Blunt proposes sending shady home lenders to prison

JEFFERSON CITY — As national concern about home foreclosures and sub-prime loans grows, Gov. Matt Blunt on Monday proposed sending some lenders to prison.

Blunt’s plan would make mortgage fraud a felony, with a sentence of up to seven years in prison. It also would allow state departments to punish predatory lenders.

In a written statement, the governor said his plan would help at-risk homeowners forestall foreclosure.

The Association of Community Organizations for Reform Now endorsed legislation last week that would create a series of new regulations for lenders while allowing borrowers to sue for violations.

That bill is sponsored by Rep. Jeff Harris, D-Columbia, who is running for attorney general, and Rep. David Pearce, R-Warrensburg, who is a banker. The lawmakers said they intend to file that bill this week.

While a draft version of the House legislation focuses on new regulations, Blunt’s plan focuses on penalties, foreclosure notice requirements and administrative oversight.

The governor calls for a hot line within the Department of Insurance, Financial Institutions and Professional Registration so that borrowers can get information about avoiding foreclosures. His proposal also would allow licensing commissions and the Division of Finance to go after predatory lenders.

Sub-prime loans are designed to help borrowers with poor track records get credit. The loans generally have adjustable interest rates that start low and gradually track upward. For many low-income borrowers, the higher interest rates make it difficult to keep up with the payments and more likely that lenders will foreclose on their homes.

It’s not the first time lawmakers have proposed criminal penalties for certain types of mortgages. Last session, Senate Majority Leader Charlie Shields, R-St. Joseph, filed a bill that would have made it a felony for lenders to mislead prospective borrowers. But the measure never made it out of a Senate committee.

Several states already have passed laws adding regulations on lenders.

A trade group for bankers has said that most of the state’s regulated financial institutions — such as neighborhood banks and credit unions — aren’t deeply involved in sub-prime loans. But the leader of a trade group for mortgage bankers warned that going too far with penalties on lenders could make it more difficult to get credit in Missouri.