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Abstract

The cornerstone of the “American Dream” has long been marked by the purchase of a home. Most families cannot afford to purchase a home with cash and, almost universally, need financing. Financing for a home purchase begins when a person or couple applies and is preliminarily approved for a home loan by a lender. The lender’s decision to approve is based on a number of different factors that are thought to predict how likely it is for the borrower to repay the loan according to its terms. The factors used to make this prediction have undergone drastic reformulations over the past century. In response to the Great Depression, during which many families were forced into foreclosure because they could not afford the balloon payments, this practice changed. The change meant that home loans were made to individuals for a fixed period of time, usually twenty years, and the principal balance was paid down slowly. Additionally, the new “typical” homebuyer had a twenty percent, instead of fifty percent, down payment. However, both before and after the Great Depression, and, in fact, until recently, the home mortgage generally was approved and funded by a deposit-taking bank. The practice of banks lending to borrowers who have significant down payments, (i.e., twenty percent) and good credit histories continues today, although this “prime lending” represents a smaller and smaller portion of the total mortgage market. The shrinking market share of the prime mortgage loan is a result of the advent and rapid expansion of so-called “subprime lending,” beginning in the mid-1990s. Simply put, the subprime lending market is populated by borrowers who would not have qualified for conventional home loans because of their lower-than-average credit scores, low net incomes, or low savings. Generally, these are borrowers who would have been rejected by traditional deposit-taking banks because the risk of lending money to these borrowers would have been deemed too great. Undeniably, access to loan funds from non-traditional sources made the dream of home ownership attainable for a much larger segment of the population. Yet the subprime lending arena has also spawned several ethically questionable lending practices, often loosely grouped under the heading “predatory lending practices.” These practices seek to exploit borrowers who, because of the risk associated with lending money to them, have far fewer options for financing. The exploitation can come in the form of onerous repayment terms and large up-front fees with little or no benefit to the borrower. These predatory lending practices and abuses were the targets of the Maine Senate when, on June 5, 2007, by a unanimous vote of 35-0, the Senate passed a broad sweeping act aimed at curbing abusive mortgage lending practices in Maine. “An Act to Protect Maine Homeowners from Predatory Lending,” Legislative Document 1869, (“Original Act”) was signed into law by Governor Baldacci on June 11, 2007, and became effective on January 1, 2008. However, on January 8, 2008, just a few days after the Original Act went into effect, the Maine Legislature passed “An Act Relating to Mortgage Lending and Credit Availability” (“Emergency Amendment”), which is a lengthy amendment to the Original Act. The Emergency Amendment sprung from a fear in the legislature that some of the provisions of the Original Act may ultimately have the unintended consequence of further destabilizing the mortgage market in Maine by drying up credit. The legislature further amended the Original Act by passing a second amendment (“Second Amendment”) later in 2008. This Comment seeks to understand the implications of the Act and the Amendments for the credit markets in Maine. In Part II, this Comment explores the background and the boundaries of the legitimate subprime lending market—a market that remains a valuable resource for borrowers unable to qualify for traditional mortgage products—versus the predatory lending practices that rightfully are the target of state action. In Part III of this Comment, the original response of the Maine Legislature, known as “An Act to Protect Maine Homeowners,” is detailed and certain key provisions are compared with the Emergency Amendment, with particular attention paid to how the anti-flipping provision will now apply in light of the Emergency Amendment. Finally, in Part IV, this Comment suggests that the Maine Legislature should (1) continue narrowing the scope of the anti-flipping provision and (2) suggest other areas of the Original Act that should be narrowed or repealed in order to prevent any additional destabilization of the credit market in Maine. This Comment concludes that the Maine Legislature, and those who supported the passage of the Original Act, have crossed the line between protecting homeowners from abusive lending practices and stepped into the area of “significantly affecting the flow of legitimate and fairly priced credit.”

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