A law passed just before midnight on the last night of the Illinois Legislature's 2005 session is causing problems for consumers and drawing the ire of many financial experts.
The legislation, sponsored by House Speaker Michael Madigan, created the Anti-Predatory Lending Database and mandated that consumers who take out certain types of loans meet with a state representative to make sure the loan wasn't toxic.
The database comes with a cost of about $1 million a year and aims to protect consumers from predatory loans. The law requires, among other things, oversight of potentially risky mortgage products initiated by mortgage brokers, such as interest-only loans and adjustable rate mortgages, the kind now implicated in the mortgage meltdown.
The state agency that oversees the database says it is a critical tool in guarding against a resurgence of dangerous, exotic loan products. But critics call it a waste of money because it girds against products long-gone from the mainstream marketplace.
"It’s like saying, 'Buckle your seat belt' after the plane has crashed," said former housing counselor and current real estate attorney Michael Van Zalingen. "The only people who can get the loans that require the counseling are making good money, sophisticated people who know what they’re doing and don’t need a housing counselor to tell them that their payment could change. It's idiotic."
Van Zalingen is referring to consumers like civil engineer Craig Chambers, who has good credit, a good job, and previous experience owning homes.
Chambers thought the recent refinance of his Edgewater home was going smoothly until an unexpected obstacle arose."
"I was told I had to go meet with a state representative. They had to explain the mortgage process to me. I thought, 'Well, that is kind of odd since I have already signed the mortgage papers," Chambers said.
Still, he went as required.
"When I went to the meeting, he had gone through the same form that I had gone through with the mortgage broker four weeks before. So it was just a reiteration. And it seemed like a vast waste of time," Chambers recalled.
He's not alone.
David Hochberg, a representative of the Illinois Association of Mortgage Professionals and a contributor to NBC Chicago's "Ask the Mortgage Man" segment, likens the database to a law that prohibits the sale of dinosaur eggs.
"It's not necessary. It's a waste of taxpayer money... Foreclosures are up. We're spending millions of dollars a year supporting the database that does nothing but make money for the company that runs the database; a lot of money,” Hochberg said. "The industry has had a total cleansing. The subprime loans and lenders that offered those products have been obliterated."
That's not entirely true, said Illinois Department of Financial and Professional Regulation Secretary Brent Adams.
"I think there are certain lending standards that have been changed as a result of the crisis, that have caused the obsolescence of certain products. But there are other products, like ARMS, that are making a comeback," he warned.
Adams said the database is a tool that can help regulators spot risky patterns faster than sending auditors out in the field.
"It's about collecting data in a real-time basis and providing consumers with knowledge and tracking suspicious activity when it occurs," he said.
So, is the state getting its money’s worth? According to ILDFPR, less than 2 percent of all loans input by brokers in Illinois are considered predatory. Six fines related to violations were issued in the last six months reported.
Last year, the state expanded the database to oversee Will, Kane and Peoria counties, along with Cook County, in a new contract worth more than $4 million.
Adams said it's a tool the state cannot afford to have, explaining that 1,000 of the loans that triggered counseling were never closed and were loans that might have resulted in foreclosures.
"Conservatively, if you say that those loans cost about $150,000 a piece, that's over $186 million in loans that did not get made when counseling was triggered. Now if those loans had been made, perhaps they could have been paid, perhaps not. The point is we know [there were] predatory loans that were not closed," said Adams.
Chambers is one homeowner whose loan triggered counseling, and ultimately did close. He doesn't buy Adams' argument.
"Look at the amount of debt our state has. This effort can be taken away and that money can go towards something that's really more important," he said.
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