WASHINGTON - While Congress mulls five bills designed to curb predatory lending, two important states - California and New York - are to take up the controversial issue today.
In Sacramento, the state Senate Finance Committee is scheduled to vote on a bill that would require lenders to consider a borrower's ability to repay and would bar mortgage refinancings that do not benefit the borrower, so-called loan flipping.
In New York, the banking department was expected to propose rules today echoing those changes and capping monthly loan payments at 50% of a borrower's verifiable monthly income. The rules could take effect in June.
Only North Carolina has enacted a law cracking down on predatory practices. Effective July 1, it prohibits loan flipping, up-front financing of insurance, and prepayment penalties for home loans of $150,000 or less. Additional limits are imposed on "high-cost" loans, defined as those with total fees and points exceeding 5% of the loan amount or an annual percentage rate eight percentage points above the yield on Treasury securities, which would be roughly 14%. For high-cost loans, the law prohibits balloon payments and financing of up-front fees or charges. The law also requires counseling for borrowers before such loans close.
Though a federal law is considered unlikely this year, Congress is watching the states. To date, five bills to tame predatory lending have been introduced, including legislation from Rep. John J. LaFalce of New York and Sen. Paul S. Sarbanes of Maryland, the ranking Democrats on their respective Banking Committees. "There were two states that we looked to in particular," Rep. LaFalce said. "One, North Carolina; the other, the regulations in the state of New York. We took great guidance from both."
Paul H. Stock, executive vice president of the North Carolina Bankers Association, said his state's law is a good model. "We feel very positive about this law," he said. "We are proud that the time and effort we devoted to drafting the law could be useful to other states."
But Senate Banking Committee Chairman Phil Gramm and other reluctant Republicans have questioned the extent of abusive practices and whether legislation would unfairly hamper legitimate subprime lending. Also, lawmakers are operating on an abbreviated schedule this election year, which discourages them from tackling complex subjects.
House Banking Committee Chairman Jim Leach, however, has tentatively scheduled a hearing for May 25 featuring federal banking and housing regulators and representatives of Fannie Mae, Freddie Mac, private-sector lenders, and consumer groups. Regulators will be asked to present evidence of increased predatory lending, discuss whether current law is being adequately enforced, and outline their efforts to curb abusive practices.
Most observers predicted that the hearing will be used to create a big splash but ultimately will supply an excuse for lawmakers to defer to the agencies until next year. However, the political landscape could shift if a major lending scandal erupts or some Republicans in tight re-election races take up the issue as a way to win over swing voters.
And what happens in the states will continue to influence Congress.
In California, the bill introduced and revised by state Sen. Hilda L. Solis would bar balloon payments on high-cost loans and all financing of life, disability, or unemployment insurance when the loan is secured by a primary residence.
"Right now the bill has a 50-50 chance of passing out of committee," said Bill Wong, a spokesman for Sen. Solis.
But the California Bankers Association predicted the measure will fail. "The bill is not expected to get out of committee because it's too broadly drafted," said Maurine C. Padden, the group's senior legislative counsel. "And there's a lot of opposition from all of the other lenders."
Under New York's proposed rules, points and fees would be allowed if two years had elapsed since the last refinancing or the money advanced to the borrower is part of a new loan. But points and fees could not exceed 5% of the loan amount. Balloon payments would be permitted but not for at least seven years. Lenders would have to give borrowers an educational brochure about home mortgages and would be required to report annually the credit history of their borrowers to a national credit agency.
State regulators said the new rules could be approved as early as June 8 and take effect two weeks later.
However, other states' initiatives on predatory lending have fizzled this year.
Legislation in Missouri, South Carolina, Minnesota, and Maryland died in committee. A bill in Illinois made it further but was not enacted. State Rep. Daniel J. Burke plans to introduce a revised bill next January. The Democrat, who represents a low-income section of Chicago, said he expects more support in the next session.
"As statistics appear, it's not only my district and my area that has been targeted by predatory lenders," Rep. Burke said. "The practice is growing throughout Illinois in ever-increasing numbers. By the time the Legislature meets again in January, every legislator will be touched by the issue and may have a different interpretation of what we're trying to do."
A measure pending before the Chicago City Council would bar banks that make or buy predatory loans from doing business with the city. Backed by Mayor Richard M. Daley, the proposal is expected to become law, and this would make Chicago the first city to impose sanctions on banks linked to predatory lending.