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Abusive loan laws advance

ST. PAUL -- Minnesota lawmakers are cracking down on abusive mortgage lending practices as the number of home foreclosures grows. A predatory lending bill Gov. Tim Pawlenty signed into law last week is modeled after recommendations from a predato...

ST. PAUL -- Minnesota lawmakers are cracking down on abusive mortgage lending practices as the number of home foreclosures grows.

A predatory lending bill Gov. Tim Pawlenty signed into law last week is modeled after recommendations from a predatory lending task force assembled by Attorney General Lori Swanson last December.

The law has two major components. It requires mortgage lenders to verify a borrower can afford to pay the loan. Another provision prohibits so-called loan churning - loan refinancing that doesn't financially benefit the borrower.

The report by Swanson's study group cited the growth of subprime loans - which often serve borrowers with credit problems - as the leading factor driving predatory lending practices. Further, the report noted a growing use of adjustable-rate loans and other borrowing plans viewed as more risky for borrowers.

"I think there is a problem out there," said Rep. Kent Eken, a co-author of the predatory lending legislation.

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Home foreclosure rates have risen across the country and Minnesota hasn't escaped the trend. Swanson said her office gets calls from people across the state who have defaulted on their loans and are looking for help.

"It seems to be that foreclosures are also at very high levels in out-state communities," she said in an interview.

Supporters said the new law won't do much to help borrowers already locked into a problem mortgage, but should serve as a deterrent for new shady loan deals.

"Where it's going to be most helpful is to cut off any new (predatory) activity," Swanson said.

Leading banking and mortgage trade groups supported the legislation, but some lawmakers believe the legislation goes too far and removes some of the inherent risk that comes with a mortgage.

Eken, DFL-Twin Valley, said he's heard a "buyer beware" argument, but the state as a responsibility "to make sure you don't have predatory practices being used against consumers."

While the new law prohibits predatory lending, another proposal would institute penalties for such action.

"It makes it easier for a predatory lending victim on their own to take action against a company or individual broker for providing a grossly unsuitable loan," said Jeff Skrenes, predatory lending organizer with ACORN, a group lobbying for mortgage reforms.

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Sen. Linda Higgins, a Minneapolis Democrat and author of the predatory lending legislation, said she expects that bill will pass the Legislature this session.

There are still other mortgage-related proposals under consideration. Both legislative chambers approved increasing the license fees for mortgage lenders. That measure bumps a first-year license from $850 to $2,250. Annual renewals would increase from $450 to $1,350.

"We are trying to get mortgage companies in Minnesota to have more skin in the game. We want them to have more stake in the community," said Bill Walsh, communications director for the Commerce Department. "We believe they will be less likely to commit fraud if they do."

A related provision requires mortgage lenders to retain at least $250,000 in net worth or at least a $100,000 line of credit.

"That's a lot of money for somebody 25 or 30 years old who wants to start a mortgage business," Rep. Torrey Westrom said.

The Elbow Lake Republican said there are problems in the mortgage industry. However, he added, "We don't need to cast the net this wide."

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