WASHINGTON - Industry officials, seeking refuge from a spate of state and local laws against predatory lending, are considering turning to the courts.
With the Senate Banking Committee today kicking off two days of hearings on predatory lending, and panel Chairman Paul Sarbanes gearing up to introduce comprehensive legislation in the fall, industry lawyers are going over their options as they try to prevent enactment of hundreds of lending rules across the country.
If congressional Democrats are able to move an anti-predator bill, which pundits say is unlikely in this Congress, the industry could swap support of the measure for a preemption provision as well as rewrites of the truth-in-lending and mortgage settlement laws.
Another option is to push for a separate preemption bill, and industry and Capitol Hill sources say that is the route favored by lobbyists representing Countrywide Home Loans. Most industry officials say such a measure would probably become a magnet for stricter lending rules. (Countrywide did not return calls from American Banker.)
"There are a lot of people in the industry who would like to see a preemption bill," said Edward L. Yingling, chief lobbyist for the American Bankers Association. But "it's too early for that, because I don't think Congress has the ability to enact a preemption bill without its being loaded up with all kinds of other stuff."
John A. Courson, the president and chief executive of Central Pacific Mortgage, Folsom, Calif., said the bottom line is "there doesn't need to be additional legislation that includes preemption." Mr. Courson is scheduled to testify at the Senate Banking hearings Friday on behalf of the Mortgage Bankers Association.
But the safest bet for lenders could be to go to court and gauge the protective powers of federal laws such as the National Bank Act, which lets federal regulators override state laws such as those that seek to limit interest rates or impose licensing limits on federally chartered institutions.
Mr. Yingling said the ABA is looking at various state and local ordinances - including ones in North Carolina, Texas, Chicago, and Baltimore - for an optimal test case.
"We believe we have a strong legal case under current law for a lot of preemption," he said. "Before there is legislation, it may make sense to test our preemption rights in court to see how far they go. Unlike with privacy, in this case we have significant preemption laws" on the books.
Some skirmishes have occurred already. The American Financial Services Association sued the Philadelphia city government this spring, charging that it exceeded its authority in passing an ordinance regulating abusive lending, and the ABA and the Pennsylvania Bankers Association were preparing to join the fight. But the state legislature beat them to the punch by overriding the municipal ordinance and thus making the bankers' case moot.
History would be on the ABA's side if it sued, one expert said.
"The industry has had some notable successes building businesses on the preemption theory," said compliance attorney Thomas B. Hudson, a partner in the Maryland firm of Hudson Cook. "The preemption argument has been a powerful one under certain circumstances. For example, the credit card business around the country has been built on the preemption theory with banks located in Delaware and South Dakota having the authority under federal law to export their rates into the jurisdiction where the customers live."
Sen. Sarbanes, a Democrat from Maryland, has said he plans to introduce legislation after the August congressional recess that will mirror a bill introduced this year by Rep. John LaFalce of New York, the top Democrat on the House Financial Services Committee.
The Sarbanes and LaFalce measures would, among other things, broaden the Home Ownership Equity and Protection Act, which uses rates and fees to define high-cost loans and trigger additional reporting requirements.
For example, the Sarbanes bill would restrict a creditor from financing any portion of the points, fees or other charges topping 3% of the loan total; prohibit prepayment penalties after the first two years of a loan; limit prepayment penalties during the first two years to 3% of the loan's total; and ban up-front payment or financing of credit life, credit disability, or credit unemployment insurance on a single-premium basis.
Citigroup Inc. and Household International Inc. recently announced plans to stop offering such products. Fair-lending activists claim that the premiums are frequently lumped into the loan's principal, sometimes without the borrower's knowledge, and say the practice adds thousands of dollars to the amount being financed.
Rep. LaFalce said through a spokeswoman Wednesday that he is "reluctant" to support any federal override of state and local laws, but stopped short of opposing it. "Preemption should not be beyond consideration if it can help produce strong federal legislation" but "only if the standards agreed to are obviously superior in terms of protecting consumers."
On the eve of the hearing, trade associations tried to demonstrate that their members are taking steps toward self-policing.
The Consumer Bankers Association released a study Wednesday that is says shows the banking industry is "diligent and resourceful" in offering financial literacy programs and creating partnerships to help consumers of all ages learn about predatory lending.
The ABA touted one of its outreach efforts, a short video titled "Predatory Lending Don't Be Scammed." It is also circulating a series of brochures: "Before You Borrow How to Protect Yourself from Abusive Lenders."