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Senate panel OKs bill to restrict ‘balloon loans’

A Senate panel has approved a bill to protect home buyers from loans that could come back to hurt them.

The bill, S1288, would restrict lenders from issuing specific types of “balloon loans” to home buyers, prohibit any lender from establishing a pattern of extending credit to people without means for repayment, and restrict lenders from charging a pre-payment penalty on home loans.

The Senate Commerce and Economic Development Committee voted unanimously on Feb. 17 to send the bill to the floor by way of the Rules Committee.

Sen. John Nelson, a Litchfield Park Republican who sponsored the bill, said the bill will prevent further deterioration of the housing market and prevent unnecessary foreclosures in the future. He said the federal government created conditions that encouraged banks to offer loans to people who shouldn’t have been able to qualify for home ownership.

“If it was your mother or your grandmother, and you watched her getting taken to the cleaners, as an individual, you get mad,” Nelson said. “So why shouldn’t we approach it the same way for either our constituents or the citizens in the state?”

A balloon loan is a short-term mortgage that is based on a 30-year amortization schedule and requires the borrower to fully repay the loan at the end of a 5-7 year period.

S1288 would not end all balloon loans. Instead, it would prohibit loans that include payments that are more than twice as large as the average of earlier scheduled payments.

There are, however, a couple of exceptions. The bill would not apply to balloon payments due at least five years after the date of the loan. And it would not apply to loans that take into consideration a borrower’s seasonal or irregular income.

The bill, which is backed by the Attorney General’s Office, also prohibits loans with repayment schedules that cause the principal balance to increase.

Jennifer Boucek, legislative liaison with Attorney General’s Office, said loans with “teaser rates” and monthly payments that don’t cover all of the interest owed have lured home buyers into deals that continuously add to the principal debt rather than decreasing it.

“It makes consumers believe that they can afford a much more expensive house than they probably can afford,” she said.

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