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Cascade: No. 57, Spring 2005

Pennsylvania Banking Department Announces Plan to Combat Foreclosures

Mortgage foreclosures in Pennsylvania are skyrocketing. An estimated 55,000 homes were sold at sheriff sales from 2001 to 2003, and the majority of loans in foreclosure were subprime, according to a study by The Reinvestment Fund (TRF).

In 2003 Pennsylvania had the ninth highest foreclosure rate in the nation for prime loans at 0.85 percent and the fourth highest foreclosure rate for subprime loans at 11.94 percent, according to statistics collected by the Mortgage Bankers Association.

The Pennsylvania House of Representatives adopted a resolution requesting that the Pennsylvania secretary of banking conduct a study of residential lending practices, trends in foreclosures, and documented lending practices that are disadvantageous to consumers.

The report of the Department of Banking (DOB), Losing the American Dream: A Report on Residential Mortgage Foreclosures and Abusive Lending Practices in Pennsylvania, surveys and researches the residential foreclosure process in Pennsylvania. It was recently submitted to the General Assembly and includes a blueprint for state action. The TRF study, which was commissioned by the DOB as part of the report to help evaluate the foreclosure problem, was also recently provided to the legislature.

Subprime lending, according to the TRF study, has grown dramatically in Pennsylvania, with subprime mortgage loan originations rising 25 percent each year from 1994 to 2003, nearly a 10-fold increase in just nine years. While statewide information was developed for the report, 14 Pennsylvania counties were studied in detail, representing most large metropolitan areas of the state and accounting for almost 60 percent of occupied housing units. Each of the counties studied had a significantly higher percentage of subprime than prime loans in foreclosure.

To combat the tide of foreclosures in the Commonwealth, the DOB report outlines action under way to better protect vulnerable consumers and proposes legislative and administrative action and topics for further study.

The DOB has reorganized to increase its enforcement capabilities. These measures include:

  • A streamlined structure to bring together all personnel in the bureaus of Examinations and Supervision and Enforcement;
  • A 30 percent increase in the licensing staff to ensure that licensees meet increasingly stringent standards before being approved to do business in Pennsylvania;
  • A doubling from three to six in the number of customer service representatives who help consumers who call 1-800-PA-BANKS;
  • A doubling from 11 to 22 in the number of licensee-examination staff to ensure compliance with state laws; and
  • A new investigations unit of 11 employees to act on referrals from other DOB bureaus and outside organizations with the objective of developing civil and criminal cases.

In the last year, the Pennsylvania Housing Finance Agency (PHFA) has expanded its counseling network efforts with a focus on pre-purchase counseling, home-buyer workshops, and training to identify abusive-lending practices.

We are proposing an increase in the loan amount of residential mortgages that would be covered under Pennsylvania’s Loan Interest and Protection Law (Act 6) from $50,000 to the Federal Housing Authority’s annual mortgage insurance limit for Pennsylvania, which is currently $172,632. We also propose that more enforcement authority be provided to the DOB.

Another recommendation would require licenses for individual mortgage loan solicitors. Builders and real estate agents should not be given a one-time exemption from licensing, and a pre-licensing education and certification requirement should be in place. We recommend that the Department of Banking code allow the DOB to make public information about licensees that are actively harming consumers.

Recommended legislative changes for PHFA would facilitate the creation of a database for mortgage foreclosure information, improve the Act 91 notices, revise the Act 91 notice, and limit attorneys’ fees to the maximum allowed under Fannie Mae guidelines.

A recommendation to address appraisal-related concerns proposes an increase in the maximum civil penalties levied by the Board of Certified Real Estate Appraisers from $1,000 to $10,000 for each violation and authorizes disciplinary action against certified real estate appraisers who have their right to practice before any state or federal agency suspended or revoked. We recommend the authorization of disciplinary action against certified real estate appraisers found guilty of performing fraudulent appraisals.

Administrative actions will include the issuance of statements of policy by the DOB to define dishonest, fraudulent, unfair, unethical, and illegal practices for mortgage brokering, lending, and servicing. The DOB will also develop a “best practices” list for mortgage brokering, lending, and servicing and encourage voluntary industry compliance. The DOB plans to promulgate regulations to codify the statements of policy. The DOB and PHFA will work to establish a foreclosure assistance office to aid consumers facing foreclosures.

For further study and dialogue with the General Assembly, the DOB suggests preclosing credit counseling for consumers, the establishment of an emergency fund for victims of abusive lending, a comprehensive review of the mortgage foreclosure process, and a review of the effectiveness of Chapter 5 of the Mortgage Bankers and Brokers and Consumer Equity Protection Act.

“Losing the American Dream: A Report on Residential Mortgage Foreclosures and Abusive Lending Practices in Pennsylvania” and the TRF study are available at www.banking.state.pa.us. For information, contact Lydia Hernandez-Velez, deputy secretary at the DOB, at (717) 783-2255.