Congress Meddles with State Lending Laws

Laws against abusive mortgage lending in more than half the states would be overridden by a congressional proposal that is the latest federal attempt to preempt state authority over financial services.

The crux of the mortgage issue is the same as in proposals afoot to bump aside certain state regulations in the banking and insurance fields: Whether the financial industry and consumers are better served by a patchwork of state laws, or a uniform national standard.

Supporters of the Responsible Lending Act, introduced by U.S. Reps. Bob Ney (R-Ohio) and Paul Kanjorski (D-Penn.), say a federal law is needed to protect consumers with poor or limited credit histories who often turn to lenders that cater to high-risk clients and therefore set more restrictive loan terms to cover increased financial risks.

Mortgage lenders have called for the bill, claiming that an increasingly diverse patchwork of state anti-predatory lending laws is difficult for them to navigate, especially in a global marketplace.

“It can create a difficult situation if lenders have to play by 50 different sets of rules,” said Rep. Stephen Lynch (D-Mass.).

But opponents claim the measure, which would replace current state laws against predatory lending with a uniform federal standard, would leave some consumers even more vulnerable to abusive lending practices and would stifle states’ innovative efforts to address an inherently local financial transaction — buying a home.

“We don’t think that there is one standard that will work for the whole country regardless of what it is. … It’s like hunting with a bazooka. There are benefits to streamlining standards and uniformity. But at the end of the day, that doesn’t mean everything has to be the same,” said Cheye Calvo, who handles state-federal issues for the National Conference of State Legislatures, which opposes the preemptive measure.

NCSL has remained neutral on a competing proposal, called the Prohibit Predatory Lending Act sponsored by U.S. Reps. Brad Miller (D-N.C.), Mel Watt (D-N.C.) and Barney Frank (D-Mass.), that essentially would set a nationwide floor of regulation to combat mortgage “loan sharks,” while leaving stronger state laws intact. Both bills were the subject of a hearing May 24 before subcommittees of the House Financial Services Committee, and chances of passage are uncertain.

The Miller-Watt-Frank bill is modeled on North Carolina’s pioneering anti-predatory lending law, which was first in the nation when it was enacted in 1999. Thirty-three states have since followed suit. Besides North Carolina, California, Georgia, Indiana, New Jersey, New York and Ohio have strong anti-predatory lending laws.

According to NCSL, common characteristics of predatory mortgage loans include:

• Excessive fees, such as pre-payment penalties; single premium insurance that adds an additional cost in case the borrower dies before the loan is repaid, and balloon payments, in which monthly dues skyrocket at the end of a loan.
• Lending practices that are not based on a borrower’s ability to repay the loan.
• Loan flipping, or repeatedly refinancing loans, charging higher fees each time.

The growth of abusive mortgage lending has been an unfortunate corollary in recent decades to the rise of the “sub-prime” lending market, which charges higher fees to handle the riskiest mortgages but overall has expanded the opportunity of homeownership to more Americans.

During the past 10 years, the sub-prime mortgage industry has more than doubled in size, according to the Center for Responsible Lending, a North Carolina-based nonprofit that battles abusive lending practices. While most sub-prime loans are legitimate, a fraction contains elements that have been deemed abusive.

Several studies by consumer advocates indicate that predatory mortgage lenders are more likely to target minorities and the elderly. A May 25 study by the National Council of La Raza, a Washington, D.C.-based Hispanic advocacy group, found that Hispanic homebuyers are vulnerable to abusive lending practices, in part because they are more likely than comparable white homebuyers to acquire sub-prime mortgages.

In a May 30 article, The Washington Post reported that home foreclosure rates rose in 47 states in March, in part because of the increasing prevalence of risky mortgage lending in some areas of the country. According to the Post, foreclosure rates in Florida, Texas and Colorado are more than twice the national average.

Calvo said the latest effort to override states’ mortgage lending laws follows other federal attempts to grab states’ authority over financial services. He cited federal regulators’ move last year to preempt state banking rules, a proposal now before the Federal Deposit Insurance Corporation that would restrict state authority over out-of-state banks, plus a nascent effort to set federal standards for insurance regulation.

Calvo said the current dual system of state and federal regulation of the financial-services industry favors consumers. Without it, “there’s a concern about a race to the bottom,” he said.

But supporters of state preemption contend that the Nay-Kanjorski bill protects consumers by eliminating the strictest state laws, which in some cases have carried unintended consequences.

“In the worst cases, these laws have chased legitimate lenders out of districts altogether,” said Regina Lowrie, chairwoman-elect of the Mortgage Bankers Association.