A new study indicates that legislators at the State House have passed some of the nation’s strongest and most successful laws against predatory lending.

Although predatory lending costs American consumers an estimated $9 billion per year, nearly half of U.S. states have no safeguards in place to stop abusive lending practices. However, according to a new study, laws designed to protect consumers against predatory lending are making a difference in states that have enacted such legislation without limiting access to credit.

The Center for Responsible Lending released the findings related to its investigation of state laws designed to protect consumers against predatory lending last week. More than 6 million subprime loans issued from 1998 through 2004 were analyzed. According to the study, predatory lending reform does succeed in weeding out loans with abusive terms.

Kathleen Keest, a senior policy council with the Center for Responsible Lending, said state laws appear to be cutting down on push-marketing and aggressive tactics that often are associated with predatory lending. She also said Massachusetts has some of the strongest – and most successful – laws against predatory lending.

Massachusetts is one of 28 states to have taken action against predatory mortgage lending in the subprime market through legislation and regulation.

According to the study, in states with anti-predatory laws about a third less abusive lending takes place. However, the study found that subprime lending volume was virtually unchanged, meaning a greater number of loans with responsible terms are being issued.

In Massachusetts, 1.23 fewer loans with abusive terms were issued per month for each 10,000 adults than in states without protections

“Can you get to zero? Probably not, but there is still room to reduce (predatory lending practices),” Massachusetts state Rep. John Quinn said. “I was very pleased with the results of the study. Massachusetts has one of the toughest laws and one of the strongest laws in the country.”

The Massachusetts law was enacted in 2004, the last year the study looked at. The study, Quinn said, shows a strong initial effect and lessening of predatory lending in the Bay State following the predatory lending bill’s enactment.

“I hope to see a continued reduction in predatory loans,” he said. “I hope the future looks bright.”

Quinn served as co-chairman of the Legislature’s Banking Committee from 2001 to 2004. Because of his work on shaping Massachusetts’ predatory lending law, he became involved with the Center for Responsible Lending and occasionally acts as a speaker on the organization’s behalf.

According to Quinn, problems with predatory lending seem to have exploded in the past decade, and legislative response is slowly catching up. The first anti-predatory lending law was passed in 1999 in North Carolina

Quinn said he believes states need to have strong laws against predatory lending in place to protect consumers and is hoping Congress will follow the example of states such as Massachusetts by enacting federal protections.

Quinn said there are two bills pending before Congress that could both have a positive effect on predatory lending prevention efforts nationwide. Action at the national level is essential because federally chartered lending intuitions are exempt to the state laws. However, one federal proposal, the Ney-Kanjorski anti-predatory lending bill, would preempt state laws and could have detrimental effects by supplanting tough state laws with less stringent federal protections, Quinn said.

The second measure, the Miller-Watt-Frank bill, co-sponsored by Massachusetts Congressman Barney Frank, would combine elements of the Massachusetts and North Carolina laws and implement them at the federal level, he said.

Access to Credit
Quinn said the argument has been raised that if lending laws are become too restrictive, loan availability for borrowers with less-than-perfect credit histories would be greatly curtailed. However, the new study finds the opposite is true.

“The argument has been, you hurt access to credit [with more restrictive lending laws],” Keest said. “What this study does is take this [assertion] seriously and look at it. Basically, what they found is the availability [of credit] has not been restricted” in states that have implemented anti-predatory lending provisions.

Keest said different states have different problems and a federal law should not destroy customized rules and regulation by superseding them. Keest, like Quinn said he favors the Miller-Watt-Frank proposal. That bill would allow states to adjust the federal rules to fit their particular needs. The Ney-Kanjorski bill does not such allow flexibility, she said.

“We think that the states have done a good job,” she said. “If we have a national standard that states can’t change, whose standards are we [adhering to].”

According to Keest, the Ney-Kanjorski bill would create weaker laws and set back the progress that has been made to curtail predatory practices in the Massachusetts lending market.

However, Kathy Schreck, immediate past chairwoman of the Massachusetts Mortgage Bankers Associations, questions the effectiveness of the Massachusetts law as cited in the study.

“I found the whole study somewhat confusing,” said Schreck.

She said the state’s latest predatory lending law was implemented in November 2004 and therefore the positive results are unlikely to be attributable to it. However, another, less stringent anti-predatory lending law was passed in Massachusetts in 2001, and Schreck said those provisions may have been responsible for the favorable results in the study.

“I would conclude then we could go back to the less restrictive regulation,” she said. “What we have now is definitely more restricting. The new law definitely limited some access to credit,” she said.

But Schreck said she does think the 2004 Massachusetts law had a positive influence by allowing the state Division of Banks to carry out fair-lending audits. “Nobody has a problem with the fair-lending audits,” she said.

At the same time, Schreck said she is in favor of a standardized federal law that would apply to all states. She said many lenders conduct business in multiple states and an across-the-boarder policy would cut down on confusion.

“I think we need more uniform laws,” said Schreck.

Schreck said fighting predatory lending means fighting the companies that are a problem. She said she attended a recent meeting at the Division of Banks where a program to conduct policy audits of new mortgage companies within four to five months of their opening was announced.

“I think that will go a long way [toward weeding out predatory lenders],” said Schreck. “In my opinion, if you really want to get rid of unscrupulous lenders, you don’t give them a license in the state.”