Legislation regulating high-risk residential mortgages and sponsored by State Senator Jacqueline Y. Collins (D-16th) passed the Senate today with unanimous support. Senate Bill 3522 would prohibit lenders from charging prepayment penalties on high-risk loans or requiring “balloon payments” – payments twice as large as the average of previous payments.

“Prepayment penalties and balloon payments punish homeowners who are trying to meet their obligations,” said Sen. Collins, who chairs the Financial Institutions Committee. “We should be making it easier, not harder, for people to stay in their homes,” added Collins, who is known for her work protecting consumers from financial exploitation.

The proposed legislation brings Illinois law into conformity with the federal Dodd-Frank Act, which prohibits prepayment penalties and changed the definition of “high-risk” to include a wider range of home loans.

“Neighborhoods are suffering real harm from the high rate of foreclosures, which flood the housing market and drive down property values when foreclosed properties are not maintained,” Sen. Collins said. “It is time for states and the federal government together to tell lenders they cannot continue to push consumers into high-risk loans and impose terms that make repayment difficult or impossible.”

Prepayment penalties can be assessed when borrowers pay off the balance of the mortgage and usually only apply within the first five years. However, the terms of some loans impose the penalty when borrowers refinance or when the home is sold – not just if the owner pays off the debt with cash. The penalties can thus trap homeowners in disadvantageous loans or keep them from relocating.

Senate Bill 3522 will now move to the House for consideration.

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