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Predatory Lending and the Law
Recently, “predatory lending” has become the buzz word in the real
estate industry. Just exactly what predatory lending
is depends upon whom is giving the definition, but generally
predatory lending is the practice of abusive methods in the brokerage
of real estate mortgage loans.
The Center for
Responsible Lending estimates that borrowers
lose approximately $9 billion
annually due to predatory mortgages. And many of the abuses of
predatory lending target the inexperienced, the elderly, and minorities.
Currently, high
profile groups and individuals are choosing sides as two bills against
predatory mortgage lending compete in Congress.
On March 9th, H.R.
1182, dubbed the “Prohibit Predatory Lending Act of 2005,” was
introduced by US Congressional Representatives Brad Miller (D-North
Carolina), Mel Watt (D-North Carolina), and the ranking member on the
House Financial Services Committee Barney Frank (D-Massachusetts).
This bill is
patterned after the 1999 North Carolina anti-predatory lending law, a
law that has been widely recognized as one the most
effective anti-predatory state laws in existence.
Consumer advocacy
groups, including the Consumer Federation of America, the Center for
Responsible Lending, the National Consumer Law Center, the National
Association of Consumer Advocates and the US Public Interest Research
Group support the Miller-Watt-Frank bill.
The following
week, Representatives Robert Ney (R-Ohio) and
Paul Kanjorski (D-Pennsylvania) introduced
the “Responsible Lending
Act,” H.R. 1295, in Congress. The Ney-Kanjorski Bill
has obtained the
support of major
financial institutions.
Groups supporting
the Ney-Kanjorski Bill include the Mortgage Bankers Association, the
National Association of Mortgage Brokers, the Bond Market Association,
the American Securitization Forum and the National Home Equity Mortgage
Association—groups that represent about 80 percent of what is
considered the “non-prime” market.
In a March 24th
article in the Washington Post, Representative Kanjorski stated that
the instance of widely varying state laws has created a hardship for
the lending industry and that “the current situation is driving lenders
out of states with strict laws.”
A circumstance
that, one must then consider, is forcing these lenders, perhaps many of
them unethical, to gravitate toward states where the laws are not so
strict-- states such as Colorado.
An April Newsweek
article stated that “mortgage lenders gripe that conflicting state laws
make it tough for them to operate coast to coast. And state-chartered
lenders say they’re at a disadvantage to national banks, which were
exempted from state laws under a rule adopted in 2004 by the Office of
the Comptroller of the Currency.”
It would seem,
then, that a law that would equalize the patchwork of current laws
would be an equitable
solution for all parties involved.
However, consumer
groups and other proponents of the Miller-Watt-Frank bill argue that
the Ney-Kanjorski, H.R. 1295, is simply a guise by “big business” to
sidestep strong state predatory lending laws and would preempt many
state laws that have been proven effective in combating predatory
lending.
With a large
percentage of predatory lending affecting minorities, consumer
advocates are getting some big names to aid in their fight against H.R.
1295. NAACP Chairman Julian Bond, the Rev. Jesse
L. Jackson, and Wade Henderson, executive
director of the Leadership Conference on Civil Rights, are joining with
consumer groups to oppose the Ney-Kanjorski bill.
Although it is too
early to predict the outcome of this heated dispute, it will be
interesting to observe the dance of legislation as these two bills make
their way through the labyrinth of Congressional hearings.
Hopefully, a final
bill will be crafted that balances the protection of consumers with the
foresight of keeping a healthy economy while providing safe and
ethical mortgage options to
those who do not qualify for prime loans.
Partisan politics
and states vs. Federal battles aside, what the Ney-Kanjorski bill
does address, and the
Miller-Watt-Frank bill does not, is the issue of introducing a new
federal standard to prevent appraiser intimidation and to enhance
enforcement practices and accountability of federal and
state appraiser
regulators.
The wording of H.R.
1295, Title IV, Sec. 402 (h) regarding appraiser independence reads:
No mortgage lender,
mortgage broker or mortgage banker, real estate broker, nor any other
person with an interest a real estate transaction involving an
appraisal shall improperly influence or attempt to improperly
influence, through coercion, extortion, or bribery, the development,
reporting, result, or review of a real estate appraisal sought in
connection with a mortgage loan.
This statement is a
shot in the arm for the
appraisal industry, who for years have struggled to bring the problem
of client pressure on appraisers to the forefront.
American Banker’s
Erick Bergquist notes that Appraisal Institute’s officials have
testified to Congress on the subject four times in the past few years.
The inclusion of appraisal activities in a comprehensive predatory
lending law would create a national standard that would validate the
importance of independent appraisals—the key factor in the soundness of
the entire real estate industry.
The Appraisal
Institute, the American Society of Appraisers, and the American Society
of Farm Managers and Rural appraisers acknowledge that mortgage fraud
is an ever growing crisis and state they believe it continues because
"unscrupulous third parties are allowed to pressure appraisers to meet
predetermined values, and very little attention is paid
to mitigating appraisal problems by improving
appraisal quality."
We intend to
continue covering ongoing legislation as well as deliberate on how
these bills and other legislation affect both the real estate industry
in general and the appraisal industry specifically.
Although this
article touches only lightly on the complexity of the bills
currently presented to Congress, it does give a good foundation for all
of us to consider the issues at hand and an opportunity to voice our
opinions concerning potential laws that will affect our entire industry.
As always, we
value your opinions and comments and welcome the open exchange of
ideas between all disciplines
of the real estate industry.
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