read them below or add one }

Chuck July 19, 2007 at 7:03 am

Alex, the latest Market Pulse from LoanPerformance is available:

http://www.loanperformance.com/market_pulse/currentMP_lowres.pdf

Sadly, Minnesota ranks #4 Nationally in percentage of Negative Amortization Loan originations in Q1 2007, at 9.5% of total.

The new MN Law taking effect on August 1st is a good thing, but in recent days the credit markets appear to have found out just what they own with pools of “stated income” and/or “low documentation” loans:

http://bigpicture.typepad.com/comments/2007/07/wtf-is-going-on.html
http://calculatedrisk.blogspot.com/2007/07/alt-the-new-home-of-subprime.html

One can watch the daily wipe-out of investor’s money here :
http://www.markit.com/information/affiliations/abx

Incidently, the pools of high-risk Commercial Property Loans are doing as badly, or worse:

http://www.markit.com/information/affiliations/cmbx

It’s not too hard to imagine that Wall Street’s interest in getting these non-tradtional mortgage loans will drop substantially.

No Fax Payday Loan-David August 25, 2008 at 1:56 am

I’m grateful for posts like this that informs us consumers about issues like predatory lending and how we can unwittingly fall victim to this. It is very important for us to be aware because with awareness comes better wiser decisions. I found some informative articles here. http://personalmoneystore.com/moneyblog/index.php?s=predatory&Submit=Search
Let us knowledgeable. Let us all be wise!

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