More than 200 national advocacy groups including the Coalition for Responsible Lending, AARP, Consumers Union, ACORN, NAACP, Consumer Federation of America, National League of Cities and National Council of La Raza joined 44 state Attorneys General in supporting an Office of Thrift Supervision (OTS) proposed rule change that would help prevent a predatory lending practice that costs 500,000 American homeowners $1.3 billion in lost equity every year.
The advocacy groups, representing more than 50 million Americans, jointly signed a letter to OTS Director James E. Gilleran supporting a change to the 1982 Alternative Mortgage Transaction Parity Act (the "Parity Act"). The OTS proposed rulemaking would prevent unregulated finance companies from claiming federal preemption of state consumer protection laws governing prepayment penalties (prohibited or limited in 35 states) and late fees in subprime loans. The National Association of Attorneys General filed a separate letter in support; 44 state Attorneys General, the District of Columbia Corporation Counsel, and the Hawaii Office of Consumer Protection co-signed the letter. signatories.
"This is a significant move that would permit states to enforce their own laws against finance company abuses and protect the hard-earned home equity of millions of American families," said CRL spokesman Eric Stein. "Abusive prepayment penalties in subprime loans trap unsuspecting borrowers in high-rate loans and too often cause families to lose their homes to foreclosure."
"As a law enforcement officer of a state with a strong predatory lending law, I welcome the OTS proposal," said North Carolina Attorney General Roy Cooper, co-chair of the Predatory Lending Working Group of the National Association of Attorneys General. "Under the new rules, predatory lenders would no longer be able to avoid North Carolina law restricting prepayment penalties by claiming our law does not apply to them." Thirty-five states, including North Carolina, now have laws preventing or limiting prepayment penalties.
The OTS proposed rulemaking amends the Parity Act, which was passed in 1982 to loosen credit restrictions at a time of high interest rates and state regulatory restrictions against adjustable-rate mortgages. The OTS reinterpreted the Act in 1996 to allow unregulated finance companies to claim the prepayment penalty and late fee preemption. The result was a dramatic increase in prepayment penalties in the subprime market from, in one estimate, 10% of loans to 80% today -- with an attendant increase in predatory lending abuses and foreclosures.
The new OTS proposal reserves this far-reaching ability to preempt state laws only for provisions specifically related to adjustable rates. Broader preemption is available only for federally-regulated depository institutions, allowing the 35 states plus the District of Columbia that have laws limiting prepayment penalties to enforce these laws to address finance company abuses.
Michael Roster, executive vice president of World Savings, the second largest thrift institution in the nation, also supported the proposal. "Sound policy assumes that regulation is the price you pay for the ability to claim preemption from state laws," Roster said. "You can't have it both ways."