Seniors Oppose Federal Predatory Laws

“We’re not opposed to federal legislation,” Dacosta Mason, AARPs national coordinator for consumer issues, told members of the Mortgage Bankers Association. “But if we’re going to have federal legislation, it’s going to have to be strong federal legislation.”

The industry’s largest groups, including the MBA, called on Congress last week to scrap state laws against predatory lending, saying that preemption of local laws in favor of a uniform federal framework would better protect borrowers from unscrupulous lenders and help foster competition within their industry.

The current patchwork of state and local laws against abusive lending grew out of the frustrations of consumer groups, who saw their efforts to get a bill through Congress blocked in the 1990s by the mortgage industry and its supporters on Capitol Hill. The groups responded by turning their attention to the states, where they have gotten predatory lending bills enacted in 24 states. Bills are pending in 17 more.

Efforts to get each state to pass a similar version of the national groups’ model law failed, however, as local consumer activists and trade groups exerted their own influence over the process in each state capital. The result was laws that varied widely from one jurisdiction to the next.

Mason acknowledged the complications this created for lenders, but said that the primary goal of any national legislation should be the extension of existing consumer protections, not preemption of strong state laws with a weaker federal statute. His group represents more than 35 million Americans over age 50, a portion of the population that accounted for about a third of the subprime loans issued in 2000.

The typical state statute limits interest rates and fees, prohibits excessive prepayment penalties and forbids mortgages that don’t take ability to repay into consideration. Many also include a provision requiring that refinanced loans provide a net tangible benefit to the borrower and some even extend liability for abusive loans to the secondary market.

Consumer groups consider assignee liability an essential component of their efforts to stem the flow of capital to predatory lenders, but such provisions have prompted investors to pull out of mortgage-backed securities from states that hold investors accountable for the abusive lending practices of loan originators.

Investors in Georgia-based mortgages, for example, could face penalties of almost three times the original loan amount, according to Standard & Poor’s.

Susan Barnes, an official at the rating agency, said the lack of uniform definitions for points and fees, coupled with the wide range of possible penalties and failure to clearly delineate loan categories, would lead investors to pull out from other unfavorable pockets of the market where the risk was either too great or too uncertain, such as New Jersey and North Carolina.

With companies forced to pick and choose markets based on the vagaries of local laws, the lenders said borrowers were being denied access to valuable mortgage products.

But Mason said that wasn’t necessarily a bad thing. Some of those who were being cut off from high-cost loans, he said, probably shouldn’t have been allowed to borrow money in the first place because they didn’t have the ability to repay the loan.