WASHINGTON — An unexpected House panel vote on a nonbinding resolution condemning predatory lending in the subprime mortgage market has sparked a furor among banking lobbyists, who fear it is the first concrete step toward tighter restrictions.
The resolution, introduced in April by Rep. Elijah Cummings, D-Md., says that Congress should enact legislation that bans unfair practices, requires loans to be underwritten at the fully indexed rate, and eliminates or reduces prepayment penalties.
After the House Financial Services Committee tentatively scheduled a vote for June 26 on the resolution, banking trade groups launched a behind-the-scenes effort to scale back the language.
"The industry is worried that this could be the first step towards more onerous legislation, and they don't want to see portions of the resolution quoted back to them when debate begins on the substantive changes to the mortgage underwriting rules," said Jaret Seiberg, an analyst with Stanford Washington Research Group. "Each release of mortgage foreclosure data only increases the pressure on Congress to do something, and this is something that can be done before the July 4th recess."
Typically, congressional resolutions are benign statements honoring things like a Girl Scout troop's achievement or a Super Bowl championship, but sometimes lawmakers use them to send a strong message about where Congress is headed. Banking lobbyists said privately that they fear lawmakers will go on record about what they should do about predatory lending.
"Generally speaking, resolutions are of little importance; most [are] fairly routine. There are, of course exceptions, such as the resolution calling for a withdrawal from Iraq that passed earlier this year, where it makes an important statement, even if it doesn't have the force of law," Charlie Cook, a political analyst and the publisher and editor of The Cook Political Report, wrote in an e-mail to American Banker. "My assumption is that industry lobbyists see this as a test vote of their situation, and the more vulnerable they appear, the worse their situation is."
Most financial services trade groups, including the American Bankers Association, America's Community Bankers, the Mortgage Bankers Association, the Consumer Bankers Association, and the Independent Community Bankers of America, refused to comment on the resolution.
But Wright Andrews, the executive director of Coalition for Fair and Affordable Lending, a trade group representing nonprime lenders, said it is no secret the industry strongly opposes the resolution.
He cited wording that essentially condemns lenders for unfairly targeting borrowers who have weaker credit — particularly minorities — with abusive loans, fueling the recent spike in foreclosures.
"The subprime market has created opportunities for 'predatory' lending in which unscrupulous borrowers have hidden the true cost of subprime loans from unsophisticated borrowers," the resolution says. Such loans "are more prevalent in lower-income neighborhoods with high concentrations of minorities." Irresponsible practices "are contributing to a wave of foreclosures," and the resolution should "raise awareness about the dangers of subprime loans."
Mr. Andrews said those statements, along with others in the resolution, are not necessarily accurate.
"If this was passed by the Congress, it would certainly give the impression that Congress believed all these things. … It's a question of balance. I'm not sure this resolution as currently drafted provides a balance," he said.
With the vote tentatively scheduled for next week, the situation remains in flux, and some observers said the industry likely will get some of the wording amended.
"I have not seen the latest draft, but … we're encouraged that they are talking to a lot of people, and that it's not set in stone," said Paul Leonard, the vice president of government relations for the Financial Services Roundtable's Housing Policy Council.
"We just want to make sure that in the resolution, it achieves those goals without causing issues that would have to be revisited in legislation, and … that they don't set a precedent for future legislative language."
Steve Adamaske, a spokesman for Rep. Barney Frank, said that the House Financial Services chairman is still working with Rep. Cummings on the resolution, and that nothing final has been decided. The spokesman would not say what Rep. Frank wants to change in the resolution.
Rep. Cummings is not on the Financial Services Committee, but is a member of the Joint Economic Committee, which is chaired by Sen. Charles Schumer, D-N.Y., who has also been active on the subprime issue. The Maryland Democrat joined eight other lawmakers in a May 15 letter to Federal Reserve Board Chairman Ben Bernanke urging the central bank to use its authority under the Home Ownership and Equity Protection Act to outlaw unfair and deceptive practices.
Vernon Simms, Rep. Cummings' chief of staff, said in an interview Friday that he knows "there is some conversation that is going to take place with some of the representatives" of the banking industry.
"There is a possibility that, depending on the information he gets, he may decide that there are some changes that need to take place," he said.
Representatives of consumer groups said that they are surprised the banking industry is mobilizing against a nonbinding resolution, but that such a response is telling.
"What this reveals is the industry is very divided over whether they want strong federal legislation or not," said Allen Fishbein, housing and credit policy director, for the Consumer Federation of America. "I think they've realized that if federal legislation were to pass, it would have to be an upgrade over existing consumer protections, and, quite frankly, I think there are some in the industry that don't see that as a desirable objective."
John Taylor, the president and chief executive of the National Community Reinvestment Coalition, said that he supports the resolution's ideals but wants legislation with teeth, and that he is becoming frustrated by inaction.
"We hope to see it codified in law, and not just a statement, which is essentially a statement of sentiment," he said.
