WASHINGTON Senate Banking Committee Chairman Paul Sarbanes said Friday that he will move forward on anti-predatory-lending legislation and would oppose an override of state and local laws unless federal limits on abusive credit practices are tightened.
The notion of preemption in inadequate federal standards I find totally unacceptable, he said at the conclusion of two days of hearings on alleged mortgage lending scams. I understand the industry argument that they operate in 50 states and therefore 50 different standards are difficult. But it is clear to me that if you start to entertain federal preemption, intimately interrelated with that question is the question of the substantive protections that would be provided under the federal standard.
The Maryland Democrats comments came a few days after a Countrywide Credit Industries Inc. spokesman said the company and others are exploring preemption legislation. Separately, an American Bankers Association official said last week that the group is studying several state and local ordinances including ones in North Carolina, Texas, Chicago, and Baltimore to test the current protective powers of existing federal laws.
After hearing 18 witnesses over two days suggest a variety of remedies to thwart bad actors among lenders, Sen. Sarbanes said he is now ready to enter a period of reflection over whether changes are needed in a bill he is preparing to introduce this fall.
The testimony brought some good thinking to the committees attention, Sen. Sarbanes said during a break. We intend to work through it very carefully and try to digest it, deepening our understanding of what the possibilities are for legislation.
The goal of the bill, according to a letter Sen. Sarbanes is circulating among his colleagues, is to effectively eliminate practices that have trapped thousands of unsophisticated and vulnerable borrowers into high-cost loans that strip equity from their homes and often lead to foreclosure.
A draft summary would outlaw up-front payment or financing of credit life, credit disability, or credit unemployment insurance on a single-premium basis.
The draft also calls for restricting a creditor from financing any portion of the points, fees, or other charges topping 3% of the loan total; prohibiting prepayment penalties after the first two years of a loan; and limiting the prepayment penalty during the first two years to 3% of the loans total.
Sen. Sarbanes asked the 10 consumer and industry advocates who testified on Friday whether they believe that narrowing the triggers in the Home Ownership Equity and Protection Act would help cut off abusive lenders. The protection act uses the level of rates and fees to define high-cost loans and to trigger additional reporting requirements.
John Courson, the president and chief executive officer of Central Pacific Mortgage Co. in Folsom, Calif., and vice president of the Mortgage Bankers Association, said that such a change could cut off the supply of subprime loans. Dropping the triggers will not solve abusive practices, he said.