Predatory Lending Laws in the Spotlight

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The New York Sun

RALEIGH, N.C. – A booming industry that makes home loans to people with fragile credit is lobbying Congress for nationwide rules that regulators and consumer advocates warn would roll back tougher state protections.


The debate comes as millions of Americans have taken out mortgages with higher fees and interest rates than the mortgages granted to people with solid credit. As these “sub-prime” loans have proliferated, so have complaints from borrowers who say they’ve been slammed by surprise fees and high-pressure salespeople.


More than two dozen states, led by North Carolina, have moved into a vacuum created by weak federal regulation, imposing their own laws targeting abusive practices. The industry’s five biggest players are based in California and one, Orange-based Ameriquest Mortgage Company, is nearing a $325 million settlement with 33 states over alleged bait-and-switch tactics, inflated appraisals, and other issues.


Amid scrutiny of their operations, lenders have rallied behind a bill sponsored by Reps. Bob Ney, a Republican of Ohio, and Paul Kanjorski, a Democrat of Pennsylvania, that would impose uniform national rules on the industry that last year issued $530 billion in higher-cost mortgages. Supporters say the measure is needed to replace a hodgepodge of state and local lending laws.


Some of the state and local protections, lenders say, make it costlier to extend credit to higher-risk borrowers. In at least one case, a lender says it cannot offer North Carolina customers the lowest possible interest rate because of restrictions in its state law.


Kurt Pfotenhauer, vice president of government affairs at the Mortgage Bankers Association, said the “predatory lending problem is frankly dwarfed” by the success story of people who can now buy homes through the use of higher-cost loans. Lenders themselves are typically in a better position than bureaucrats to tailor products for the needs of the marketplace, he said: “The market works because it regulates itself.”


Consumer groups say the Ney-Kanjorski bill is a thinly veiled attempt to undo tough state regulations where they exist, and to prevent new laws from being adopted.


“If we’ve done a public good here, why does that standard have to be diluted?” a North Carolina’s banking commissioner, Joseph Smith Jr., asked.


The national proposed standards, for example, would be more permissive than several state measures when it comes to the practice known as “flipping,” in which loan agents persuade borrowers to refinance after a short period of time, in some cases just months after they took out their existing loan.


Flipping generates new fees and commissions for lenders and loan agents, and can put cash in the pockets of borrowers. But it also chips away at homeowners’ equity, and may saddle them with costlier terms than they expected. The practice has been abetted by rising housing prices, allowing loan salespeople to tell borrowers that they can painlessly tap the added equity in their homes. But if home prices level off or decline, some debtors could find themselves with a home that is worth less than their mortgage, and face a heightened risk of foreclosure.


Consumer advocates are backing a bill by Reps. Brad Miller and Melvin Watt, both North Carolina Democrats, and Rep. Barney Frank, a Democrat of Massachusetts, that would parallel the North Carolina law by including a strict ban on flipping and requiring borrowers to get counseling before signing higher-cost loans. Unlike Ney-Kanjorski, it would not prevent states from imposing stricter requirements.


As the national debate unfolds, the experience of North Carolina looms as Exhibit A. Its predatory lending law is among the toughest, most scrutinized, and most hotly debated of all the state efforts.


“It’s the law that everybody points to,” an expert on predatory lending issues at George Washington University, Gregory Squires, said.


To prevent flipping, North Carolina forbids “knowingly or intentionally” refinancing a home loan in a way that does not give the borrower a “reasonable, net tangible benefit” considering “all the circumstances.”


For mortgages of $150,000 and less, the law also banned prepayment penalties, which in some cases lenders charge when borrowers pay off the entire loan amount early. Lenders say these penalties are needed to preserve profits after they provide credit to risky borrowers, but critics say they are an unfair way of locking people into costly loans.


The New York Sun

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