Minnesota’s revised predatory lending law

A new Minnesota predatory lending law goes into effect on August 1, just two days away. As pointed out at Behind the Mortgage, the law focuses on “stated income” loans, also called “liar loans.” Perhaps more importantly, the law also gives borrowers the right to sue anyone who falsifies information on a mortgage application.

A stated income loan is one where the borrower states their income other than by providing W-2s and pay stubs. These loans are sometimes called liar loans because without income verification, it is obviously very easy to lie about income, something predatory mortgage brokers use to their advantage, coaxing (or coercing) borrowers into bad loans that end up screwing lenders and borrowers alike.

The new law is primarily regulatory in nature, imposing strict new standards on brokers and originators when writing stated income loan applications. Under the new law, brokers and lenders must actually verify the borrower can afford to repay the loan. It also imposes new disclosure obligations on brokers and originators who, despite popular assumption, are in sales, not professional services.

The private right of action may be the most significant part of the legislation, but I have my doubts that it will be used very often. Can a borrower who signs a loan application with “inaccurate” income information sue the mortgage broker, even though both are technically complicit in the fraud? I guess we will have to see how the law views this situation.