Reining in predatory lending practices

"No credit? No problem!" the ads screamed in recent years to get more consumers into homes and cars. Yet there has indeed been a problem with luring people into financial commitments they cannot afford. And that problem is now coming home to roost in the form of increased foreclosures, job losses and stock market dips.

That's why Minnesota legislative proposals that would crack down on predatory, misleading lending have merit. A bill introduced by Rep. Jim Davnie, DFL-Minneapolis, and supported by Attorney General Lori Swanson, would curb lenders' ability to offer mortgages that require little or no proof of a borrower's ability to repay. So- called "no-doc" loans of recent years allowed unethical brokers and agents to lure people into mortgages they couldn't afford.

Among the subprime loans are adjustable-rate mortgages with high- interest rates that help those with poor credit qualify. They also include loans with low-initial "teaser" payments that eventually get recalculated to double or triple monthly payment.

Some unscrupulous brokers and lenders used those nontraditional loans to take advantage of customers. But there was blame to go around the entire mortgage system when interest rates were low, home values were high and banks were eager to lend. From property assessors to title companies to major banks, the availability of funds and unprecedented home appreciation during the late 1990s and early 2000s provided incentive to make even risky loans. Those early in the loan process could make their money up front, with no regard for whether the loan would be repaid in the future.

Some self correcting of the market is beginning to occur, forced by the increasing foreclosures. Big lenders are indeed pulling back from subprime business. Freddie Mac and the Federal Reserve Board are tightening up, telling lenders to stop issuing mortgages without downpayments. Some lenders who held big portfolios of subprime loans have lost millions and are either laying off staff or closing shop altogether. But that kind of market adjusting comes at a high price that could have been avoided with better oversight.

Nationally, more than 30 states have already passed rules attempting to protect consumers from harsh mortgage practices such as inflated closing costs, penalty interest rates, prepayment penalties, balloon payments and broker kickbacks. And Congress will soon consider a proposal for federal assistance to help prevent victims of shady loan practices from losing their homes.

As the proposals move through the Legislature, lawmakers should seek the right balance between rules that stop greedy, predatory lending practices cold while still allowing realistic mortgage opportunities for honest, hardworking people. Because home ownership can improve everything from student performance to neighborhood stability to economic success, society has a stake in promoting it. Minnesota needs laws that protect consumers from loan scams while still promoting fair access to credit.

FORECLOSURES SOAR:

- Minneapolis had more than 1,300 foreclosures in 2006, up 79 percent over the previous year.

- In St. Paul, 623 properties went into foreclosure in 2005. Just six months into 2006, there were already 705 foreclosures.