Clamping down on predatory lending
By Holden Lewis • Bankrate.com

You can't ban predatory lending without defining it. After some difficulty, lawmakers across the country have come up with a fairly uniform definition.

Most legislation first defines "high-cost" lending. A predatory loan is a high-cost loan that contains certain provisions.

To understand how this works in practice, let's look at Philadelphia's ban on predatory lending, enacted earlier in 2001.

First, the ordinance defines a high-cost loan. Philadelphia says a high-cost loan:

• carries an interest rate of 6.5 percent or more than the yield for Treasury securities of the same term. To put that in English, on April 13, 2001, the yield for 30-year Treasuries was 5.59 percent. Add 6.5 percent to that and you get 12.09 percent. So in May 2001, a high-interest loan on a 30-year mortgage would be defined as having an interest rate of 12.09 percent or higher.

Even if the interest rate hovers just below that cutoff point, a loan is considered high-cost if:

• it has total points and fees of 4 percent or more if the loan is for $16,000 or more, or
• its total fees exceed $800 if the loan is for less than $16,000.

The ordinance carves out exceptions for points that buy down the interest rate.

Philadelphia allows these high-cost loans, so long as the borrower gets approved home-loan counseling. Presumably, a counselor would try to talk a borrower out of getting a high-cost loan.

But a high-cost loan is predatory and illegal if:

• it involves fraudulent sales practices;
• it refinances another high-interest loan and doesn't offer the borrower a better deal than the old loan;
• it carries a "balloon payment" at the end of the term;
• the payments aren't enough to pay any of the principal, so that the amount of the loan rises each month instead of falling (this is called "negative amortization");
• points and fees are financed as part of the loan payment;
• it requires the borrower to resolve disputes with the lender through arbitration rather than through the courts;
• it charges prepayment fees;
• credit insurance premiums are included in the mortgage payment;
• the lender doesn't investigate whether the borrower can afford to make the payments; or
• the borrower doesn't get the mandated home-loan counseling from an approved agency.

Laws against predatory lending: A national movement
Many cities and states are considering or have passed laws with similar framework but different details.

Those details wander all over the map.

Lawmakers in Louisiana, Missouri and Pennsylvania have introduced bills that define a high-cost loan as having a rate of 5 percent above the Treasury yield, while Ohio is considering a threshold of 10 percent above the Treasury yield.

Chicago passed an ordinance that requires the CEOs or chairmen of financial institutions to sign a pledge that their companies and any affiliates won't write any predatory loans in Chicago.

In Illinois, if you have a high-interest home loan and you fall more than 30 days behind in your payments, the lender has to send you a letter notifying you that debt counseling is available.

Massachusetts and New York force high-cost lenders to tell credit bureaus when their borrowers pay on time. That bans a practice in which some subprime lenders have been known to hide borrowers' good payment histories. That way, the customers' credit scores don't improve, so they can't get loans on better terms.

And Pennsylvania is considering a law that, among other things, would make it harder for lenders to take advantage of immigrants. The bill says that if the lender and borrower negotiate in a language other than English, the lender must provide a translation of the loan contract.