Learn Lending Basics to Avoid a Predatory Mortgage

Unless a court blocks it, a new Montgomery County law will take effect on Wednesday that could have significant impact on home buyers and mortgage lenders there.

In November, the Montgomery County Council enacted legislation that expanded the county's fair housing and civil rights law, with an eye to increasing the penalties for what it saw as predatory lending practices. According to a news release issued by the council, "The measure expands the categories of lending activities that constitute discriminatory housing practices and increases the amount of damages that the Commission on Human Rights can award from a maximum of $5,000 to a maximum of $500,000."

The new law defines "indicators" of discriminatory lending practices, some of which include:

· Marketing mortgages that a borrower cannot afford to repay based on income and credit levels.

· Charging abusive prepayment penalties.

· Financing excessive points and fees.

· Steering a borrower to a more expensive mortgage by discouraging that borrower from obtaining a loan with more favorable terms.

According to the council: "Discriminatory predatory lending targets borrowers with limited or poor credit for loans with exorbitant or abusive terms based on race, national origin, sex, age. . . . Most abusive home-lending practices occur in the sub-prime market and many address home loan opportunities for people with limited credit histories. African Americans, Latinos, the elderly and those with low-incomes are disproportionately victims of predatory lending."

On Feb. 10, the American Financial Services Association, a trade group representing lenders, filed suit in Maryland Circuit Court challenging the authority of the council to enact this law.

According to Randy Lively, president of the association, "Maryland's law is clear that only the state has the power to enact regulations governing mortgage lending."

There has been no court action yet on the suit, but a hearing is set for Tuesday.

Several states and other jurisdictions have passed laws in recent years cracking down on lending practices. The Center for Responsible Lending, a consumer-advocacy group that supports such laws, recently released a study it said showed that consumers have benefited. "State laws enacted to prevent predatory mortgage lending work as intended to reduce abusive loan terms without impeding credit," according to the center. "Strong state laws have been good for consumers while supporting a thriving subprime lending market. They provide credit-strapped families with plenty of access to responsible home loans at typical -- or even lower -- costs."