Representative Bob Ney (R-OH) has introduced HR 833, “The Responsible Lending Act,” under the guise of protecting consumers from predatory lending. But the bill would actually exacerbate the problem by weakening existing federal law.
The Ney bill invalidates all state and local predatory lending laws, including those that afford additional protections. Lenders have clamored for federal preemption for years, arguing that preemption is necessary because the myriad of state and local laws present compliance nightmares. The National Community Reinvestment Coalition (NCRC) and its 600 member organizations are lobbying members of the House Financial Services Committee to oppose the Ney bill, and Congressional staffers believe it will significantly change before reaching the House floor. Many Republicans are balking at the preemption provision as an infringement of state’s rights, while industry lobbyists continue to stress that preemption is necessary to provide a nationwide standard and lower consumer costs.
As Shelterforce readers know, predatory loans are a subset of sub-prime loans that exploit vulnerable borrowers and threaten the reinvestment gains made possible by the Community Reinvestment Act. These loans are characterized by higher interest rates and fees, abusive terms and conditions that trap borrowers and lead to increased indebtedness. Predatory loans also violate fair housing laws by targeting women, senior citizens and minorities. In Best and Worst Lenders, NCRC documents dramatic lending disparities in high cost and prime lending loans in minority neighborhoods in 25 metropolitan areas, even after controlling for income levels and housing costs. These results indicate that legislative measures are needed to protect communities from abusive practices, including steering minorities to high cost loans when they qualify for prime loans.
Ney’s proposal would weaken existing provisions of federal law by absolving financial institutions purchasing predatory loans from liability in most instances and by loosening protections against flipping. Balloon payments would be permitted as long as they are disclosed to the consumer; current federal law prohibits balloons for the first five years on high cost loans. Although the Ney bill prohibits prepayment penalties beyond the fourth year of the loan, it does not limit the amount of those costs. Prepayment penalties are traps on abusive loans since borrowers must often pay thousands of dollars in order to refinance them.
Sen. Paul Sarbanes (D-MD) and Reps. Janice Schakowsky (D-IL), Stephanie Tubbs Jones (D-OH) and David Scott (D-GA) have introduced bills that provide more effective remedies.
For example, the Sarbanes and Schakowsky bills apply consumer protections to considerably more high-cost loans than the Ney bill. Sarbanes proposes outlawing prepayment penalties beyond two years and capping the amount of those costs; Schakowsky would prohibit prepayment penalties on all high cost loans.
The Jones bill would require mortgage brokers and agents involved in subprime lending to become certified and proficient in federal laws aimed at protecting consumers. The bill authorizes funding for financial literacy education for home buyers and establishes minimum standards that lenders must meet prior to foreclosing on a home, such as providing written notice to consumers explaining their legal rights.
Rep. Scott’s proposal, the “Prevention of Predatory Lending Through Education Act,” authorizes the Secretary of Housing and Urban Development to make grants available to local governments, states and nonprofit organizations for counseling and education programs, and establishes a toll-free telephone number for complaints regarding predatory lending.
The Financial Services Committee of the US House of Representatives (where the Ney bill has been referred) will be busy this summer as it examines the financial industry’s use of consumer credit data and as Congress considers preserving the national standards in the Fair Credit Reporting Act. While that debate ensues, the Ney bill will be put on hold. As the lending industry uses this time to advance their point of view, consumer groups must steadfastly pressure Financial Services Committee members to reject Ney’s bill.