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March 15, 2005
US Representatives Introduce Anti-Predatory Mortgage Lending Bill
    by William Baue

The bill, based on an effective North Carolina anti- predatory lending law, and is supported by anti-predatory lending activists such as the Center for Responsible Lending and Fair Finance Watch.

Last week, US Congressional Representatives Brad Miller (D-NC), Mel Watt (D-NC), and Barney Frank (D-MA), the ranking member on the House Financial Services Committee, introduced the Prohibit Predatory Lending Act of 2005 (H.R. 1182). The bill is based on a 1999 North Carolina anti-predatory lending law widely considered to be a model of effectiveness.

Predatory lending preys on uninformed borrowers, particularly those with poor credit histories who cannot qualify for prime-rate loans. The new bill would outlaw common predatory mortgage lending practices, such as "flipping" (or mortgage refinancing where high fees negate any benefits), mandatory arbitration clauses (which insulate abusive lenders from legal recourse), and exorbitant prepayment penalties. The bill, which would amend the existing federal Home Ownership and Equity Protection Act (HOEPA), would also require borrowers to receive homeownership counseling.

Borrowers lose an estimated $9.1 billion annually due to predatory mortgages, according to the Center for Responsible Lending (CRL), an arm of the Durham, North Carolina-based nonprofit Center for Community Self-Help. In a policy brief issued in support of the bill, CRL notes that the North Carolina law saved the state's citizens an estimated $100 million in its first year.

The brief also cites a June 2003 University of North Carolina study finding that the state law succeeded in reducing the incidence of loans with predatory terms. For example, it documented a 72 percent drop in subprime prepayment penalties on loans with terms of three years or longer. At the same time, it resulted in a 43 percent increase in legitimate subprime mortgage loans.

"It is important to note that while all subprime loans are not predatory, almost all predatory loans are subprime," the brief points out. Borrowers who cannot access prime-rate loans due to poor credit histories rely on subprime loans, which charge higher interest rates and/or fees to compensate for the increased risk associated with such borrowers. Predatory lending crosses the line from risk management into the realm of abusive practices.

Support for the North Carolina law is not universal, however. A November 2002 working paper from the Credit Research Center (CRC) of Georgetown University's McDonough School of Business questions CRL's findings.

Empirical evidence on both sides will likely impact Representatives' voting on the bill, which will need bipartisan support to pass. The Prohibit Predatory Lending Act of 2005 is similar to a Miller-Watt bill co-sponsored last year by 19 Representatives--all Democrats.

"It is early to gauge Republican support for the bill," Rep. Miller's Press Secretary Joe Bonfiglio told "Reps. Ney [R-OH] and Kanjorski [D-PA] are going to introduce their predatory lending bill sometime this week, so I think you will start to see members comparing both after that bill drops."

Anti-predatory lending activists praise the bill, though they also point out its limitations.

"It is important that a federal bill be passed, given that the Office of the Comptroller of the Currency and the Office of Thrift Supervision both offer the ability to 'pre-empt' and work around the state anti-predatory lending laws that have been passed," Matthew Lee, executive director of predatory lending watchdog Fair Finance Watch, told "We are also concerned with the aspects of predatory lending that go beyond mortgages: for example, payday lending and car title lending."

According to CRL, borrowers lose an estimated $3.4 billion from payday loans annually, and $3.5 billion in other lending abuses, such as overdraft loans, excessive credit card debt, and tax refund loans.


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