Judge Suspends Montgomery Law On Penalties for Predatory Lending

Montgomery County Council member Tom Perez, left, backs the law; member Howard A. Denis opposes it. (By Juana Arias -- The Washington Post)

Montgomery County's effort to curb discrimination in mortgage lending through harsh penalties against alleged predators ran into two major obstacles yesterday. A state judge issued a temporary injunction to halt the law's enforcement for four months, and the Bush administration said the measure usurps federal authority.

The double blow jeopardized what Montgomery's officials characterized as an effort to strengthen civil rights protections in an increasingly diverse county. But it also stopped the defection of mortgage lenders -- about two dozen of whom have announced that they would suspend making loans in Montgomery. Such departures would raise the possibility that the market would become less competitive and force up the price of loans.

The legislation, which was to go into effect today, would raise from $5,000 to $500,000 the maximum damages that a lender must pay if a borrower can show discrimination.

An industry association sued the county last month, and several mortgage lenders asked the Treasury Department's Office of Thrift Supervision, the federal agency that regulates more than 800 savings and loan institutions, to review the county's action. The agency's chief counsel, John E. Bowman, wrote in a legal opinion that savings and loan institutions, which provide home loans, do not have to comply with the local law. If legislation such as Montgomery's were allowed to proceed, he said, "then countless other local governments throughout the United States could do so as well, usurping Federal authority to establish uniform rules."

Also yesterday, Circuit Court Judge Michael D. Mason ruled that the plaintiffs had "raised questions that are serious, substantive and fair grounds for litigation" and ordered the county to refrain from enforcing the new law until he makes a final decision in the case after a hearing scheduled for early July.

The law's chief backer vowed to continue his fight. "I disagree with efforts to put local governments out of the business of protecting residents from discrimination," County Council member Tom Perez (D-Silver Spring) said. "I'm going to fight against that."

He seemed unfazed by the federal intervention. "It's an opinion -- it has no legal standing," he said.

Two council members who have long opposed the legislation, Michael Knapp (D-Upcounty) and Howard A. Denis (R-Potomac-Bethesda), said they would work to repeal it, citing concerns about the economic impact.

Consumer activist Ira Rheingold, executive director of the National Association of Consumer Advocates, said he was shocked by the federal preemption of the Montgomery law, adding that he had "never before seen" a federal agency preempt a discriminatory lending law. Discriminatory lending is also prohibited under federal law, but is seldom enforced by federal banking regulatory agencies, he said.

"If the OTS is not a captive agency, I don't know what is," Rheingold said. "It's being done simply to protect industry, not to protect consumers."

The tussle over the Montgomery law is part of a debate over how and whether local governments have the right to enforce laws against predatory lending practices, at a time when there is widespread acknowledgment that abusive lending practices have become more commonplace. More than 20 states have passed laws restricting predatory lending, creating what lenders say is a patchwork of conflicting laws and standards across the county.

Bush administration banking regulators have said that nationally chartered financial institutions do not need to comply with local predatory lending laws. The Office of the Comptroller of the Currency, which regulates banks, in 2003 said that federal law preempted predatory lending laws passed in New Jersey and Georgia.

The new law in Montgomery sought to protect minority borrowers at a time when new federal lending statistics have found that blacks and Hispanics are paying much more for loans than whites and Asians. Lenders say they must charge higher interest rates to people who are greater credit risks.

Perez, a Latino and a civil rights lawyer who served in the Clinton administration, is one of two minority politicians ever elected to the Montgomery County Council. He has said that Montgomery's leadership does not adequately reflect the county's increasing diversity, and he championed the lending legislation as a way to represent the interests of what he calls the "new Montgomery."

More than two dozen lenders, of about 600 doing business in Montgomery, had said they would cease or suspend lending in the county because the law is worded too vaguely and would expose them to financial risk. The new law amends legislation that allows damages against lenders who discriminate against minorities by giving them costlier loans than other borrowers receive or by overcharging them on fees.

The American Financial Services Association and a group of mortgage brokers and lenders challenged Montgomery in a lawsuit last month, saying that only the state of Maryland can regulate lending. County lawyers responded that state laws allow local jurisdictions to protect civil rights and argued that the Montgomery bill sought to regulate discrimination, not lending.

Montgomery lenders and borrowers expressed relief at the ruling.

"We are absolutely thrilled a judge has realized the potential damage this law could cause," said Thomas Shaner, executive director of the Maryland Association of Mortgage Brokers. "We're all against discrimination here, but let's find another solution."