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Illinois Pushes Mortgage 'Counseling' Plan

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Officials in Illinois have come up with a new version of a much-debated pilot program to fight predatory lending. The new plan would require first-time homebuyers in the Chicago-area to undergo financial counseling before a loan can be approved.

RENEE MONTAGNE, host:

Call it foreclosure prevention - that's what officials in Illinois say is behind a push which requires potential homebuyers to attend a counseling session if they're taking on risky or unconventional home loans. Earlier this year, the state's governor suspended a controversial pilot program which targeted specific neighborhoods in Chicago. Now a new version, which aims to protect a broader array of people from high-cost loans, is in the works.

NPR's Cheryl Corley reports.

CHERYL CORLEY: There've been lots of predictions about how many people will lose their homes this year because they can no longer afford to pay their risky, or even predatory home loans. In some Chicago neighborhoods, it's no prediction. It's reality.

Mr. SHERROD GORDON(ph)(Community Organizer, Chicago Southside): See the interesting thing is on this block here - 76th and Laslin - a lot of these houses, they're not boarded it up, but they are still in foreclosure.

CORLEY: Sherrod Gordon is a community organizer on Chicago's South Side. Subprime loans - higher-cost loans offered to borrowers with more troubled credit histories - are common here. So are foreclosures. As Gordon drives slowly down the street, he knows which of these solid brick bungalows has a spotty financial history.

Mr. GORDON: There's like a house in foreclosure on every block, and that's ridiculous.

CORLEY: In an effort to track abuses like hidden or excessive mortgage fees, Illinois lawmakers passed a bill last year establishing a predatory lending base. The pilot program - commonly called House Bill or HB 4050 - flagged applicants with low credit scores entering into high-risk loans. They were required to participate in mandatory loan counseling. The program was put on hold last January after critics called it discriminatory, since it targeted buyers in mostly minority neighborhoods. Now Illinois has rolled out a revised version: first-time home buyers - or people seeking to refinance a home in all of Chicago and the surrounding Cook County suburbs - would have to undergo a review for certain types of loans.

Dean Martinez, whose office oversees the program, says the focus is no longer on credit scores or the consumer, but on loan products with interest-only payments or prepayment penalties, as well as some adjustable-rate mortgages.

Mr. DEAN MARTINEZ (Secretary, Illinois Department of Financial and Professional Regulation): Well, we want to make sure is that the borrowers are aware, so that the dream of owning a home does not turn into a nightmare of foreclosure. And that's what we're trying to avoid.

Ms. KANEESH JOHNSON(ph): This is my bathroom. Working on it. It's got to be redone. And this is my kitchen.

CORLEY: Kaneesh Johnson lives in a South Side Chicago neighborhood called Roseland. She and her ex-husband lost their home after they refinanced. And Johnson bought this brick, two-unit apartment building with the help of a mortgage broker after going through a home loan review counseling session.

Ms. JOHNSON: I think on some levels, this is good because of the fact that you learn things that you didn't know, like the different fees that you're paying the loan and exactly how the loan works; if, you know, you can afford it.

CORLEY: Before the pilot program was suspended last January, 1,200 people went through counseling. A study compiled by the counseling agencies says more than half the borrowers couldn't afford the loans they were getting into. The report also states that nine percent of the loans involved fraudulent activity.

Ofelia Navarro, the head of the Spanish Coalition for Housing, says the agencies obviously support the loan reviews, but fear adding potentially thousands of new people to the program could cause it to fail.

Ms. OFELIA NAVARRO (Head, Spanish Coalition for Housing): Are we prepared right now to move forward and to do this countywide? We believe that the answer to that is no.

CORLEY: That's also the belief of the Illinois Association of Mortgage Brokers, which says the proposed new counseling program could delay closings and sweep in financially-savvy consumers who don't need any advice. Executive Director Marv Stockert says the rule would still be unfair because it targets one segment of the mortgage industry.

Mr. MARV STOCKERT (Executive Director, Illinois Association of Mortgage Brokers): Those people who are walking into a bank savings and loan are being told you don't have to go through counseling, even though they may get an adjustable-rate mortgage, they may get a stated-income loan. What's the difference? It should be one or all.

CORLEY: Critics and supporters have a few months to make suggestions, but Illinois officials shepherding the expansion of the home loan counseling program expect it to become a permanent feature of the state's housing market. They call it one of the best ways to rein in predatory lending and to stave off future foreclosures.

Cheryl Corley, NPR News, Chicago.

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