Mortgage Counseling Hits Roadblocks

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Illinois is addressing rising foreclosure rates with a new law requiring some buyers to get counseling about predatory loan terms. But good intentions didn’t stop lawsuits challenging an earlier, pilot version of the counseling program.

The new law passed this month requires Chicago-area consumers buying their first home or seeking mortgage refinancing to get credit counseling if they want to take out a home loan with adjustable rates or unconventional terms, the Wall Street Journal reports (sub. req.). The aim is to teach buyers about hidden traps in their mortgages so they can make informed decisions.

The new law applies to all of Cook County, which includes some Chicago suburbs, allaying bias concerns about an earlier pilot program that targeted ZIP codes with high foreclosure rates and large concentrations of minorities. The new requirement takes effect next July.

The earlier program drew criticism that it would discourage mortgage brokers from operating in the targeted areas, and spurred at least two lawsuits alleging discrimination and civil rights violations. Mortgage brokers feared a loss of business and suggested that minority homeowners would have difficulties obtaining loans.

One plaintiff, Tammy Peña, claimed the law prevented minorities from getting credit on the same terms as whites. Her suit claimed she was unable to sell her home during the pilot project, referring to one potential buyer who backed out of a possible deal because he refused to go to credit counseling. The suit was dismissed after Illinois Gov. Rod Blagojevich suspended the program in January.

Peña’s home still has not sold.

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