Standards for Mortgage Lending Debated
Wednesday, May 25, 2005
Lending industry officials and consumer advocates clashed Tuesday at a congressional hearing over the best ways to rein in abuses in the $600-billion-a year market for high-cost home mortgages. Both sides agree that bad practices are resulting in people losing their homes to foreclosure because of steep payments and extra fees.
Lenders have endorsed a proposed measure that would establish uniform national lending standards, preempting more-restrictive lending laws that have been passed in more than a dozen states. The measure also would improve consumer literacy outreach aimed at protecting people buying or refinancing their homes from fraud by unscrupulous lenders.
Consumer advocates want to boost home-finance education as well, but they oppose the proposed federal measure because it would strip consumer protections from states that have done more to protect consumers than federal regulators have done. The state laws, modeled after a measure passed in North Carolina in 1999, generally limit hefty fees, prepayment penalties and "loan flipping," in which houses are refinanced frequently, stripping out equity.
The public hearing before the House Financial Services Committee highlighted a measure co-sponsored by Reps. Robert W. Ney (R-Ohio) and Paul E. Kanjorski (D-Pa.) that would preempt state legislation. Also in the spotlight was a competing measure sponsored by Reps. Brad Miller and Melvin L. Watt, both North Carolina Democrats, that would establish the North Carolina law as the national model.
"North Carolina has made excellent strides, but we need to be practical," Kanjorski said at the hearing, adding that his bill could be amended to make it more acceptable to consumer advocates. "The North Carolina standard has very little chance of becoming national."
At issue is what is known as "subprime lending," in which lenders charge higher interest rates and require additional fees from home buyers or homeowners who are thought to pose a higher credit risk than people who have good credit. Critics have long charged that some lenders are profiting by exploiting unsophisticated consumers by charging them interest rates and fees in excess of the credit risk they may pose. Then, when homeowners default on their loans, the lenders can take possession of their homes, a lucrative ploy in the current housing boom.
At the hearing, industry leaders acknowledged that there is a serious problem. So-called predatory lending is a "stain on the industry," said Regina M. Lowrie, president of Gateway Funding Diversified Mortgage Services LP in Horsham, Pa., the incoming chairwoman of the Mortgage Bankers Association. But she warned that the proliferation of restrictive state laws passed in reaction to the problems could curtail subprime lending or cause lenders to increase the rates they charge to other homeowners. She said the nation's homeownership rate has reached a record of nearly 70 percent because new kinds of loan programs have been developed, making homeownership available to poorer people.
Similarly, Micah S. Green, president of the Bond Market Association, called predatory lending a "blight on the industry," but he also supports preempting state laws restricting it.
Joseph A. Smith Jr., North Carolina's commissioner of banks, testified that North Carolina's more restrictive laws have not constricted the supply of mortgage money available to consumers or boosted interest rates, and that such reports circulated by lenders' groups are inaccurate.
"I have never heard a single example of a single person . . . who was denied mortgage credit because of our laws," Smith said. "I have yet to meet a flesh-and-blood example."
Lowrie said she knew of a blind man denied a mortgage in New Jersey after that state passed a predatory lending law.
The key question facing Congress is whether, or how much, the federal government should protect consumers from financial predators.
Rep. Barbara T. Lee (D-Calif.) said that what the "loan sharks" are doing is "downright criminal," and that she feared the proposed preemptive legislation would "actually make matters worse."
Rep. Jeb Hensarling (R-Tex.) countered: "I'd offer the opinion the consumer is the best judge of what is in the consumer's best interest."
The legislation is expected to move ahead this summer. Last month, Rep. Michael G. Oxley (R-Ohio) chairman of the Financial Services Committee, signed on to the Ney-Kanjorski bill as a co-sponsor.