Predatory lending bill signed into law in Ohio

Governor signs new law that attempts to reduce home foreclosures

The problem of predatory lending is one that continues to plague most states. The term is loosely defined, but as one Supreme Court justice’s said about obscenity - “I know it when I see it.” Predatory lending is generally taken to regard loans made to people with poor or damaged credit who will not otherwise qualify for the best, or “prime” interest rates. That portion of the lending market that caters to people with poor credit histories is known as the “subprime” market.

It is understood that this market comes with some risks that lenders in the prime market do not face. Borrowers at who apply for home loans at subprime rates will have a tendency to default on their loans more than will customers with better credit histories. The lenders say that they have to charge the customers more in order to offset that additional risk that they take. The problem, as many have pointed out, is that the fees and interest rates charged to customers in this segment of the market often grossly outweigh the risks. Interest rates are often as much as 5 points higher than those offered to prime customers, and the loans are often padded with excessive closing costs that can easily exceed 5% of the loan amount. These burdens make paying the loans even harder for customers who already tend to have greater than average financial troubles, and the result is often a high rate of foreclosure.

Some of these foreclosures are intended, as the lenders can then sell the houses at a profit. Ohio’s new predatory lending bill, recently signed into law by Governor Bob Taft, was written to clamp down on the type of lending that intentionally takes advantage of those who cannot afford to buy a home at prime rates. 

Among other things, the bill offers these provisions:

• Prohibits changing loan terms at the last minute.
• Puts restrictions on home appraisals in order to eliminate fraudulent appraisals that are artificially inflated in order to help the borrower qualify for the loan.
• Allows borrowers to sue lenders under Ohio law for mortgage related problems that are not covered by Federal law.
• Attempts to limit closing costs to 5% of the loan amount on loans of more than $25,000.

The law isn’t as strongly worded as those of other states, such as North Carolina’s predatory lending law. The bill required a lot of compromising by both parties and the end result was somewhat watered down. But it is a start; Ohio has one of the higher rates of foreclosure in the United States and having people thrown out of their homes, particularly by lenders who intentionally issued loans designed to do just that is not something most people want to see.

The new law goes into effect in 2007; the extra time was permitted to allow various financial agencies to prepare for the changes. Legislators hope that with the additional restrictions, conventional market forces will encourage lenders to be competitive even when dealing with customers who have less than ideal credit.