Predatory lending is back in the news.
A new Montgomery County law will take effect which will have significant impact on home buyers and mortgage lenders in that County.
On November 7, 2006, the Montgomery County Council enacted legislation which expanded the County's fair housing and civil rights law. According to a press release issued by the Council, "The measure expands the categories of lending activities that constitute discriminatory housing practices and increases the amount of damages that the Commission on Human Rights can award from a maximum of $5000 to a maximum of $500,000."
The new law defines "indicators" of discriminatory lending practices, some of which include:
- marketing or refinancing mortgages that a borrower cannot afford to repay based on income and credit levels;
- charging abusive prepayment penalties;
- financing excessive points and fees, and
- steering a borrower to a more expensive mortgage, by discouraging a potential borrower from obtaining a mortgage loan with more favorable terms.
According to the Council:
Discriminatory predatory lending targets borrowers with limited or poor credit for loans with exorbitant or abusive terms based on race, national origin, sex, or age. Most abusive home-lending practices occur in the sub-prime market and many address home loan opportunities for people with limited credit histories. African Americans, Latinos, the elderly and those with low-incomes are disproportionately victims of predatory lending.
(Montgomery County Council News Release, November 29, 2005).
On February 10, 2006, the American Financial Services Association (AFSA), a trade group representing many of Montgomery County's largest mortgage lenders, filed a lawsuit in the Circuit Court challenging the authority of the Council to enact this new law.
According to Randy Lively, president of AFSA, "Maryland's law is clear that only the state has the power to enact regulations governing mortgage lending." Lively added, however, that "AFSA opposed discriminatory lending and supports allowable county efforts to crack down on abusive lending practices."
To date, there has been no court action on this lawsuit.
Recently, a study by the Center for Responsible Lending concluded that: state laws enacted to prevent predatory mortgage lending work as intended to reduce abusive loan terms without impeding credit.
Strong state laws have been good for consumers while supporting a thriving subprime lending market. They provide credit-strapped families with plenty of access to responsible home loans at typical -- or even lower -- costs.
(The complete study, entitled "The Best Value in the Subprime Market: State Predatory Lending Reforms," dated February 23, 2006, can be found here ).
The Montgomery Council calls it "discriminatory lending," while others call it "predatory lending." But like the proverbial rose, predatory lending by any other name is still discriminatory.
The Center for Responsible Lender provides a brief description of some of the most common of the abusive practices:
- Loan Flipping: Here, the borrower is "flipped" by a lender who insists that the consumer refinance its current loan -- sometimes over and over again -- primarily for the purpose of generating more fees for the lender.
- Unnecessary Products: A lender will insist that the consumer buy such things as credit life insurance, or other products which are not necessary for the borrower. Once again, this serves primarily to increase the pockets of the lender.
- Mandatory arbitration: Instead of taking a lender to Court where the parties will get a full and fair trial on the merits, many lenders will require that a borrower must go to arbitration if there are any complaints. Often, this arbitration must take place in the home state of the lender, which may be thousands of miles away from where the borrower lives.
Home ownership is the great American dream. But unscrupulous lenders have long clouded this dream, by making mortgage loans to borrowers where the terms of the loan were designed for failure and foreclosure. Once the home is foreclosed upon, the lender starts all over again, and it is a vicious cycle with little or no end in sight.
The Center for Responsible Lending concluded that its findings have two significant implications for state and federal policymakers who are "grappling with the best way to prevent predatory lending."
First, the finding suggest that strong state laws like those in place in New Mexico, Massachusetts and North Carolina can serve as successful models.
Second, the findings call into question the advisability of federal proposals that would nullify state efforts and substitute a weak national standard. From a homeowner's perspective, it appears that mortgages protected by strong state laws may be the best deal in the real estate market.
But laws alone are not enough. Consumers must understand that they must protect themselves. They must learn the basics of mortgage lending as well as the steps to avoid. CaseNuevaHouston is a consumer organization in Texas that assists homebuyers, mostly Latinos, in becoming homeowners. Recently, they issued the Home Buyer's Bill of Rights, which can be found as a sidebar to my column.
The market is slowing cooling down, and interest rates will rise by the end of this year. These factors become open season on lenders to take advantage of unsuspecting consumers.
If you are looking for a mortgage loan, you must shop around. And even if you can qualify for a loan, you must also be comfortable that you can make the monthly payments on a timely and regular basis.
