Movement Toward Federal Preemption
of Predatory Lending Laws

This headline in the New York Times caught our attention for obvious reasons. Authors Diana B. Henriques and Jonathan Fuerbringer assert that federal laws regulating residential mortgage lending have provided insufficient protection to consumers. Consequently, many states have "adopted their own laws over the past three years to combat mortgages that carry "unjustly high fees or rates that can cost some borrowers their homes." The journalists cite the law in Georgia as one that provides adequate protection to homeowners.

Given the market backlash to the Georgia law, a Georgia consumer might be forgiven for asking "What good is a law that protects me as a mortgage borrower if I can't find a lender who will give me a loan?" As we noted in an earlier issue of Spotlight, the Georgia statute has several features that gives lenders serious heartburn, including prohibiting making mortgage loans to consumers without regard to their ability to repay or refinancing loans without demonstrable benefit to the consumer. Left open is the question of how to adequately document that the borrower can repay or whether the borrower benefits from the refinancing. Most important, a borrower who later can't repay the mortgage can sue, not only the original lender, but also the subsequent purchaser of the mortgage. The provision is called "assigned liability." An assigned liability law goes into effect in New York on April 1. In January, Standard and Poor's announced that it would no longer give credit ratings to securitization trusts that buy home mortgage loans from Georgia. The announcement reflected the fact that uncertainties involved in the application of the law made it impossible to judge the risk involved in the home mortgages originating in Georgia. GMAC and others have stopped buying home mortgage loans from Georgia, citing the unpredictable risk of making such loans.

The economic message has caught the attention of the Georgia legislature. Banks and credit unions have persuaded the state's House of Representatives to approve a bill (unanimously) that calls for a significant revision in the assigned liability clause. Consumer groups, such as the AARP, have vigorously opposed these changes. Bertha Lewis, of the New York chapter of ACORN, a consumer advocacy group that supports local lending laws initiatives, observed: "We are quite concerned about the 'death of a thousand cuts' for predatory lending laws across the country."

Mortgage lenders have warned that a patchwork of state laws could "seriously disrupt" the residential mortgage market. However, the residential mortgage market would be significantly improved if Congress passes a federal predatory lending law that would supplant the various state laws regulating residential mortgage loans. Representative Bob Ney (Ohio-R) has introduced a bill to amend the Home Ownership and Equity Protection Act of 1994 to pre-empt the new local laws that apply to high-cost mortgages. Rep. Ney argues that legislators should avoid enacting "feel good" laws that will backfire "by driving away lenders and drying up the subprime market." The proposed statute would continue a lender's' liability clause, but "is more limited and predictable."