On August 7, 2007, the Illinois Senate passed Senate Bill 1197, as amended. Senate Bill 1197 is intended to, among other things, impose signifi cant new “standards, duties, prohibitions and requirements” on mortgage brokers and mortgage bankers in the State of Illinois. Also, Senate Bill 1197 would permanently extend the “predatory lending database pilot program” to all of Cook County, Illinois.

Specifically, Senate Bill 1197 amends the Illinois Residential Mortgage License Act of 1987 (205 ILCS 635/1-1) and the Illinois Residential Real Property Disclosure Act (765 ILCS 77/1) (collectively, the “Acts”). Banking organizations, chartered by a state or the federal government Department of Financial and Professional Responsibility, any service corporation of such banks and savings and loan associations or “fi rst tier” subsidiaries are exempted from the Acts and, hence, the amendments contained in Senate Bill 1197.1 While a bank or thrift is exempt from the Acts, the Acts still may impact individual banks and thrifts. A bank or thrift that purchases a loan from a mortgage broker may be held responsible for violations of the Acts committed by the mortgage broker.

SB 1197 Amendments to the Illinois Residential Mortgage License Act of 1987

Senate Bill 1197 amends the Illinois Residential Mortgage License Act of 1987 to include the creation of, among other things:

  • enforcement procedures for the Illinois Attorney General to prosecute unlawful practices, pursuant to the Illinois Consumer Fraud and Deceptive Trade Practices Act;
  • a private right of action by borrowers injured by the violations of the amended standards, duties, prohibitions, or requirements of the Illinois Residential Mortgage License Act of 1987;
  • a duty to verify the borrower’s reasonable ability to repay (through examination of tax returns, payroll receipts, bank records, or other “reasonably reliable methods,” which methods do not include a statement by the borrower that his or her income is suffi cient); and
  • an “agency relationship” between mortgage brokers and borrowers that requires mortgage brokers to (i) act in the borrower’s “best interests and in good faith,” (ii) carry out all lawful instructions given by borrowers, (iii) disclose to borrowers all material facts of which the mortgage broker has knowledge that might reasonably affect the borrower’s rights, interests and benefi ts, (iv) use reasonable care, and (v) account to the borrower all the borrower’s money and property received.

In addition, Senate Bill 1197 amends the Illinois Residential Mortgage License Act of 1987 to require that a copy of any appraisal be provided to the borrower within three days of receipt, but no less than 24 hours prior to the day of closing, and to require the disclosure of other refi nancing options if the subject of a future loan is discussed. Finally, Senate Bill 1197 amends the Illinois Residential Mortgage License Act to prohibit “equity stripping” and “loan flipping,” as defi ned by the Illinois Fairness in Lending Act.

The history of Senate Bill 1197 shows that the amendments were contemplated by the Illinois legislature as early as February 2007, before subprime mortgage lending became headline news. However, the recent attention paid to subprime mortgage lending policies undoubtedly played a factor in the Senate’s passing of Senate Bill 1197 on August 7, 2007.

SB1197 Amendments to the Illinois Residential Real Property Disclosure Act

When it was first enacted on October 1, 1994, the Illinois Residential Real Property Disclosure Act required “sellers” to make certain disclosures to “prospective buyers” of “residential real property.” In 2006, the Illinois legislature amended the Illinois Residential Real Property Disclosure Act to include a “predatory lending database pilot program.” The pilot program required the Secretary of the Illinois Department of Financial and Professional Regulation (the “IDFPR”) to identify certain areas of Cook County, Illinois that had experienced high rates of foreclosure on residential home mortgages, to submit certain data to a “confi dential database” created and maintained by the IDFPR to monitor “predatory lending practices,” and to provide counseling to borrowers whom the IDFPR determined, upon review of the information, may require counseling. Borrowers could not waive counseling if the IDFPR recommended it.

Illinois temporarily halted the pilot program after community and civic organizations objected. The pilot program was alleged to be discriminatory and to have caused some lenders to stop doing business in certain areas of Cook County. Some borrowers claimed that the pilot program prevented them from selling their homes because of the chilling effects allegedly caused by the program.2

Senate Bill 1197 is intended to revise the pilot program and make it permanent for all of Cook County, instead of areas within Cook County selected by the IDFPR. The database for the permanent program will remain confi dential (unless the borrower requests that the confi dentiality restriction be lifted as to his or her information) and may not be obtained under the Freedom of Information Act, except as otherwise provided. The permanent program also continues the “counseling” provisions for certain borrowers, which may not be waived.

The information that is to be collected by the IDFPR and maintained in the database includes, among other things:

  • the name, address, social security number, date of birth, income and expense information of the borrower;
  • a description of the collateral, amount of the loan, rate, whether the rate is fixed or adjustable, amortization, and “any other material terms”;
  • the borrower’s credit score;
  • information about the “originator” of the loan, fees charged, points, yield spread premium, and “other charges of renumeration”;
  • information about affi liated or third-party service providers (e.g., appraisers, title insurance companies, closing agents, and realtors);
  • all information on the Good Faith Estimate and Truth-in-Lending statement disclosures;
  • annual real estate taxes for the property, together with any assessments;
  • information about how the broker or originator obtained the client and referral source (if any);
  • notices required by law and dates given to the borrower;
  • whether a sale and leaseback was contemplated and, if so, the identity of the interested parties;
  • any and all financing by the borrower for the subject property within 12 months prior to the date of application;
  • loan information (rate, term, purchase price, down payment and closing costs);
  • whether the buyer is a first-time homebuyer or refi nancing a primary residence;
  • whether the loan permits interest-only payments;
  • whether the loan may result in a negative amortization;
  • whether the total points and fees payable by the borrower at or before closing will exceed 5%;
  • whether the loan includes a prepayment penalty and, if so, the terms; and
  • whether the loan is an ARM.

A borrower who is a first-time homebuyer or is refinancing a primary residence and is seeking a mortgage that includes (i) interest-only payments, (ii) the risk of negative amortization, (iii) points and fees in excess of 5%, (iv) a prepayment penalty, or (v) an adjustable rate, shall be recommended for counseling by the IDFPR. Finally, the IDFPR is to submit reports to the Governor and the General Assembly semi-annually (May 1 and November 1) of each year, detailing its fi ndings on the program and at least the following information: (i) the number of loans in the program, (ii) the number of borrowers receiving counseling, (iii) the number of loans closed, (iv) the number of loans requiring counseling, and (v) the number of loans requiring counseling where the originator changed the terms subsequent to counseling.

Governor Blagojevich still needs to sign Senate Bill 1197 before it becomes law. If signed into law, the permanent program would not take effect until July 1, 2008. The legislature did not report any opposition to the permanent program in Senate Bill 1197.