At first, an exemption in Philadelphias recent ordinance cracking down on predatory lending seemed like a silver lining for banks that originate subprime loans. But by Monday, lenders concluded it is anything but.
The ordinance, adopted unanimously Thursday by the Philadelphia City Council, would exempt banks, thrifts, and credit unions from tough predatory lending rules but not their affiliates or subsidiaries.
Its the big hoax to say that banks are exempt, said James R. Biery, the president, chief executive, and treasurer of the Pennsylvania Bankers Association. We feel this is ill-advised and unfair; theres already a sufficient licensure and regulatory structure in place.
This is a crafty way of drafting legislation, said James Ballentine, director of the American Bankers Associations Center for Community Development. It sends an incorrect message that there is a full exemption.
A recent internal memo by the city solicitor said Philadelphia lacks the authority to regulate the activities of banks, thrifts, and credit unions, which is why they were exempted. But it can regulate the subprime lending companies affiliated with them, the memo said.
The earliest the ordinance could take effect is April 19 the deadline for Philadelphia Mayor John F. Street to sign or veto it.
In late March, Mr. Street sent a letter to Philadelphia City Council President Anna C. Verna expressing concern that banks were only granted partial exemptions. It is imperative that the city proceed carefully so as not to undermine the legitimate lending institutions that are essential to the citys well-being, Mr. Street wrote. But in view of the councils 16-to-0 vote for the ordinance, a veto would probably be overridden.
In a March 29 letter to Councilman Frank DeCicco, Pennsylvanias banking commissioner, James B. Kauffman Jr., said he had gotten few consumer complaints and found no significant trends among Pennsylvania lenders. I have a great concern that an ordinance such as the one passed by the Philadelphia City Council could preclude those who currently have credit available to them from having it in the future, Mr. Kauffman said in an interview Monday. Lenders may just pull out of the city of Philadelphia.
Lenders argued that the distinction between a company and its affiliates is meaningless and pointed to Citigroup Inc. and its subprime unit, Associates First Capital.
Although Citi is exempted, Philadelphia could still file suit against it, said one industry source.
High-cost loans are defined in the ordinance as those with an interest rate 6.5 percentage points above the yield on Treasury securities of a similar maturity or those with points and fees totaling 4% or more of the loan amount. Threshold loans, defined in the ordinance as loans charging between 4.5 and 6.5 percentage points more than the yield on comparable Treasuries, are acceptable subprime loans.
The ordinance also defines predatory loans as high-cost or threshold loans made as a result of deceptive sales practices or that involve loan flipping, balloon payments, excessive points and fees, or mandatory arbitration, among other practices. A lender would be labeled predatory if it made 10 predatory loans in one year or if predatory loans made up 5% of its loans originated or arranged in a year.
Though high-cost lenders can be penalized, most enforcement is focused on predatory lenders.
Predatory lenders can be fined from $100 to $300 a day for violations and may be sued for damages and relief. Both high-cost and predatory lenders face cancellation of their contracts with the city, the loss of business privilege licenses in connection with home repair or improvement contracts, and forfeiture of government-funded housing assistance.
J. Denis OToole, vice president of government relations at Household International Inc., said that by determining what a high-cost loan is, Philadelphia is setting price controls.
As a result, something akin to California consumers energy woes, he said, could befall would-be mortgage customers in Philadelphia.
If you put price controls on what lenders can charge and only put them on one part of the business, price controls have been shown not to work, he said.
Jennifer Gordon contributed to this story from Washington.