Anti-Predatory Laws Creating Challenges
Credit unions and their state and national trade groups have been outspoken critics of "predatory lending" practices. But they are also finding many of the laws being proposed to combat the problem are creating more problems than solutions-especially for credit unions themselves.
That's the case, for instance, with a measure before the Detroit City Council that aims to prohibit predatory lending, which is being described by credit union leaders as harmful to both the city and local financial institutions.
The council had planned to vote last Wednesday on the ordinance that would limit fees and interest rates on mortgage lending in the city, but delayed the action after opposition triggered a fear of legal challenges and the possibility of its nullification by the state legislature.
Instead, the council rescheduled the vote for Dec. 19 to give city officials, lenders and local community organizations, including the NAACP, time to reach a compromise.
Marcus Rankin, marketing director of Detroit Postal Employees Credit Union, told the Council during a public hearing last Tuesday that the ordinance would drive legitimate lenders out of the city, because it would be difficult or impossible for homeowners to sell their homes. He also suggested that property values would drop if enacted.
"We are concerned that if the ordinance passes, legitimate lenders will simply stop lending in the city, as has already happened in Cleveland, where a similar ordinance has been in effect for about a year," Rankin reiterated in a letter sent to the council.
He said his staff also created and e-mailed a list of 14 concerns about specific points in the ordinance that it thinks would negatively affect the city and the local financial industry.
A spokesperson for the Michigan league said that while Detroit's goal to protect residents from predatory lending is admirable, the proposed city ordinance is too restrictive and confusing. He said he would rather see the city support an anti-predatory lending bill pending at the state level.
During a legislative session last month, the Michigan Senate Committee on Banking and Financial Institutions favorably reported on Senate Bill 708, Michigan Predatory Lending Practices Act, and asked that its substitute, S-6, be adopted and the bill then passed. The bill and the substitute were referred to the Committee of the Whole.
Detroit's 42-page ordinance would, in part, limit up-front fees or points on mortgage loans to 3% of the loan's value and cap the loan's interest rate on a sliding scale that varies with the market. Presently, that rate is 9%.
Rankin said the ordinance is too broad and contains confusing language that insinuates that any lender that offers balloon payments, credit life and credit disability insurance, or requires private mortgage insurance, for starters, is considered a predatory lender.
Rankin did offer a quick fix-to make credit unions and banks exempt from the ordinance, because the industries are closely regulated and has received no complaints of predatory lending practices.
"This ordinance, as written, I fear, would be disastrous to all lenders in the city and everyone who wants to borrow for non-commercial real estate reasons within the city," he wrote, adding that while the intent of the ordinance-to stop predatory lending-is good, it's equivalent to using a tank to kill a fly.
"Yes, you may kill the fly, but you'll also destroy the whole block (and maybe, sadly, the whole city) while doing so," he said.