The Sunday New York Times Op Ed page, urging federal legislation, praises Minnesota’s 2007 mortgage legislation while pointing out that it is limited to state-chartered banks (well, not really — it covers mortgage brokers and others as well). See, e.g., Minn. Stat. 58.13 (Standards of Conduct for Mortgage Originators and Servicers).
Minnesota attorneys Prentiss Cox, Eldon Spencer, Amber Hawkins, and Mark Ireland have been leaders in crafting, drafting, and lobbying for legislation in this area for the past several years.
Still, I wonder whether the Minnesota legislation and others like it address the problems at the eleventh hour (or later) after the market had all but eliminated the now-prohibited practices (e.g., “churning,” or “negatively amortizing loans”). I wonder what the data is in other states where these practices are permitted by law (or by banks in Minnesota not subject to the laws). I predict such loans and lending practices are gone — without the legislation.
A potential problem with legislation to address “sharp practices” in mortgage lending practices is that the prohibitions are after-the-fact — the proverbial “day late and a dollar short.” The legislation prohibits “no doc” loans, for example, but we’re in a downturn where few if any lenders would issue such loans these days regardless of whether they are permitted by law. And the problem is not merely that the legislation may be ineffectual as a practical matter. Changes to Minnesota’s mortgage lending laws have greatly increased the value of borrowers’ claims for plaintiffs’ lawyers (broadening liability, providing for fee-shifting, punitive damages, and imposing a somewhat unclear “utmost duty of good faith toward borrowers” from mortgage brokers (are brokers allowed by law to make a profit?)). Consequently, when the market is revived, the sellers’ costs of mortgage loans in Minnesota will rise significantly, which could put home ownership or secured credit that much further out of reach for many Minnesotans.