WASHINGTON -- Comptroller of the Currency Eugene A. Ludwig and Federal Reserve Governor Lawrence B. Lindsey clashed Wednesday on a proposal to control interest rates on second mortgages.
At a Senate Banking Committee hearing, Mr. Ludwig endorsed a bill to curb the high-interest lending that has been criticized as "reverse redlining."
Mr. Ludwig qualified his support for the bill by urging that any regulation "not lead to regulatory paralysis." However, he said, rate controls are paramount.
Mr. Lindsey, in contrast, told committee members: "The bill runs the risk of shutting off credit altogether." He said its scope and disclosure requirements would cause a "negative impact on the second-mortgage market."
Riegle, D'Amato Are Sponsors
The reverse-redlining bill is sponsored by the committee's chairman, Sen. Donald W. Riegle Jr., D-Mich., and its ranking Republican, Sen. Alfonse D'Amato of New York.
Sen. Riegle said it aims to prevent "shady lenders [from] peddling high-rate, high-fee mortgages to cash in on poor homeowners."
Second-mortgage or home-equity loans can be useful to finance home improvements or education. But critics have charged that some lenders purposely charge excessive rates to force borrowers into default and foreclosure.
The proposed Home Ownership and Equity Protection Act of 1993 would prohibit prepayment penalties, balloon payments, and negative amortization plans. Offenders would face $1,000 in civil penalties.
The bill also calls for more disclosure of loan terms.
Pro and Con
"These requirements will not deter any lender from making legitimate mortgage loans and serve a credit need," Mr. Ludwig said.
But Mr. Lindsey doubted the disclosures would have "a positive impact." Moreover, he expressed worry that the bill's definition of high-cost mortgages is too broad, tending to prevent some marginal borrowers from getting credit.
For example, the bill covers loans at interest rates more than 10 points above Treasury securities. Some owners opt to finance modest home improvements with credit cards, which charge up to 21%, Mr. Lindsey noted.
"Therefore, extensions of credit at 14% do not seem necessarily high-cost loans," he said. This provoked an indignant response from Sen. D'Amato, who called it "preposterous" to compare unsecured credit card loans to those secured by homes and life savings.
In contrast to Mr. Lindsey, who said the bill goes too far, some believe it is not strong enough. Michelle Meier, banking lobbyist for Consumers Union, said the bill would "still leave us in troubled waters." She advocated a "broader approach" to abuses of the home equity market.
Both Mr. Ludwig and Mr. Lindsey have strongly supported initiatives to boost lending in poor communities and inner cities.
Mr. Ludwig reiterated his pledge to strengthen the Community Reinvestment Act, saying the administration is busy working on it.
Mr. Reerink writes for Medill News Service.