Does My Buyer Really Need Housing Counseling?

by Chicago Agent

The anti-predatory lending database program, also known as SB1167 went into effect on July 1 of 2008. The purpose of the program, according to the state of IL on the Illinois Department of Financial and Professional Regulation (IDFPR) website, is:

“To reduce predatory lending practices by assisting the borrower in understanding the terms and conditions of the loan for which he or she has applied. The act does not prohibit any type of loan. It is solely the borrower’s decision whether to proceed.”

Barry Stoltze, Sales Director at Baytree Lending

Barry Stoltze, Sales Director at Baytree Lending

What this means is that the mortgage loan data is entered into a database. If the loan, borrower, and/or lender meet certain criteria then the borrower must attend ‘housing counseling’. The borrower cannot waive this. The borrower can still obtain any kind of (legally permitted) mortgage, regardless of what the counselor advises, however, he/she must attend the housing counseling.

Initially applicable to Cook County only, the program has grown to include Will, Kane, and Peoria Counties and may expand in the future to include even more Counties.

This means the property has to be in certain counties. Since Chicago finds itself in Cook County, this is a worthwhile refresher if you are a Chicago real estate agent. What else?  It has to be an owner-occupied, one- to four-unit property. With most houses and condos fitting the bill, does everyone in one of these Cook County properties getting a mortgage need to go for housing counseling? Actually, no. According to the state, counseling is required if:

A. In a purchase transaction, all borrowers are first time homebuyers or he borrower(s) are refinancing a primary residence,


B. The loan is a mortgage that includes one or more of the following:

1) The loan permits interest-only payments

2) The loan may result in negative amortization

3) The total points and fees payable by the borrower at or before closing will exceed 5 percent

4) The loan includes a prepayment penalty

5) The loan is an adjustable rate mortgage which allows adjustments of the interest rate in the first three years.

One standard from group A and at least one standard from group B must be present or counseling will not be required.

So, what does all this mean? Your first time homebuyer that wants a three-year ARM mortgage will require housing counseling.  If at least one of the buyers is not a first time homebuyer and they want a three-year ARM mortgage, housing counseling would not be required.

2010 was a volume-record year for refinancing. Is the rule any different for your clients when they refinance?  Unfortunately, yes!  If your client is refinancing a primary residence one- to four-unit, and their new ARM has a pre-payment penalty (very common with Jumbo ARMs), or they are refinancing into a three-year ARM, or they are refinancing into an interest only ARM-still a practical and popular product, they will require housing counseling. Your clients, who are attorneys, CEOs, PHDs, CPAs, MBAs, etc., that fit into the above bucket, have had to attend housing counseling through a state approved counseling agency. If they applied for their mortgage through a company licensed as an Illinois Residential Mortgage Licensee. Most mortgage brokers and mortgage bankers, large and small are licensed by the state and are required by law to participate in the program.

Are any mortgage lenders exempt?  Yes!  And this is a little-known fact that your loan officer friends may not mention at a cocktail hour; any entity not required to be licensed under the (IL) Residential Mortgage License Act, such as banks and other depository financial institutions. Mortgage companies affiliated with banks, even small community banks, which make the same mortgage loans to the same individuals as some of the local mortgage brokers/bankers, some of which have become household names, are exempt from the act.

So if your clients are refinancing and don’t want to be bothered with the hassle of credit counseling, they may want to get a rate quote from a mortgage lender that’s tied to a bank. At the very least, you may want to advise your client to ask the question of their mortgage professional: Will this loan process require that I attend mortgage counseling? If the answer is ‘Yes’, then let them know that they may want to talk to another mortgage professional that’s exempt, if they don’t want to be bothered with the counseling. If the rates compare and the fees compare, who wants to take time out of their day for housing-counseling?

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  • Bob Perry says:

    What Barry really has said is brokers are bad and banks are good. I’d expect no less from a bank employee!

    I would remind everyone how mortgage brokers came to be: We found retail mortgage consumers the same loans for lower rates and costs. Funny how bank employees don’t ever speak about this at thier cocktail hour(s).

    I will also inform you that the majority of borrowers still take the same loan. Go to http://www.idfpr.com/finlit101/sb1167.asp and read the reports for yourself. You will find that the majority of loans that triggered counseling we not from purchase transactions. In fact the largest amount of counseling was caused from interest only loan products. The zip codes from this borrower demogaphic are not normally associated with borrower zip codes that in part began SB1167.

    What really worries me (and should worry consumers) is that banks and other depository institutions are exempt. Why should anyone trust the very same banks that own the credit card companies? Thomas Jefferson warned us all long ago about the power of banks. Maybe we should all listen!

  • Dennis says:

    I am not sure I would suggest you tell anyone to select a lender on the basis of lack of compliance. Just because the lender is Federally Chartered and as such does not have to comply with state laws is not a compeling reason to use such a lender. What the Federally Chartered lenders will not tell you at cocktail hour is why they don’t comply with the state laws. After all was it not the Federally Chartered Banks that got us where we are today in this mortgage mess!

  • Greg Viti says:

    Thank the lord that the law makers are watching out for us. Sellers disclosure, Radon disclosure, Mold disclosure. Then all the great forms one signs when they get a loan, all put in place to hopefully protect the public. So now we have forms forever. I am thinking in most instances these forms confuse more than they help, at least in our market. I find buyers to be well educated and well versed in the process. I appreciate the government trying to help. I would prefer that they police the banks and mortgage lenders. This policing should not be another hurdle that the buyer has to jump over. So often laws get put into place and what they are meant to be protecting us from becomes a moot point by the time the laws hit the books.

  • Russ says:

    FDIC insured banks are allowed preemption from state lending laws. In lay man terms, it basically means that banks do not have to follow state lending laws.

    The end result is that you have FDIC banks basically being held to a lower standard than brokers. For instance, a broker could have a client where he is using Too Big Too Fail bank as the lender and still require credit counseling. However, if that client went to Too Big Too Fail bank directly, they could get that same loan without the counseling. Banks use preemption rulings as a competitive advantage against brokers and independent lenders because they can’t compete on anything else – rates are higher, employees are generally less educated, etc.

    We won’t even get into the new licensing through the NMLS where brokers pass background check, competency tests at both the state and national level, credit worthiness, etc. FDIC employees don’t have to do any of it. Where do you think all the has been and incompetent LOs work now? That’s right.. your local Too Big Too Fail bank branch.

    SB1167 is a fustercluck legislation but what else can you expect from IL legislators? The only people it applies to at this point now are the top 1% of borrowers. My last client that needed counseling made $450k a year and had nearly $1 million in assets. Needed counseling because his jumbo mortgage had a 1 year prepay. However, the reality is that most consumers will go to counseling when you factor in that FDIC banks rates are going to be so much higher than what independent brokers/correspondents offer. Paying an extra .5% on your mortgage to avoid taking 1 hour out of your day is retarded.

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