Setting the Record Straight

Congressional predatory lending legislation puts North Carolina’s law at risk

By Rob Schofield

No act of the past decade has brought greater national attention and acclaim to North Carolina lawmakers than their groundbreaking efforts to attack predatory mortgage lending. The original 1999 reform legislation (which requires unbiased financial counseling before borrowers can be sold certain types of “high cost” loans) and its progeny have saved thousands of North Carolina families from the financial ruin and indignities that accompany losing one’s home and have served as a model for several other states.

Unfortunately, in a strange twist of politics, progressive members of Congress appear to be advancing legislation that would dramatically weaken the North Carolina law. At last report, it was unclear whether members of North Carolina’s Congressional delegation could prevent this result.

Good initial intentions

The proposal in question is H.R. 3915 – the “Mortgage Reform and Anti-Predatory Lending Act of 2007.” The bill is actually co-sponsored by North Carolina’s own Brad Miller and Mel Watt (and others) and is inspired by the North Carolina law. One of its chief objectives is to import some of the key consumer protection components of North Carolina law into the federal statutes. Earlier this week, members of the House Financial Services Committee gave initial approval to the measure.

The bill is clearly well-intentioned. Highlights include:

 

• A new “duty of care” that requires loan originators to offer loan products that are appropriate for a borrower’s circumstances.
• New licensing and registration requirements for loan originators that promise to weed out some of the industry’s bad apples.
• A prohibition in the “subprime” market on so-called “yield spread premiums” in which lenders give cash payments to brokers who steer vulnerable consumers into higher cost loans.
• A prohibition on “prepayment penalties” that make it impossible for borrowers to escape high cots loans.
• A prohibition on mandatory arbitration clauses that rob borrowers of their right to sue in court.
• Protections for renters when the homes in which they are living are foreclosed upon.

 

A debilitating amendment

As with most consumer protection laws in the highly complex world of mortgage lending, the key to producing success in the real world is good enforcement. Government can have all the laws in the world on the books, but if no law enforcement official or private attorney has the ability (or any incentive) to sue to enforce them, they are sure to have little or no impact. That’s where opponents of H.R. 3915 weighed in earlier this week.

Recognizing the popularity of mortgage lending reform in the current political environment, industry opponents opted not to launch a frontal attack on the bill. Instead, lenders succeeded in inserting language into the so-called “master amendment” adopted in committee on Tuesday that both “guts” the enforcement sections of the bill and preempts states like North Carolina from enforcing significant portions of their preexisting laws.

The issue is complicated, but important. Here’s how it works in very basic terms:

When bad actors make predatory loans to borrowers, they never keep them to service themselves. Instead they sell them right away on the “secondary market” to another business that’s often referred to as the “assignee.”

Under North Carolina law, borrowers retain the ability to sue assignees. In other words, the original predatory lenders cannot launder the loans by simply selling them to someone else. Similarly, big assignees who buy up lots of loans cannot avoid potential liability by claiming that they had nothing to do with the original violation.

The result of this simple rule is a powerful self-enforcement incentive. Because big assignees will be on the line for the sins of the original predators, they have a tremendous incentive to self-police.

Under the amendments to H.R. 3915 adopted on Tuesday, however, remedies for consumers against assignees are effectively nonexistent. This is especially true if the assignee is a “trust” since trusts would be completely exempt from liability. The committee’s action was rightfully critiqued in an editorial from the New York Times.

To make matters even worse, not only does the amendment eliminate liability for assignees under the proposed federal law, it preempts such provisions in state laws. In other words, under the new amendment, North Carolina’s existing common law rule which permits borrowers to go after assignees would be effectively repealed by an act of Congress. Note here that most subprime loans in North Carolina are held by trusts and it’s usually trusts that commence foreclosure proceedings.

In effect, if it is passed into law as it currently reads, the federal bill would eviscerate the very state law that inspired it in the first place.

Setting the record straight

The master amendment adopted on H.R. 3915 clearly puts the progressive sponsors and supporters of the legislation in a difficult spot. While wanting badly to pass consumer protection in the faltering mortgage lending industry, the sponsors are now faced with the prospect of passing a bill that sounds great but that ultimately accomplishes very little.

Happily, according to the most recent reports, Congressmen Watt and Miller are on to the lenders’ scheme to gut their legislation while undercutting good state laws (like North Carolina’s) at the same time. Consumer advocates report that both members may even go so far as to work against their own legislation – if that’s what it takes to stop the lending community’s backdoor scheme. Watt has apparently expressed such an intent. Advocates are also hopeful that Governor Easley and Attorney General Cooper, two of the chief architects of North Carolina’s law, will speak up against the lender’s amendment as well.

Let’s hope that before it comes to that, the House leadership weighs in on this critical matter and forces the big money lending lobbyists to back down from their scheme to undermine an important bill that could help millions of families.      

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This entry was posted on Thursday, November 8th, 2007 at 7:21 pm and is filed under Setting the Record Straight. You can follow any responses to this entry through the RSS 2.0 feed.