More muscle for borrowers; New Minnesota laws aimed at curbing abusive mortgage lending practices kick in next week

Here's a look at what it'll mean for Minnesota home buyers.

Most consumers assume that their mortgage lender is making sure they're getting an appropriate loan at the best possible interest rate.

While many brokers may have felt a moral obligation to look out for the borrower's best interests, after Aug. 1 they'll have a legal duty to do so.

"I was totally surprised to learn that many fine, honorable brokers didn't see themselves as having an obligation to their clients," said Amber Hawkins, an attorney who helped craft and lobby for the bill, which was championed by Minnesota Attorney General Lori Swanson.

"They looked at themselves as salesmen, which is totally different than consumers see them. They didn't believe they were doing anything dirty by maximizing their profit at consumers' expense."

Hawkins, a former Legal Aid attorney who works for the newly formed Foreclosure Relief Law Project in St. Paul, said this "duty of agency" provision buttresses all of the other consumer protections contained in the new laws.

It means that if brokers get compensated from a lender for lining up a mortgage loan, they have to tell consumers about it. They also have to tell borrowers if their loan has hidden surprises, such as an interest rate that could increase over time.

During the housing boom, many borrowers refinanced their homes or bought new ones using stated-income loans that required little or no documentation of income and assets, making it easier for unscrupulous brokers to put consumers into loans they couldn't afford and pocket the fees that came with them.

The same was true for a rash of exotic loans that were born during the boom. Borrowers were often steered into complicated loans that offered low teaser rates that later rose, causing their payments to balloon well beyond their ability to pay.

Others signed up for loans with low minimum payments that didn't even cover the interest, resulting in a mortgage balance that keeps increasing as the unpaid principal and interest get added onto their mortgage.

"This is one of the fundamental causes of the foreclosure mess," said Ron Elwood, an attorney with the Legal Services Advocacy Project in St. Paul. "There wasn't any obligation for the broker to determine whether that person was going to be able to pay their monthly mortgage. And that's going to change."

The law will require brokers and lenders to verify a person's ability to repay the loans by using income, assets and other nontraditional criteria such as a history of past payments on rent or utilities. This provision also includes making sure that borrowers will be able to make payments after the initial teaser rate expires on an adjustable-rate mortgage.

People who suspect they've been harmed by brokers, lenders and appraisers will have an easier time suing for damages, costs and attorney fees.

That's because the law provides for "private right of action," which gives victims the express right to sue.

"Borrowers were continually losing lawsuits, even when any reasonable set of people would say they'd gotten a deceptive or unfair loan," said Prentiss Cox, a University of Minnesota professor and former assistant attorney general who worked on the legislation. "The law was stacked against them. This rights the imbalances and makes it possible for homeowners to get recourse."

Violations of the law also are clearer, giving consumers a better chance in court. In addition to banning below-interest mortgage payments, the law makes prepayment penalties illegal for subprime loans. Lenders and brokers also won't be allowed to quickly refinance a mortgage, an activity known as "churning," unless the borrower benefits.

Anyone involved in the transaction-borrowers, brokers, lenders and appraisers-who falsifies information on a mortgage application or who knowingly uses false information can be charged with mortgage fraud, and face fines and prison terms if convicted. Such activities previously were prosecuted using money-laundering or mail-fraud statutes.

"The new legislation will lead to better-informed borrowers, which can only make the marketplace work more effectively," said Elwood.