Robert D. Perrow
bperrow@williamsmullen.com

Reproduced with permission of The Virginia Association of Mortgage Bankers (804.285.7557).
Copyright ©2000 by The Virginia Association of Mortgage Bankers. All rights reserved.

The Challenge to Lenders and Brokers

Mortgage lending is facing a new challenge. Through pressure from consumer and civil rights groups as well as senior citizens organizations such as AARP, federal and state legislators and regulators, as well as government sponsored enterprises and some large municipalities, are moving rapidly against lending abuses they label as predatory lending practices.

Two questions quickly come to mind: What is a predatory loan? Why is anti-predatory lending legislation still an issue after enactment of the Home Ownership and Equity Protection Act in 1994 ("HOEPA")?

The clear message from all the recent legislative and regulatory activity is that a predatory loan is going to be what the legislators and regulators say it will be. Basically, the term applies to high interest and high fee mortgages. But what constitutes a high fee or a high interest mortgage is being defined by the legislators. Not surprisingly, the existing and proposed legislation is not consistent. A real concern is whether the new definitions of predatory loan will encompass some loan products presently exempt from the provisions of HOEPA and permitted under state lending laws.

It is clear from all the legislative and regulatory activity that HOEPA was not a sufficient response to the abuses being addressed. Certainly, the atmosphere is such that HOEPA, if changed at all, will be strengthened to encompass more loans.

At this point in time, it is important for lenders and brokers to be aware of developments at the state and federal level with respect to proposals for legislation and regulation.

State Legislation

Perhaps the most alarming situation occurred in North Carolina where, with the support of a consumer group and the then attorney general, consumer oriented legislation was enacted in 1999. According to the chief lobbyist for the Mortgage Bankers Association of the Carolinas, the North Carolina legislation caught the industry by surprise. The new law has created compliance problems for bankers and imposed unwelcome fiduciary duty requirements on brokers.

In Virginia, no legislation has been enacted particular to address specifically what is commonly understood to be predatory lending practices. There are indications such legislation may be introduced in the 2001 General Assembly. Predatory lending legislation has been introduced in New York, Illinois, South Carolina, Minnesota, West Virginia, Maryland, California and Utah.

Enactment of a variety of anti-predatory lending statutes will create a hodge podge of regulation. The statutes vary in scope and detail. Typically, predatory loan legislation has a provision setting an interest rate above which the requirements of the statute will be applicable. With respect to such high interest loans, prepayment penalties, negative amortization, financing of credit insurance and loans with high fees may be prohibited. Some proposed legislation prohibits or restricts balloon payments, bans default interest rates, and requires credit counseling. Arbitration may be prohibited and the lender may be required to assure that the borrowers have the ability to repay the loan. Simply, attempts are being made to regulate through legislation almost every detail of a mortgage loan deemed to be a high interest loan.

Federal Legislation

At the federal level, four different bills have been introduced in Congress. Congressman John Lafalce (D-NY) (H. 4250) and Senator Paul Sarbanes (D-Md.) (S. 2415) have sponsored the Predatory Lending Consumer Protection Act of 2000 and Illinois representative Janice Schakowski has introduced the Anti-Predatory Lending Act of 2000 (HR 3901). Senator Schumer (D-NY) and Congressman Ney (R-OH) each have introduced legislation (S. 2405) and (H. 4213). All federal bills are directed at amending the Home Ownership and Equity Protection Act that is a part of the Truth-in-Lending Act by lowering the interest rate triggering the provisions of HOEPA and strengthening other provisions of the legislation. For instance, Senator Schumer's bill goes to the extreme of applying restrictions on all mortgage loans such as prohibiting prepayment penalties and financing of credit insurance.

Regulatory Activity

The topic of predatory lending is being addressed by the regulators. The Department of Housing and Urban Development and the Treasury Department have formed a joint task force to assess the issues related to sub-prime lending and to review existing state and local initiatives to combat predatory lending. Secretary Andrew Cuomo of HUD has stated that legislation is needed to prohibit the secondary market government sponsored enterprises from purchasing predatory loans and that legislation should define what constitutes a predatory loan and the permitted terms and conditions. The joint task force has been holding a series of public forums across the country. It is expected that additional federal legislation will be recommended based on the work of the joint task force.

On May 19, 2000, the FHA announced its FHA Fraud Protection Plan to protect homeowners from predatory lending practices. Under this Plan, once FHA identifies an inflated FHA mortgage, it will require the lender to write down the loan balance to a level consistent with market value. FHA will impose a cap on points and fees. They will track the loan performance of brokers and will rate appraisers on performance of the loans associated with their appraisals.

The government sponsored enterprises, Freddie Mac and Fannie Mae, have each issued regulations regarding Anti-Predatory Lending Policies for the loans they purchase. Freddie Mac issued its rules on March 24, 1999 and Fannie Mae issued similar regulations on April 11, 1999.

Conclusion

Simply, predatory lending is a hot topic and the industry should be extremely concerned about the resulting legislation and regulation that will govern this area. Whether and how lenders and brokers will be affected will depend on the details of the legislation and regulations that ensue. It is clear on the federal level that the present administration and the democrats are strongly behind anti-predatory lending legislation. The republicans have a more "wait and see approach" and most are looking to see if existing legislation is sufficient. The republicans, however, will not find it popular to oppose legislation in this area. Moreover, there is a practical reason to have federal legislation that preempts state laws so that compliance will be simplified. Stay tuned, there is more to come in this area.

Mr. Perrow heads the Consumer Finance/Mortgage Banking Practice Group of Williams, Mullen, Clark & Dobbins. The firm has offices in Richmond, Virginia Beach, Newport News, Tysons Corner and Washington, D.C. Mr. Perrow can be reached at (804) 783-6446. His e-mail address is bperrow@wmcd.com.