Illinois’ attorney general Lisa Madigan urged the Federal Reserve to end financial incentives for loan officers and mortgage brokers for the types of loans written for borrowers. According to a statement from Madigan’s office, federal law allows lenders to receive bonus compensation based on the type of loan issued, meaning loan officers who place borrowers in higher risk, adjustable-rate mortgages may actually receive incentives to do so. An inquiry to the Fed was not immediately returned. Joining Madigan in her proposal to change rules when implementing the federal Truth in Lending Act were attorney generals from Arizona, Connecticut, Iowa, Maryland, Massachusetts, Minnesota, Missouri, New Hampshire, North Carolina, Ohio, Rhode Island, Tennessee, Vermont and West Virginia. According to Madigan’s statement, lenders receive extra payments after putting borrowers into high-risk loans at higher rates than what borrowers qualify for, ultimately placing them in loans they cannot afford. “Eliminating these incentives for brokers would help to end the deceptive practices used to entrap unsuspecting borrowers in loans they couldn’t afford,” Madigan said. “I strongly support the Federal Reserve’s suggested changes because they would afford consumers significantly stronger protection against the very actions that contributed to the collapse of the housing market.” Instead, Madigan suggested that the Fed provide incentives on the long-term performance of the loan written. “Much of the current foreclosure crisis can be traced to the point where these toxic loans were originated,” Madigan said. “Instead of considering the long-term impact of issuing a loan a consumer couldn’t afford, lenders typically opted to immediately sell off loans to institutional investors without consequence after borrowers went into default. Putting an emphasis on the overall performance of a loan would require lenders to care about more than just obtaining the consumer’s signature on the bottom line.” Write to Jon Prior.

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