WASHINGTON - Mortgage brokers are criticizing New York's proposed predatory lending rule, arguing it will reduce the number of small loans.
"We're concerned the 5% cap is too low and captures a percentage of the market that is too broad," said Zahra Jafri, legislative chairwoman of the New York Association of Mortgage Brokers and president of Lynx Mortgage in Great Neck, N.Y.
"We don't want to discriminate against people with lower-cost homes or those who need smaller amounts of credit," said Laura J. Borrelli, former president of the National Home Equity Mortgage Association and owner of Barrister Mortgage and Investments, West Paterson, N.J.
For smaller-sized loans, Ms. Jafri said the limit on points and fees should be expressed as a dollar amount instead of a percentage of the total loan. Otherwise, she said, some smaller loans could be classified as high-cost but are not truly predatory loans.
Last week, New York state regulators proposed new rules that would restrict high-cost mortgage lending, defined as points and fees totaling more than 5% of the loan amount or an annual percentage rate 8 percentage points above the yield on Treasury securities.
Representatives for the mortgage broker industry said it's much easier to reach that 5% cap on smaller loans. As an example, Ms. Borrelli said a $300 application fee would total 2% of a $15,000 loan, but only 0.15% of a $200,000 loan.
But Barbara Kent, director of consumer affairs and financial products for New York's banking department, said the rule does not bar this lending. It merely imposes new restrictions. "We're not saying you can't make that loan, just if you make it you have to follow these regulations," Ms. Kent said.
According to the proposed rule, the conditions on high-cost home loans bar balloon payments, call provisions, and higher interest rates in the case of default. A high-cost home loan could not be made unless the lender "reasonably" believed the borrower was able to repay. The new rules also would limit loan payments to 50% of the borrower's verifiable monthly income.
The New York proposal is open for comment until May 26. The banking department's board could approve the regulation as soon as June 8, provided no further revisions are required. If approved, the regulation could go into effect by June 22. "This regulation, once adopted, will go a long way to ending predatory practices," Ms. Kent said. "Beyond this regulation, what's needed is enforcement, which we here at the banking department will do."
According to Ms. Kent, violators will be subject to unlimited fines, more frequent exams, and the prospect of rebating overcharges to customers. Lenders with a pattern of violations could lose their license.
The agency was prompted to act after uncovering abuses in its examinations of subprime lenders. However, the banking department could not provide data on how many home loans made in the past year would qualify as "high-cost" under its proposal. Nor could the agency estimate how many predatory loans it would prevent with this rule.
The banking department also has received few direct complaints from individual consumers or community groups. But Ms. Kent said that does not mean there haven't been abuses. "This regulation was not thought up in a vacuum," she said. "This is a real problem."
"This regulation is like the ugly duckling which most people never expected to become the beautiful swan," Ms. Kent said. "We believe the regulation would serve as an effective model nationwide."
At least one federal bill has taken a cue from the New York proposal. Rep. John J. LaFalce, D-N.Y., has drawn on the proposal for his legislation, introduced April 12. "New York was the floor," said one of his aides. "We decided we couldn't make our bill any less strict than that."