|
All state and local predatory lending laws would be invalidated under a bill that is set to be introduced into Congress in February. The Responsible Lending Act of 2003 will generate intense opposition from consumer groups, who complain that it stacks the deck against borrowers.
When explaining why Congress should trash anti-predatory lending laws in North Carolina, California, New York City, Chicago, Cleveland and many other places, the bill's supporters will point to recent events in Georgia, home of the nation's most far-reaching ban on predatory loans.
Georgia's law prohibits myriad mortgage abuses and invites wronged borrowers to sue. Consumers can sue not only brokers or lenders, but the investors who ultimately buy their loans.
Most home loans are bundled together into multimillion-dollar "mortgage-backed securities" resembling bonds. They are sold to institutional investors. Georgia was the first state to make these investors liable for any predatory loans within their mortgage-backed securities. Investors could be sued for punitive damages, even if they didn't know they held predatory loans.
So Standard & Poor's announced in mid-January that it no longer would rate mortgage-backed securities containing home loans from Georgia. The rating agency explained that this was the only way to guarantee that investors couldn't be sued.
Lenders stopped underwriting some niche loans in Georgia -- mainly low-documentation and interest-only mortgages, which were popular, and some sub-prime loans for borrowers with flawed credit. S&P's action did not affect people getting standard, conventional loans bought by Fannie Mae, Freddie Mac and Ginnie Mae, although some lenders warned that it would threaten the availability of mortgages to everyone.
The Georgia law's critics say the federal government needs to pass an anti-predatory lending statute that invalidates all state and local laws that are more restrictive than the federal law -- a doctrine called "federal pre-emption."
Ken Thomas, a fair-lending expert and author, calls what happened in Georgia "a perfect example of the law of unintended consequences." Georgia's experience, he says, "is going to be the watershed where they went too far, too quickly. It'll be used as an example of why we need federal pre-emption."
Thomas believes pre-emption is necessary because states are competing to enact the most stringent anti-predatory lending laws. First it was North Carolina, then Georgia.
"Predatory lending definitely exists and there's a need to get rid of it but you don't need to drop a daisy-cutter bomb on a little problem," Thomas says. Allowing borrowers to sue secondary-market investors is that daisy-cutter, Thomas believes.
Lenders have clamored for federal pre-emption for years, arguing that it's too difficult to abide by myriad state and local laws. They want one national law to tell them which predatory practices they must discard and which ones they can keep. They will have another chance to get federal pre-emption this year, when U.S. Rep. Bob Ney, R-Ohio, introduces the Responsible Lending Act.
The heart of Ney's 64-page draft bill is on Page 28, which says it "shall pre-empt any law" of any state or political subdivision that regulates any type of mortgage (not just "high-cost mortgages"), "irrespective of whether such laws afford additional substantive protections."
Ney's draft bill declares that secondary-market investors aren't liable for predatory loans, meaning that when borrowers sue, the buck will stop with the mortgage broker or lender. And it would create an industry-dominated board that would oversee the federal Housing Department's housing counseling programs. Mortgage executives would edit brochures distributed by the Department of Housing and Urban Development.
"There's no compromise that we could accept that would resemble this bill in any way," says David Swanson, communications coordinator for the Association of Community Organizations for Reform Now.
ACORN, the retiree lobby AARP, the National Community Reinvestment Coalition and other consumer groups are expected to fight the Ney bill. The Mortgage Bankers Association, National Association of Mortgage Brokers and their members are expected to support the bill. Ney's office did not respond to a request for comment.
|