JOHN QUINN
‘Comprehensive bill’
It was open season on predatory lenders at a recent hearing before the Legislature’s Joint Committee on Banks and Banking, but while advocates of several proposed predatory lending bills say abusive lenders must be stopped, some mortgage industry officials say the line between predatory lending and the types of high-risk loans necessary for community reinvestment has blurred and must be redefined.
“This is a very complicated issue, but the bottom line is very simple,” said Sen. Dianne Wilkerson, D-Boston. “The focus of this bill is to protect the people – not the mortgage lenders and not the mortgage banker and not the secondary market.”
Wilkerson, the author of Senate Bill 24, “Establishing Protections Against Predatory Lending in the Home Lending Market,” testified before the committee, who heard testimony on four bills dealing with predatory lending at the May 21 hearing. S. 24 would establish a new set of banking and lending laws to further regulate the mortgage lending business and the industry’s “high-cost mortgage loans” issued by lenders.
Wearing white stickers with large red letters that read “Stop the Loan Sharks,” members of the Boston chapter of consumer advocacy group the Association of Community Organizations for Reform Now also spoke at the hearing, telling stories of victims who have fallen prey to predatory lending practices.
Abby Cook, an ACORN member who claimed to have been victimized by predatory lending practices by Household Finance, said she was still paying heightened fees and excessive interest rates on the home her family purchased 30 years ago.
“This bill is so important because so many people work too hard to make their American dream [come true], but high interest rates and stripped rates are sucking the life out of people. I hate to see that and it’s a shame that loan sharks are more protected than people,” said Cook. “These bills will protect people from losing their dreams.”
Karen Miller, another ACORN member and alleged Household Finance predatory lending victim, said by passing S. 24, “bad lenders will leave, and why is that a bad thing? [Predatory lenders] are raping the community.”
Some members of the banking and credit union community stood in support of S. 24’s efforts to end predatory lending practices through legislation, and agreed that education, alongside legislation, is the best combination for ridding predatory lending practices.
Brockton Credit Union Senior Vice President Leo MacNeil said, “Education is the best tool against predatory lending practices.” MacNeil gave joint testimony with the Massachusetts Credit Union League.
The MCUL said predatory practices, such as excessive prepayment penalties, unilaterally accelerating on a borrower’s indebtedness, encouraging a borrower to default on a loan when refinancing, and failing to disclose the risks of a high-cost mortgage or failing to take into consideration the borrower’s ability to repay a loan are types of consumer abuses that must stop.
However, the banking committee is faced with a difficult decision of whether to enact legislation in Massachusetts. The passage of similar predatory lending laws in other states, most recently Georgia and New Jersey, have illustrated potential problems with the process.
As of May 1, California, Georgia, North Carolina, New York, New Jersey, New Mexico and Arkansas have adopted anti-predatory lending laws that provide varying levels of protection. Arizona, Massachusetts, Rhode Island, South Carolina, Kentucky and Tennessee all have bills pending in state legislatures that would restrict predatory lending.
The laws in Georgia and New Jersey forced some mortgage lenders out of business because loans sold in the secondary market were followed by liability provisions, causing business to suffer at in-state companies. Those reactions caused concern among members of the Massachusetts banking committee to pass similar legislation.
“The secondary market in Georgia said, ‘We aren’t going to buy loans from Georgia,’ and in New Jersey, Standard & Poors said they will not accept loans from the secondary market,” said Rep. John Quinn, D-Dartmouth, co-chairman of the banking committee. “This is certainly the most controversial portion of the bill. We’d hate to shut down the mortgage lending industry [and] I’m concerned about the [reactions in] Georgia and New Jersey.”
‘Fine Line’
Members of the Massachusetts lending industry say they fear the same consequences will occur here should predatory lending legislation is pass.
In written testimony from the Massachusetts Bankers Association, the organization said it opposes S. 24 because the bill ultimately would establish a new chapter of the banking laws and impose substantial additional restrictions on financial institutions.
Philip F. Freehan, executive vice president of East Boston Savings Bank in East Boston, also testified on behalf of the MBA and said that while the association endorsed the Division of Banks’ regulatory efforts to curtail abusive lending practices, the MBA believes the best tool “for fighting predatory lending is consumer education.”
The MBA has attempted to curb predatory lending with consumer education initiatives including brochures, the creation of a foreclosure prevention counseling program with the National Consumer Law Center, public awareness campaigns on lending scams and the development of industry guidelines for subprime mortgage lenders.
“In recent years, efforts by predatory lenders have been moderated, due to the proactive steps taken by state and local government officials, consumer advocate groups, the [MBA] as well as other trade associations to educate consumers on the risk associated with doing business with unscrupulous lenders,” said Freehan.
MBA officials said legislative attempts to prevent predatory lending could adversely impact legitimate subprime and traditional lending products. As an alternative plan, the MBA proposed creating a working group to conduct a review on the extent of predatory lending occurring in the state and continue to educate consumers on the risks associated with doing business with crooked lenders.
“The predatory lending working group would look at what [regulations] are currently in place what are the concerns … then make recommendations to address concerns,” said Kevin F. Kiley, executive vice president and chief operating officer of the MBA. “The group would consist of [banking] committee members, members from the Division of Banks, industry organizations, members of the mortgage industry and ACORN. The idea is to come up with a reason for why people think the regulations [for predatory lending] currently in place need to be changed.”
The MBA along with the Massachusetts Office of Consumer Affairs, which oversees the Division of Banks, offered support of House Bill 9 – “An Act Relative to Preventing Abusive Mortgage Lending Practices” – which would make fair credit exams mandatory for mortgage companies.
“Currently, we are doing some ‘safe and soundness’ exams on the mortgage lenders and we certainly feel we can do more,” said Beth Lindstrom, director of the Office of Consumer Affairs. “Fair credit exams should be done on mortgage companies and that is not happening right now. The administration is very unified and we feel very strongly about this.”
Two other predatory lending bills, H. 1617 and H. 2915, were not discussed in depth at the hearing.
However, the fine line between predatory lending and community reinvestment, which often entails legitimate subprime loans, remains blurred to some.
“The issue I wrestle with is at what point does a loan become predatory? We are trying to define the devils of the terms – what is predatory and what is a risky loan based on a consumer’s credit background?” said Quinn. “There is always risk with a loan – but where does it turn into taking advantage of the borrowers situation?”
According to Kevin Cuff, executive director of the Massachusetts Mortgage Bankers Association, which opposes predatory lending legislation, no one can define the limits of bad vs. good in the mortgage industry.
“There is the fine line that runs between subprime lending and predatory lending and the concept is blurred and I can’t define it for you, but you do know based upon the situation when someone is being taken advantage of,” said Cuff.
Quinn said the role of the banking committee now would be to define as clearly as possible the difference between high-risk and predatory loans, and work with members of the industry to form a unified definition that would make clear the presently blurred line.
“I want to define as clearly as I can the difference between a high-risk and a predatory [loan] and put together a comprehensive bill … I hope by working with industry members and activist groups, we can get pretty close to an agreement,” said Quinn. “It’s a win-win situation because it’s good for industry to get the stigma of predatory lending off of them, and good for borrowers to get increased protection.”
