Housing Counselors at Risk Under New Laws and Rules

Housing counselors are at risk of legal action and insufficient compensation under the proposed rules of the Residential Real Property Disclosure Act (H.B. 4050). The Illinois General Assembly passed the Act, effective January 1, 2006, implementing a four-year pilot program requiring designated mortgage applicants living in certain neighborhoods on Chicago’s Southwest Side to seek housing counseling. Housing counselors are required to submit applicant financial information into a new Predatory Lending Database and to offer a series of “recommendations” indicative of the future of the proposed transactions. However, any person violating this statute commits “an unlawful practice within the meaning of the Consumer Fraud and Deceptive Practices Act” (Section 765 ILCS 77/70(j)).

As the law currently reads, if a counselor receives inaccurate financial information from a borrower and then misevaluates the quality of a loan or lender, or even fails to realize that a borrower is “precipitously close to not being able to afford the loan” (Section 765 ILCS 77/74 new), the counselor could be exposed to liability under the Illinois Consumer Fraud and Deceptive Business Practices Act. Whether or not the housing counselor’s error is negligent or an innocent mistake, the counselor may still face liability. This overly broad provision not only limits the flow of important information to borrowers but also could prevent borrowers from obtaining mortgage loans or negatively affect a seller’s ability to sell property in the designated neighborhoods.

Not only does the Act fail to provide adequate legal protection for housing counselors, but also the Act fails to provide a uniform compensation amount to ensure that lenders pay for the full cost of the counseling. Currently the Department of Financial and Professional Regulation rules state that “reasonable and customary costs associated with credit counseling provided under the Act shall be paid…” (Chapter 2, DFPR Section 346.30), but the rules do not specify the amount to be paid or the system of collecting fees and paying counselors. The rules were passed last month but are awaiting an implementation date.

Housing advocates, including Housing Action Illinois, Neighborhood Housing Services of Chicago, Lakeside CDC, the Woodstock Institute, the Resurrection Project, LUCHA, the Spanish Coalition for Housing, the Legal Assistance Foundation of Metropolitan Chicago, the Rogers Park Community Development Corporation, and the Sargent Shriver National Center on Poverty Law are calling on the state to establish legal protections for housing counselors and to administer a sufficient, consensual, and centralized payment system. A state-administered centralized collection and payment system and a clear compensation structure will ensure that needed housing counseling is available to borrowers.

For more information, contact Brenda Grauer, Housing Action Illinois, 312.939.6074 ext. 2, or Dan Lindsey, Legal Assistance Foundation of Metropolitan Chicago, 312.347.8365.

Poverty Action Report
February 2006