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New Bill in Congress Threatens to Leave Homeowners at Mercy of Predatory Lenders

Wednesday, March 16, 2005

WASHINGTON, D.C. -- A new bill in Congress would demolish many of the protections states and the federal government have carefully erected against predatory lenders and would expose millions of homebuyers to the loss of their savings and even their homes.

The bill by Congressmen Robert Ney of Ohio and Paul Kanjorski of Pennsylvania would preempt state laws proven effective at curbing abusive lending and replace them with a weak federal standard.

The Center for Responsible Lending, a nonprofit, nonpartisan policy and research group, urges Congress to reject this bill in its current form, which CRL regards as an attempt by lenders to get around strong predatory lending laws.

Predatory lending robs homeowners of more than $9 billion a year, CRL estimates, and threatens the poorest of homeowners: the elderly, minorities, immigrants -- those least able to survive these scams with homes and savings intact.

Predatory lenders, including some large financial institutions, threaten entire neighborhoods as people lured into borrowing more than they can afford at unconscionably high fees later lose their homes to foreclosure.

CRL urges Congress to instead support a bill by Congressmen Brad Miller and Mel Watt of North Carolina and Barney Frank of Massachusetts modeled on a North Carolina law proven to cut predatory loans while ensuring everyone can still get a home loan. The Miller-Watt-Frank bill would eliminate loopholes in federal law rather than create new ones.

"The numerous loopholes in this bill show a lack of understanding of how predatory lending steals the home equity of thousands of American families every year," said Mark Pearce, president of CRL. "We simply can't afford the costs that come with it: The boarded-up houses in struggling neighborhoods, the hard-earned gains of working-class people wiped out by predatory lenders. At bottom, that is what this debate is all about."

Consumer groups joined CRL in opposing the bill.

"The bill's proposed evisceration of all effective remedies under federal law for home mortgages, combined with the preemption of state protections, completely negates any proposed improvements for consumers," said Margot Saunders, managing attorney at the National Consumer Law Center in Washington, D.C. "On behalf of our low-income clients, who are homeowners throughout the U.S., we will oppose this bill."

Here are the holes in the Ney-Kanjorski bill:

  • It fails to count fees, such as the penalties for paying off a loan early that trap borrowers in expensive loans or the kickbacks to brokers called yield spread premiums, in deciding whether a borrower is protected by federal predatory lending law. Under the Ney-Kanjorski bill, lenders can dodge the law by shifting their compensation to these excluded fees. The Miller-Watt-Frank bill, in contrast, takes the approach of numerous state laws by including these fees.
  • It fails to stop abusive loan flipping -- when lenders make repeated loans to homeowners simply to generate fees. The Ney-Kanjorski bill addresses flipping only for high-cost loans, allowing lenders to repeatedly flip borrowers as long as the upfront fees are only 4.99% of the loan each time. And the bill's exceptions create a road map for abusive flips that would actually be permitted under the law. In contrast, Miller-Watt- Frank follows the approach of North Carolina and other states by prohibiting abusive flipping practices on all home loans.
  • The bill lets lenders strip borrowers of their equity by imposing high upfront fees. In many high-cost loans, borrowers never realize the significance of the exorbitant hidden fees on the loan because they don't pay for them in cash but instead finance the points by rolling them into the loan. The state of North Carolina and the Miller-Watt Frank bill prohibit the financing of any fees on a high-cost loan. The Miller-Watt-Frank bill and at least seven states, including Arkansas, Georgia, Massachusetts, North Carolina, New Jersey, New Mexico, and South Carolina also require counseling for loans that have an extremely high interest rate or excessive points and fees so that borrowers know what they're getting into. The Ney-Kanjorski bill does not.
  • It fails to ban mandatory arbitration on all home loans. Being forced into mandatory arbitration leaves homeowners cheated by their lenders with no legal recourse. While the Ney-Kanjorski proposal bans mandatory arbitration on high-cost home loans only, the Miller-Watt-Frank bill prohibits the use of mandatory arbitration clauses in all home loans, which is, in fact, the current standard for the mortgage industry.
  • It fails to prevent abusive prepayment penalties on sub-prime loans, or loans to people with less-than-perfect credit records. While the bill limits prepayment penalties on all home loans to three years, it permits lenders to charge a high prepayment fee, typically 4% to 5% of the loan. These penalties often lock people into expensive loans.
  • The bill would roll back provisions of federal law that protect borrowers from abusive lenders after their loan has been sold to an investor. Because most subprime loans are sold into this secondary market, borrowers with predatory loans may be unable to defend their home against foreclosure. In contrast, numerous states, including Illinois, Massachusetts, New Mexico and North Carolina have found an approach to liability that balances the ability of the secondary market to purchase subprime loans and the need for borrowers to be able to protect their home against abusive lenders.
  • The bill razes state protections for homeowners. Rather than preserve and strengthen state and federal protections for homeowners, the Ney- Kanjorski bill wipes out state anti-predatory lending laws and significantly weakens some protections now available under the federal Home Ownership and Equity Protection Act.
  • The bill includes numerous loopholes that undercut its stated purpose. For instance, it encourages carving up high-cost loans into several loans to avoid triggering protections for homeowners.

Among the groups joining CRL in opposing the Ney-Kanjorski bill in its current form, introduced Tuesday, was U.S. PIRG in Washington, D.C.

"Data brokers like Choicepoint, air polluters, rent-to-own stores, car rental companies and now predatory mortgage lenders are all seeking federal safe harbors from strong and innovative state consumer and health protections," said Ed Mierzwinski, consumer program director for the group. "So we'll keep fighting to convince Congress to make federal laws floors, not ceilings. Otherwise we cannot guarantee our citizens the protections they deserve."

The Consumer Federation of America in Washington, D.C. also opposes the bill in its current form. "It falls considerably short in key areas and does not provide the necessary safeguards that would truly eliminate incentives for lenders to make predatory loans nor does it preserve access for justice for victims of abusive mortgage practices," said Allen J. Fishbein, director of housing and credit policy. "Consumers require protections beyond what is provided for in this bill."

The chart below compares the two predatory lending bills.

  1. Points and fees definition for purposes of triggering protections for "high-cost" loans

    Miller-Watt-Frank (H.R. 1182)
    5%, includes prepayment penalties and yield spread premiums in addition to other origination fees.

    Ney-Kanjorski (H.R. 1295)
    5%, but fails to cover most prepayment penalties and appears to exclude yield spread premiums.

  2. Flipping

    Miller-Watt-Frank
    Requires reasonable tangible net benefit on all home loans.

    Ney-Kanjorski
    Requires reasonable tangible benefit only on high-cost loans. Allows numerous exceptions and only applies if refinance is within two years of original loan.

  3. Protections against high-cost abuses

    Miller-Watt-Frank
    Prohibits financing any fees on a high-cost loan. Requires counseling prior to obtaining a high-cost loan.

    Ney-Kanjorski
    Allows lenders to finance up to 5% of a high-cost loan (loans with upfront fees above 5% or high interest rates). Does not require any counseling prior to obtaining a high-cost loan.

  4. Prepayment penalties

    Miller-Watt-Frank
    Includes prepayment penalties in points and fees.

    Prepayment penalties in excess of 2% of the loan amount, or longer than 2 ½ years trigger high-cost loan protections.

    Bans prepayment penalties for high-cost loans whose size is beneath Federal Housing Authority mortgage limits

    Ney-Kanjorski
    Does not include prepayment penalties in points and fees, unless the lender is refinancing its own loan.

    Bans prepayment penalties on all home loans that would extend beyond 3 years from origination.

    Permits large prepayment penalties (e.g. 4%-5% of loan amount) by allowing lenders to calculate penalty based on monthly interest payments rather than on the amount prepaid. Such calculation penalizes borrowers with higher interest rates.

  5. Mandatory arbitration

    Miller-Watt-Frank
    Bans mandatory arbitration on all home loans.

    Ney-Kanjorski
    Bans mandatory arbitration only on high-cost loans. Falls short of industry best practices.

  6. Assignee liability

    Miller-Watt-Frank
    Maintains existing protections under the Home Ownership and Equity Protection Act of 1994 (HOEPA).

    Ney-Kanjorski
    Rolls back current federal law protections for borrowers whose loan has been sold on the secondary market. Limits ability of borrowers with predatory loans to defend home from foreclosure.

  7. Preemption of state laws

    Miller-Watt-Frank
    Sets a floor for minimum standards. Retains right of states to address mortgage lending abuses.

    Ney-Kanjorski
    Wipes out effective state protections for homeowners.

For a more detailed analysis of both bills, please go to CRL's website, http://www.responsiblelending.org.

Contact: Michael Flagg at 202-349-1862 or mike.flagg@responsiblelending.org