Georgia's on mortgage industry's
Georgia has one of the nation's strictest laws against predatory
mortgages. Depending on who you talk to, it's a stupid law to protect
stupid people, or it's a model statute that defends little old ladies
against crooked lenders.
Savvy legislators in other states and cities will
pay attention to what happens in Georgia. The Georgia Fair Lending
Act went into effect Oct. 1, and the state's mortgage industry warns
that the law harms the people it was designed to protect because
it restricts their access to credit. "For the most part, no
one is going to do high-cost loans," said B.J. Van Gundy, a
lobbyist for the Georgia Association of Mortgage Brokers.
The law harms people who need relatively small mortgages,
such as "the individual who has gone out and bought an $80,000
house and they've saved $20,000 and they want to borrow 60 grand
and they're going to live somewhere in 'Podunk,' Ga.," an Atlanta-area
mortgage broker says. "And they deserve to be treated like
somebody who's going to buy a $150,000 house."
The broker, who asks not to be identified ("I
don't want the banking commission to go, 'We've got a mortgage broker
over there who's shot off his mouth."), calls the Georgia Fair
Lending Act "a ridiculous law that doesn't make sense."
The law's proponents roll their eyes at such criticism.
"This legislation, this kind of approach,
has worked in North Carolina," says Kathy Floyd, advocacy director
for AARP Georgia. North Carolina had probably the nation's strictest
state law against predatory lending before Georgia got into the
act, and Floyd says there's no evidence to show that North Carolinians
have been denied mortgages because of the law.
Georgia based its legislation on North Carolina's
law and added language suggested by the national AARP, the retirees'
lobby. The AARP maintains that predatory lenders often target the
elderly because they have equity in their homes and need to borrow
money to make repairs. The Georgia law is designed to help these
people -- the stereotypical little old ladies who are ripped off
by crooked mortgage brokers -- as well as people with bad credit
who are unsophisticated about money.
Power to the people?
Georgia's mortgage lenders and brokers complain that their state's
law, known as GAFLA, makes it harder to foreclose on homes bought
by risky borrowers, and invites borrowers to sue if they decide
they got a bad deal. They can sue brokers, lenders, servicers --
even the investors who buy bundled loans.
"In fact, GAFLA is broader and more punitive
than any other 'predatory lending' statute or ordinance yet devised,"
sums up an analysis written by an attorney who advises the state's
lenders how to comply with the law.
The law categorizes mortgages as uncovered, "covered"
and "high-cost." Most mortgages will be uncovered. People
with moderate credit problems generally will qualify for "covered"
mortgages -- home loans at 4 percent above the prime rate. Right
now, the threshold for covered mortgages would start at 8.25 percent.
A mortgage can become "high cost" in two
ways. First, it's a high-cost loan if it has an interest rate of
about 13 percent. That kind of rate is reserved for people with
truly bad credit histories. The second way of defining a high-cost
loan has to do with points and fees. On a loan of more than $20,000,
points and fees of more than 5 percent make it a "high-cost"
Take the example of someone borrowing $60,000 to
buy a house. If the points and fees exceed $3,000, it's considered
a high-cost loan because they exceed the 5 percent threshold. "That's
a category that nobody's going to touch," the broker says.
"You'd be a damn fool."
It's easy to reach the 5 percent threshold on a small
loan, the broker says, especially if it's a VA loan, with its mandatory
funding fee, or an FHA loan, with its upfront mortgage insurance
premium. He has clients who want to take out an $85,000 construction
loan, and he thinks he will have to turn their business away. "I've
kind of drawn the line at 100 grand," the broker says.
Floyd, from AARP Georgia, has little sympathy for
brokers and lenders who complain that the law will shut out small
borrowers. "This kind of approach has worked in North Carolina,
and the data on access to credit and what's happening has not shown
that it's had that kind of impact in North Carolina," she says.
"I know anecdotally that some brokers are telling people that
they don't qualify, and blaming the legislation. Now, that's not
a very nice tactic!"
The Georgia law also makes it harder to refinance
a mortgage for borrowers getting "covered" loans if the
current mortgage is less than 5 years old. Borrowing language suggested
by the AARP, the law requires the borrower and lender to certify
that refinancing confers a "reasonable, tangible net benefit."
It doesn't define what that means.
"It was a fatal attempt to help people
who were gouged by aluminum siding salesmen who were preying on
these stupid people who had these houses that might have needed
repairs," the broker sputters. Dishonest home improvement contractors
would offer to refinance the home, but at high rates and fees to
steal the homeowner's equity. "But there's laws in the books
that take care of people like this," the broker says.
Floyd is unmoved by such complaints, and points out
that Georgia's law also limits the amount of late fees that can
be charged, prohibits single-premium credit insurance and prohibits
Scaring off lenders
Georgia and North Carolina aren't the only states with anti-predatory
lending laws, and other states add such laws with each legislative
session. That concerns Kenneth Thomas, a banking expert who researches
lending in low- and moderate-income communities.
"The patchwork of municipal and state
laws is making it hard for lenders," he says. He would prefer
Congress to pass a well-thought-out law that would override state
and local laws.
Thomas worries that lenders really will leave states
such as Georgia because of anti-predatory lending laws that are
too strict. "The main thing we want to keep is maximum competition,"
he says. "My view is let the market decide these things."
Thomas is not a free-market fundamentalist; he says
regulation is necessary but over-regulation is harmful. Already,
he says, there are reports that some lenders have elected to stop
lending in Georgia. Freddie Mac, the nation's second-biggest buyer
of mortgages, has stopped buying "high-cost" loans.
"Fewer choices for consumers is never
a good option," Thomas says. "We want to maximize the
number of choices. We want competition and we want disclosure. With
those two things it's never a guarantee, but that's the best market