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
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
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.
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 SocialFunds.com.
"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
SocialFunds.com. "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.