For the past four years legislators in Indiana have been debating predatory lending, an issue where federal regulators have proved particularly willing to preempt state laws.
Thirty-one other states and the District of Columbia have predatory lending laws on their books, but experts say Indiana's new law is the first to specifically exempt banks and credit unions.
Bank lobbyists called the Indiana Homeowner Protection Act, which Gov. Joseph E. Kernan, a Democrat, signed into law March 18, a major victory for the state's financial institutions. They are also calling the law a potential model for the rest of the country.
Amber Moore, the director of governmental relations for the Community Bankers Association of Indiana, said she has already heard from her counterparts at other state groups and she expects they will be lobbying for similar legislation in their states.
According to the National Conference of State Legislatures, 22 states are considering enacting or updating predatory lending laws. Meanwhile, Congress is debating whether to preempt such state laws in the interest of national uniformity.
Thomas W. Dinwiddie, the counsel for the Indiana Mortgage Bankers Association, said the Indiana law finally passed because of a "recognition by consumer groups that we don't need to deal with mortgage lending in general but with the problem lenders."
Moreover, since banks and thrifts are subject to the Home Ownership and Equity Protection Act and Indiana-chartered banks are subject to similar regulations, consumer activists conceded that additional legislation covering banks was unnecessary, he said.
Regulations issued by the Office of the Comptroller of the Currency's in January that preempt state laws and regulations also worked in the banks' favor, Mr. Dinwiddie said. This assertion that national banks were exempt from state laws helped to convince consumer groups that a borrower who had a problem with a bank could seek a remedy from the bank's regulator, he said.
Thomas B. Williams, the vice president of government affairs for the Federal Home Loan Bank of Indianapolis, said he planned to provide his counterparts with the text of the law at a meeting next month.
The Indianapolis bank likes the law and thinks it might interest the other Home Loan banks, Mr. Williams said, because it does not hold wholesale buyers of loans liable for purchasing predatory loans. It also exempts Home Loan banks from penalties if a predatory loan is used as collateral for one of its advances.
The law covers loans made by mortgage brokers and consumer finance companies. It protects borrowers from practices such as balloon payments, and it limits the points and fees lenders can charge.
It also creates a homeowner protection unit in the Indiana Attorney General's Office that will be funded by a new $3 mortgage-recording fee, which will apply to any mortgage made in the state, including those made by banks.
Heather Morton, a policy specialist with the National Conference of State Legislatures, said debates about predatory lending pit two competing priorities against each other - protecting consumers from unscrupulous lenders and giving legitimate ones the leeway to serve subprime borrowers.
"The issue of predatory lending is a difficult one, because legislators are trying to find a balance between protecting consumers from predatory practices and allowing access to credit," she said.
Mr. Williams said the Indiana law helps balance those priorities by recognizing the difference between regulated and unregulated lenders and not making it more difficult for regulated lenders to serve borrowers who have had credit trouble.
"In our view, it could serve as a model," he said. "There's already a state and federal regulatory system to help consumers" who have problems with traditional lenders.
The OCC's regulations have reenergized the debate on Capitol Hill over whether a federal anti-predator bill is preferable to differing state statutes.
Rep. Paul Kanjorski, D-Pa., said last month that he is working on a bill that would preempt state and local lending laws with a strong federal standards.
