A long-fought battle ended in Illinois last week, souring consumer and states rights advocates but providing clarity for mortgage lenders and secondary market participants. Striking down an appellate court ruling, the state's Supreme Court ruled lenders were not bound by certain fee restrictions that the state's predatory lending law imposed.
For secondary market participants - from trustees to investors - that means pending and future lawsuits in regard to fees deemed excessive under the so-called Illinois Interest Act will not end up costing what could have been quite a bit of time and money. Consumers, on the other hand, will largely need to look to federal law for predatory lending protections.
The court held that the state's law, which blocks lenders from charging more than 3% of the principal mortgage amount in points and fees if the interest rate is higher than 8%, was pre-empted by federal law. The case, U.S. Bank N.A. versus Michael Clark, reversed a March 2004 appellate court decision that held that Illinois lawmakers had opted out of the pre-emption clause of the federal Depository Institutions Deregulation and Monetary Control Act. Loans dating to 1992 would have been affected by the appellate court decision.
Wording in the state law was unclear as to how far consumer charges could reach, said Dianne Rist, a partner at Chicago-based law firm Chapman & Cutler, which coordinated defense in the case before the Illinois Supreme Court. Such ambiguity found in various state and local predatory lending legislation has, at times, caused lenders to pull back from originating mortgages in those jurisdictions, and for rating agencies to beef up credit enhancement requirements or threaten downgrades to affected securities. Fitch Ratings, for example, warned last year that if the state Supreme Court upheld the appellate court ruling, it may place securitizations with affected loans on rating watch negative and/or require increased credit enhancement on loans from those areas going forward.
"It was a concern because it was not clear whether the assignee was included. It was very broad language," Rist said.
Penalties under the Illinois Interest Act are equal to double the amount of interest accumulated over the life of a loan. A 30-year, $145,000 mortgage with a 10% interest rate could accumulate some $300,000 in interest, making for a $600,000 penalty, Rist argued in the case.
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