WASHINGTON - Over objections from the banking industry, the District of Columbia's City Council has passed the nation's first bill that would let homeowners contest a foreclosure on the grounds that an initial loan was predatory.
If the court then ruled in the homeowner's favor, foreclosure proceedings would be halted and the homeowner compensated by the lender.
"The bill strikes the right balance between protecting consumers and fostering an environment of access to credit for D.C. residents," said Stephen Taylor, general counsel for the District of Columbia's office of banking and finance. "Not everyone is happy, but I think overall we did a good job and are taking a lead in the country."
Part of a legislative package to revamp the city's century-old foreclosure laws, the bill was passed by the council Tuesday. It cannot become law until it is reviewed by Congress and approved by Mayor Anthony Williams, which could happen as early as April.
Mayor Williams supports the bill, which defines predatory loans as those that charge excessive fees or are made to borrowers known to have "insufficient repayment ability." A loan made to refinance a property more than once in 18 months - with no benefit to the homeowner - would also be considered predatory.
In a last-minute amendment, however, the council exempted all loans that qualify for sale to Fannie Mae and Freddie Mac.
Fe Morales-Marks, vice president of the national housing impact division at Fannie Mae and a member of the task force that helped draft the bill, said the amendment would guarantee lenders selling loans to Fannie and Freddie that they would not be sued for predatory practices.
"This helps lenders that serve in this market and want to expand into the market to do so with some certainty," Ms. Morales-Marks said.
North Carolina is the only state with an anti-predatory-lending law on its books. But unlike that law, which bars origination of predatory loans, the District of Columbia bill attacks them in the foreclosure stage.
Banking groups, which say they are committed to curbing predatory lending, oppose the District of Columbia's bill because foreclosure often takes place years after a loan is made, said Stephen Verdier, general counsel for America's Community Bankers. He said this can lead to various interpretations of what is and what is not a predatory loan.
"These prohibitions are going to be analyzed five or 10 years down the road," he said. "The economic context will be different and people's memories will have faded. This introduces a lot of uncertainty into the process, and lenders are not going to take the risk."
Mr. Verdier and other trade group representatives say they are wary of this retroactive approach and of the bill's language, which they describe as vague.
Ann Canfield, executive director of the Consumer Mortgage Coalition, said, "We all think that the rules should change to stop predatory lending, but I think the way the District bill goes about it is overly broad."
Ms. Canfield said the bill's general guidelines would make it difficult for people to get a small-business loan when they use a home as collateral, and make it harder for lenders to meet Community Reinvestment Act goals.
There are "many problems" for lenders that want to make loans in the prime and subprime markets, "and I think that consequently, a large piece of the market will dry up," Ms. Canfield said.
Mr. Taylor said the bill should not worry legitimate lenders.
"This does not stop subprime lending, just bad subprime lending," he said. "And if you are a lender doing a good job, then you have nothing to fear."
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