Overview of Major State Developments: Predatory Lending

1
Overview of Major State Developments Predatory
Lending

• Donald C. Lampe
• Womble Carlyle Sandridge Rice PLLC
• Charlotte, NC
• dlampe_at_wcsr.com

2
Changing Landscape, Changing Meaning

• The p word first came into common usage in
  early 90s, to describe unfair and
  discriminatory mortgage lending
• Used to describe unfair/abusive loan terms and
  practices, leading up to the enactment of the
  federal high-cost home loan law, HOEPA, in 1994
• New life North Carolinas groundbreaking
  high-cost home loan law in 1999 addressed at
  predatory lending (in the bill title)
• Off to the races as many other states and
  localities enacted (anti-) predatory lending and
  predatory lending became common usage
• Now, the term is used (and abused) to describe
  any kind of loan terms, practices or outcomes
  that are thought to be unfair to the borrower

3
What Does it Mean?

• In spite of all the legislating, and regulating,
  there is no agreed-upon definition of predatory
  lending
• The banking regulators say making a loan based
  on the foreclosure value of the home (lax
  underwriting, lack of concern for borrower)
• Concerns over potentially unfair and abusive
  mortgage lending terms and practices grew with
  the expansion of non-prime lending and
  higher-cost mortgage product
• Proponents of more regulation always say
  Subprime lending does not equal predatory
  lending, but do they really mean it?
• What it really is a collection or grouping of
  lending practices and loan terms that the
  borrower DOES NOT UNDERSTAND, resulting in a loan
  that the borrower CANNOT AFFORD

4
Where are We Now (2006)?

• Many types of legislation and policy initiatives
  are described as predatory lending
• This includes licensing of mortgage
  professionals, limitations on loan fees/costs,
  loan servicing, lending discrimination and even
  general regulation of all residential mortgage
  loans
• Widespread perception among consumer and
  community advocates and policymakers that many
  kinds of mortgages are inherently unfair and must
  be regulated in any way possible
• Also, additional HMDA data and anecdotal evidence
  of discrimination has added to the urge to
  regulate, based on strongly-felt civil rights
  beliefs e.g., more minorities than whites get
  higher-cost home loans

5
Examples of the Expansion of Regulation of
Predatory Lending

• Illinois Predatory Lending Database Law HB 4050
• Legislature mandates submission of detailed loan
  applicant data to the regulator
• Regulator decides if applicant needs counselling,
  etc.
• Pilot program aimed at inner-city Cook County
  (Chicago) zipcodes
• Elimination of discrimination or big brother?
• Database not up and running yet
• Montgomery County, Maryland Ordinance
• Began as a predatory lending bill but morphed
  into comprehensive amendments to the local fair
  housing ordinance

6
Examples of the Expansion of Regulation of
Predatory Lending contd

• Montgomery County, Maryland Ordinance contd
• State law (Maryland) preempts local predatory
  lending laws but not anti-discrimination
  ordinances
• Court sided with industry in AFSA v. Mont Cty
  lawsuit and granted preliminary injunction
  against effectiveness and enforcement
• County Council may or may not act to amend/repeal
  so the court may be the final arbiter
• So, what started as predatory lending became
  discrimination interchangeable doctrines and
  policies under local law

7
Examples of the Expansion of Regulation of
Predatory Lending contd

• Ohio SB 185 (pending)
• The logic Ohio 1 in foreclosures, need strong
  laws on origination to stop foreclosures
• The idea make Ohios Consumer Sales Practices
  Act apply to mortgage lenders
• Lots of problems with that, legally untold
  damages, vague standards of liability
• House Committee Substitute modified CFSA coverage
  but added long list of prohibited or restricted
  lending terms and practices a borrower bill of
  rights
• Bill contains stricter regulation of mortgage
  brokers, appraisers and settlement JVs a
  something for everyone approach
• If it passes, look for more of the same in other
  places (!)