WASHINGTON, D.C. -- State predatory lending laws, including North Carolina's first-of-its-kind legislation targeting abusive home mortgage terms, are working to protect consumers while not drying up the availability of credit to low-income borrowers, according to testimony delivered to Congress today by Self-Help Credit Union Senior Vice President George Brown, who also is spokesperson of the Center for Responsible Lending (CRL).
Brown also told those attending a joint hearing of the U.S. House Financial Services Subcommittee on Financial Institutions and Consumer Credit and the Subcommittee on Housing and Community Opportunity that state laws seeking to curb predatory lending should not be preempted.
Brown said: "Federal preemption of state anti-predatory lending laws would be misguided and harmful to homeowners. Federal regulators have used ideas developed in state law with regard to many financial services activities. On predatory lending, states have moved with caution and have adopted and refined laws with which lenders can comply. We urge you to partner with states and provide meaningful protections for the nation's homeowners."
Brown pointed out that there is extensive data showing that North Carolina's predatory lending law is working and that the experience of Self-Help indicates that subprime lending can be done without being predatory.
"Our own analysis of home loans reported to federal regulators under the Home Mortgage Disclosure Act (HMDA) shows that subprime lending continues to thrive in North Carolina," Brown said. "In 2000, North Carolina was still the sixth most active state for subprime lending. One in every three loans to low-income North Carolina families, those with annual incomes of $25,000 or less, was subprime, the highest proportion in the country."
The CRL spokesperson added: "The best research in the field was recently completed by the Center for Community Capitalism at the University of North Carolina's Kenan-Flagler Business School in June 2003. This study concluded that the North Carolina law succeeded by reducing the incidence of loans with predatory terms.
Specifically, the study reported:
- a 72 percent drop in subprime prepayment penalties with terms of three years or longer;
- loans to borrowers with substantially impaired credit actually increased by 31 percent;
- the law appears to have reduced steering, as subprime loans to borrowers who could more easily qualify for low-cost conventional loans declined by 28 percent, while loans by prime lenders increased 40 percent;
- and subprime home purchase loans increased by 43 percent.
Simply put, the study suggests that the reduction of subprime refinances is consistent with a 'weeding out' of bad loans since passage of the law."
The success story for predatory lending laws extends beyond the borders of North Carolina. Brown said: "In the great spirit of cooperative federalism, other states are learning from and improving upon our example. Moreover, North Carolina is learning from the efforts in other states. Following the lead of several other states, our legislature amended the North Carolina law this year to bring open-end loans within its scope ... We believe the federal government is facing a choice to either continue its partnership with states in the effort to protect the hard-earned wealth of American families or destroy the ability of states to protect their homeowners."
Brown highlighted the issue of assignee liability as one that the states have tackled to help consumers. He said: "Under current law, homeowners are frequently left unprotected when they seek help from the courts after their home is threatened by loans with illegal terms. Without assignee liability, a family that has been the victim of a predatory loan cannot stop the foreclosure of their home. Instead, they end up losing their home, and then must bring a separate action against the original lender in order to pursue any claims of abusive or illegal practices. This separate action can take years, and the home is long gone before the homeowner even has a chance of recovery against a bad actor. Worse, very often the party that originated the loan is no longer in business and has no assets from which to recover. Assignee liability corrects a flaw in the home lending market and serves to protect responsible lenders and their customers by encouraging the market to police itself. Without assignee liability, purchasers of these loans have no incentive to determine if the loans were abusive, and indeed, the loan purchasers reward unscrupulous lenders by paying more for these predatory loans."
As a nonprofit community development lender, Self-Help (http://www.self-help.org) has provided over $2.6 billion in financing to 33,400 families to buy homes, build small businesses and organize non-profits in 48 states since its founding in 1980. Through its loans, Self-Help has created or maintained approximately 20,000 jobs, 18,775 child care slots and 8,400 public charter school spaces. Seeking to serve those who have traditionally been denied access to credit, Self-Help's loans go disproportionately to women, African Americans, Latinos and rural borrowers. Despite the claims of many in the industry that low-income borrowers are too risky to serve, or too risky to serve without practices we consider abusive, Self-Help's overall loan loss rate is less than 0.5% per year, and our assets have grown to over $1 billion.
Contact: Christine Kraly for CRL at 703-276-3258 or cKraly@hastingsgroup.com