Predatory lending is profitable, and Congress is helping

Congress certainly has an odd way of naming bills. The Bankruptcy Abuse and Consumer Protection Act, for instance, was not a bill written to protect consumers. It was a bill written to protect credit card companies from consumers. And as the “Clear Skies Initiative” was written to allow companies to continue to pollute, we now have the proposed “Responsible Lending Act.” Proposed by Representative Robert Ney of Ohio, this bill appears, on its surface, to toughen predatory lending laws throughout the nation.

It’s an odd sort of bill from someone who, at least in theory, belongs to a party that is opposed to Federal meddling in the affairs of the States. And yet, here it is, attempting to “toughen” lending standards by making it harder for lenders to add prepayment penalties and superfluous fees to subprime loans offered to people who cannot qualify for the best loan rates. It certainly seems like a great idea on the surface. A bit of investigation reveals, however, that Representative Ney has received a lot of campaign contributions from the mortgage industry and the bill is actually designed to help lenders, not borrowers.

How are lenders aided by this proposed bill? For starters, the bill will take precedence over any current state laws that govern such lending. Many states, such as North Carolina, already have tough laws regarding predatory lending and this law would render those laws moot. North Carolina currently prohibits any prepayment penalties on mortgages of under $150,000. This new law would eliminate that. The state law also caps points and fees that can be added to the loan amount; the Federal law has no such limits. The practice of tacking on fees to the loan amount is a frequent one in predatory lending; it makes the upfront costs of the loan seem a lot lower while forcing buyers to finance the fees over the 30 year loan term.

The proposed law would also loosen state laws the affect loan “flipping.” Flipping is where a lender urges a borrower to repeatedly refinance a home. The refinancing is presented as a benefit to the buyer, but actually does nothing to help them. Instead, it allows the lender to reap more mortgage fees and possibly higher interest rates. In extreme cases, these fees and interest can be so extreme that the buyer ends up losing the house to foreclosure. Such protections would be gone under the proposed Federal law.

The lending industry, as you might expect, defends the bill, saying that current state laws are simply too varied and confusing. They point out that a unified law that covers all 50 states would make it much easier to do business. Indeed, it would, but it remains to be seen how the public would benefit from a bill that all but eliminates existing consumer protections.

Under the current administration’s Big Business-friendly policies, the bill, or some variation of it, will almost certainly become law. But that doesn’t mean that it will help anyone.