Predatory lending: Who's watching your back?
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David Reiss, an assistant professor at Brooklyn Law School, teaches property and real estate transactions. He says the OCC clearly has the authority to regulate national banks, but that current national laws against predatory lending are insufficient. According to Reiss, the current law's threshhold interest rates and fees for a loan to be considered predatory are set too high and should be lowered.

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"The states have created laws that follow the format of federal HOEPA laws but have increased the number of loans that fall within their purview by lowering the triggers," he says.

Reiss adds that national banks aren't known to be predators, but the OCC pre-emption is for the national banks and their nonbank-operating subsidiaries. Most predatory lending happens in the subprime market, and the banks, he says, have been buying operations that have engaged in predatory lending.

New Jersey's anti-predatory lending law, which took effect in late 2003, is considered by many to be one of the strongest in the nation. Robert Tillman, state banking director, says not only are his and other states' rules more restrictive than the national rules, they also give consumers a stronger right to claim damages.

"If the lender engages in any of the things prohibited in the state rules, then, under most state laws, a consumer would be able to recover damages in court," he says. "The OCC will spend some time handling consumer complaints, but very seldom is there a situation where they refund money to a consumer or provide the consumer with a cause of action to take to a court against one of its charters. The states have tried to fill the gap, and they've done a very good job handling claims and providing these rights to consumers."

While bankers, lawyers, consumer groups and Congress tangle over the turf war, consumers will be left with the difficult task of fending for themselves.

Allen Fishbein, director of housing and credit policy at the Consumer Federation of America, says most predatory lenders don't want to push borrowers to foreclosure; they want to strip equity from their homes. States with stronger laws put restrictions on the frequent refinancing of high-cost loans, flipping and additional fees.

Fishbein notes that some states have protections that are significantly above and beyond federal laws. In particular, he cites New Jersey, New Mexico, New York and, to some extent, California. But others, he says, might be meaningless. "You can't make a sweeping generalization."

"What the OCC is doing is creating a situation where consumers, by the choice they make as to which financial institution they use, will be afforded a significantly different set of protections," he says.

"A state-chartered bank may bar mandatory arbitration clauses in a home loan, but if you go to a federally chartered institution or even a subsidiary, that would not be illegal. You can't ask consumers to have that degree of knowledge about lenders."

Fishbein says the federal law should act as a floor. A national bank would have to abide by the federal rules, but if state representatives decided additional protections were needed because of abusive lending practices, the state should be able to enforce its laws.

"In a period where abusive lending, particularly in home lending, is on the increase," Fishbein says, "consumers are hit with hidden fees and service charges they're not aware of. The federal system should be complementing the states and creating the best protection for consumers. It's working the other way around. It's a pick-and-choose system, and that's not the best use of resources."

Congressional committees continue to hear testimony for and against the OCC pre-emption issue, and at least one state has taken legal action. Last year, New York's attorney general sued a subsidiary of a national bank for allegedly illegally threatening to foreclose on a home.

While the move was meant to help the homeowner, Spitzer says the action was also a direct challenge to federal banking regulators.

His argument is still the same today: "The National Bank Act does not prohibit state attorneys general from enforcing state laws against national banks. Indeed, for over 140 years, no one, including the OCC under dozens of administrations, has questioned the fundamental right of the states to enforce nonpre-empted laws against national banks."