Federal legislation follows states' lead
against high-cost, high-fee lending
By Michael D. Larson • Bankrate.com

The fight against predatory lending has been heating up for more than a year. But in the past few weeks, it has boiled over.

On March 9, Rep. Jan Schakowsky introduced the first federal bill designed to toughen curbs on abusive mortgage and home equity lending practices. In April, two more legislators announced their own version at a press conference and both proposals follow by mere days several anti-predatory lending speeches by key government officials. All told, the moves virtually guarantee the fight against borrower abuse that began with the Homeo Ownership and Equity Protection Act (HOEPA) of 1994 looks to end, once again, in the halls of Congress.

"This is a very strong bill that will help deter and eliminate a practice that's hurting families, that's hurting low-income workers and that's hurting older women," says Nadeam Elshami, a spokesman for Schakowsky. The Illinois Democrat represents parts of Chicago, a city identified as one of the biggest victims of high-cost, high-fee loans designed to strip homeowners of their equity.

"Because of these practices, the final result is someone or some family is hurt," he adds. "This sends a strong message that predatory lending should not be tolerated."

Predatory lending remains undefined
While lenders, consumer advocates, government regulators and federal legislators are still working on an exact definition of predatory lending, they've become increasingly convinced people need stronger protection from it since 1997. That's when North Carolina community groups started pushing for legislation, arguing the federal HOEPA law, which was designed to strengthen the Truth in Lending Act, wasn't working. In 1999, they got what they wanted when Gov. Jim Hunt signed an anti-predatory lending bill. Lawmakers in Illinois, Missouri, Minnesota, California and elsewhere have followed with their own proposals since then.

At the same time, federal lawmakers failed to follow through with their own initiatives. Congressional hearings in 1996, which included testimony from elderly victims of predatory lending, didn't lead to action on the House or Senate floor, for instance. But persistent lobbying from consumer groups and other events drawing attention to the issue, including a March 15 front-page story in the New York Times, galvanized support for further legislation.

"The regulatory agencies have been meeting about it, but there hasn't been action on the federal level," says Nina Simon, senior staff attorney with the AARP Foundation, a division of the American Association of Retired Persons. Yet "the states have been very active and it's now resurfaced as a national issue. I think it's hard for the federal government not to recognize it with so many states and cities getting involved in it."

Since the end of last year, officials have certainly made up for lost time. Both Federal Reserve Board Chairman Alan Greenspan and Office of Thrift Supervision Director Ellen Seidman weighed in with speeches condemning predatory lending. The Schakowsky bill from early March and the April 12 announcement from Rep. John LaFalce, D-N.Y., and Sen. Paul Sarbanes, D-Md., have also helped move the process forward.

Several lending practices will likely be declared illegal as a result, though exactly when remains to be seen. Individual state legislatures may go even further, so the list of prohibited practices could be longer depending on where a borrower lives.

What looks likely right now
As it stands now, balloon payments and prepayment penalties on subprime mortgages could be outlawed. Lenders also might be prevented from financing excessive costs and fees into a mortgage loan's principal. Other proposals are aimed at stopping lenders who repeatedly refinance borrower loans to generate fees and those who lend without regard to their borrowers' ability to repay in order to profit by seizing their homes through foreclosure and selling them.

Reformers concede that at least some of those loan provisions, including prepayment penalties, have legitimate uses. But they argue that they've been applied in such a way that borrowers are overwhelemed. Lenders may pile a balloon payment, prepayment penalty, mortgage life insurance and other provisions onto one loan, for instance, making the combined financial burden too much to bear.

"A wide variety of people are trying to define what constitutes predatory lending," says Deborah Dakin, OTS deputy chief counsel for regulations and legislation. "A lot of these can separately be used as very useful tools in a different market and we don't want to say that any one practice is always predatory, but some of them are likely to be abused."

Targeting the most vulnerable
What makes the problem worse, according to some observers, is that predatory lenders target senior citizens, minorities and other vulnerable consumers who don't even realize such practices can strip them of their homes. That's because many such borrowers don't have extensive experience with homeownership or the complicated loan programs available today.

"There's intimidation and fear," says Anna DeSimone, president of Bankers Advisory Inc. The Arlington, Mass.-based company performs compliance and quality control audits for mortgage lending clients.

"First-time home buyers are so happy to get the house, they don't question the closing costs."

Swept up in the tidal wave, however, are many of the nation's subprime lenders, who feel they're getting unfairly branded as predatory. At the National Home Equity Mortgage Association's annual meeting last month, members railed against the bad publicity they were getting. One executive at the Orlando, Fla., conference said he felt lenders to people with blemished credit were being treated the same way as tobacco companies.

Industry "bad apples" are picked for blame
Other industry representatives point out that many subprime practices -- such as charging higher rates and fees to customers with poor credt -- make business sense. Companies have to compensate for the added risk of lending to people who are more likely to default, so they make those borrowers pay more. As for widows losing their homes and minorities getting ripped off, they blame "bad apples" in the business rather than the business itself.

"Is it immoral that an 85-year old lady should have that happen to her? Hell, yeah, it's immoral. Is it wrong? Yeah. But is it prevalent? No," says Peter Cugno, chairman and chief executive of AMERICAS MoneyCenter Inc. in Long Beach, Calif.

"Using the words predatory lender and subprime lender in the same sentence is going to do our industry a great deal of damage," he adds. "Predatory lender is not synonymous with subprime."

Still, consumer advocates say that industry officials are only kidding themselves when they argue there isn't that big of a problem. And with momentum on their side, they're likely to get legislation passed soon that will give borrowers more protection than ever before.

"We know that there's a need for lenders in the subprime market, but predatory practices only benefit the lenders and they don't benefit those consumers who really need the money," says Elshami, the Schakowsky spokesman.

"It's just wrong for predatory lenders to go in and cheat the widow out of her house, period. That's the practice that needs to be stopped -- immediately."