Slapping Down Predatory Lending, State By State

Predatory lending practices are catching the attention of legislators at both a state and federal level. New laws and programs aimed at protecting seniors, home repair projects, enlisted military personnel and minority neighborhoods from unscrupulous lenders are either taking effect or are being actively pushed for passage.
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California represents 40% of the nation's reverse mortgage market, with a high number of seniors as borrowers. In a September 7 ceremony at a Palo Alto senior center, Gov. Arnold Schwarzenegger signed SB 1609 into law. The new law requires reverse mortgage applicants to first receive a briefing from an independent credit counseling agency approved by HUD about the merits and problems inherent to reverse mortgages. The new law also requires loan documents to be in the same language in which the loan was negotiated and prohibits lenders from requiring borrowers to purchase annuities as part of their loan packages.

SB 1609 was inspired by several cases of predatory lending and mortgage fraud aimed at seniors. State Senator Joe Simitian introduced the legislation as part of his annual ‘There Ought to Be a Law’ contest, based on the account of a retired Palo Alto civil servant who was sold a reverse mortgage but whose broker instead arranged a traditional mortgage. The broker subsequently disappeared with $190,000 in loan proceeds.

Pennsylvania's state government didn't wait for its legislature to step in regarding predatory lending for homeowners seeking repair and renovation funds. The Keystone Renovate and Repair Loan Program, announced by Gov. Edward G. Rendell on September 14, will kick off in November under the auspices of the Pennsylvania Housing Finance Agency (PHFA).
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Under the program, homeowners can apply for up to $35,000 in below-market, fixed-rate loans from PHFA-approved lenders. The program also allows for the conversion of multi-unit properties into single-family residences.

Part of the inspiration for this program was predatory lending aimed at Pennsylvania homeowners. The state's banking department report found that a major contributor to the rising number of foreclosures was the unsavory alliance between predatory lenders and home improvement contractors who conspired to peddle loans for overpriced and even unnecessary repairs and renovation. The new program will also provide participants with counseling on selecting reputable contractors.

Another sector in the predatory lending spotlight has been the U.S. military, particularly enlisted personnel. At both a federal and state level, the Department of Defense has been pushing aggressively to halt payday lending activities concentrated around military bases, where lenders can rack up triple-digit interest rates on an APR basis. Payday lending is intended to bridge a borrower's cashflow gap between paychecks with short-term subprime loans secured by a post-dated check that includes both the original loan principal and the accrued interest.

Mortgage lending is not, on its own terms, under attack in this area. However, a future generation of mortgage customers could easily find themselves kept out of the market due to bad credit, heavy debt or even bankruptcy generated through excessive interest rates demanded by the payday lenders. The situation even extends to national security – the Defense Department's ‘Report on Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents’ estimates that 80% of naval security clearance revocations and denials were due solely to individual financial issues.

The Pentagon proposed federal legislation that sets a 36% ceiling on annual interest rates lenders can charge to enlisted service members. Although the proposal has bipartisan support in Congress, it has already raised concern from both the banking industry and the payday industry, which are opposed to cap measures on lending. The proposed legislation is currently before the Congress.

At a local level, 12 states have laws prohibiting triple-digit rates on payday loans (Arkansas, Connecticut, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont and West Virginia), while New Mexico law allows only two renewals on such loans. However, bills introduced in the California legislature that mirrored the proposed federal law were rejected in both houses this summer.

Illinois' House Bill 4050, also known as the Predatory Lending Database Pilot Program, was designed to require borrowers living in 10 Chicago ZIP codes to receive credit counseling before they can close on their mortgages.

The Chicago ZIP codes in this four-year pilot program were chosen for their historically high foreclosure rates and reports of predatory lending. However, the neighborhoods are also predominantly African American and Hispanic, and reports have already come in about lenders either pulling out of these areas or abruptly withdrawing mortgage offers made prior to the law's passage. No other municipality in the state is included in the program.
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The Illinois state government has not announced plans to tinker with House Bill 4050. But over in Ohio, where the Homebuyer's Protection Act takes effect on January 1, Attorney General Jim Petro is proposing new administrative rules to define ‘unconscionable mortgage lending’ in the state. The new rules range from a prohibition on the sharing of loan value or desired appraisal value with appraisers to new disclosures that suppliers must give consumers regarding their right to refuse to close if contract terms were not as promised. The Attorney General plans to formally file his proposals on September 29.


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