State level anti-predatory regulations bolster less potent federal rules and many can serve as models for stronger federal regulation without undercutting the vibrant subprime home loan industry.
An in-depth, benchmark study of the subprime mortgage market, its predatory lending subculture and state-level laws designed to combat that subculture, gives a decisive vote of approval for states' anti-predatory lending rules.
Responsible Lending's 31-page "The Best Value In The Subprime Market: State Predatory Lending Reforms" reports, "Our findings show that state laws enacted to prevent predatory mortgage lending work as intended to reduce abusive loan terms without impeding credit. Strong state laws have been good for consumers while supporting a thriving subprime lending market. They provide credit-strapped families with plenty of access to responsible home loans at typical -- or even lower -- costs."
When the report was released in late February, 2005, more than half the states had passed some anti-predatory lending-specific law to supplement federal protections aimed at ending abusive mortgage lending practices.
Predatory lending practices are a malignant outgrowth of the otherwise useful subprime residential mortgage sector.
Subprime loans are generally more expensive than prime loans, because they are intended for borrowers who pose a greater risk to lenders, typically because of the lack of credit or previous credit problems. The higher costs help offset lenders' added risk.
However, without the subprime segment, some borrowers would have been locked out of the American Dream, especially during the recent residential real estate market boom. Home prices in America increased by more than 12 percent in the past year, 55 percent in the past five years, and by more than 75 percent in 1 out of five states in the past five years, according to the Office of Federal Enterprise Oversight.
Unfortunately, in numerous documented class action suits, state-filed suits, independent studies and consumer complaints, too many subprime loans have became predatory with exorbitantly high costs, penalties and other financially abusive features often directed at specific groups, including minorities, older, low-income borrowers and others who can least afford the added cost.
In the second largest state or federal mortgage consumer protection agreement in history, the nation's largest subprime lender Ameriquest Mortgage Co. agreed in January 2006 to a $325 million settlement to be split among 49 states and the District of Columbia. In addition to the monetary settlement, the Orange, CA-based company agreed to make sweeping reforms of practices 49 Attorneys General alleged were predatory. Ameriquest denied any wrong doing and retained its license to operate.
In some cases, the most blatant predatory lending tactics have been shown to have been designed specifically to separate home owners from their money or their homes or both.
Responsible Lending is a leading proponent for ending predatory lending.
The organization is a unit of the Durham, NC-based Center for Community Self-Help, a community development advocate to help under-served families own homes or small businesses. In 1998, the Center created Responsible Lending to focus the Center's work on preventing segments of the finance industry from stripping wealth from minority and poor communities.
Also in response to fast growth in predatory lending activity and the snail's pace of federal legislators attempting to strengthen the outdated, 12-year-old Home Ownership and Equity Protection Act (HOEPA), designed to address the problem as it was more than a decade ago, numerous states passed laws to halt predatory lending on their own turfs.
To examine those laws' effectiveness, Responsible Lending's landmark research examined 28 state reforms by analyzing six million subprime mortgage loans made over a seven-year period (1998 - 2004).
"Specifically, we compared borrowers' experiences under reforms in each of these states to those of borrowers in states with minimal protections or no laws. We were further able to isolate and measure the effects of the reforms by controlling for differences in key economic, geographic, temporal, and loan and borrower characteristics," the Center reported.
Responsible Lending found, for the most part, the laws have accomplished what they set out to accomplish -- reduce or eliminate predatory lending activities without disrupting the market of honest subprime lending.
But the laws have done even more.
The findings include:
- In states with strong anti-predatory laws, families in the subprime market receive fewer loans with abusive terms.
When Responsible Lending compared anti-predatory law (APL) states with non-APL states, APL states reduced loans with predatory terms by more than 30 percent, non-APL states saw a 5 percent decline in loans with predatory lending terms.
States with the strongest APL laws saw even greater reductions in loans with predatory terms -- 48.1 percent in South Carolina, 43. 7 percent in Georgia, 38.5 percent in New Mexico and 37 percent in New Jersey.
The smallest decline in loans with predatory terms, 11.3 percent in Idaho, Kansas, Missouri, Ohio and Wisconsin, all of which have similar laws, still beat the non-APL average.
Only one non-APL state, Texas, reduced loans with predatory lending terms by a greater percentage, -- 21 percent -- than some APL states, Idaho, Kansas, Missouri, Ohio and Wisconsin (11.3 percent) and West Virginia which reduced the loans by 16.4 percent.
- Strong APL state laws have not curtailed consumer access to subprime credit. Opponents of legislation to fight predatory lending often charged legislation would create laws so broad sound subprime lending would suffer.
Instead, for the most part, APL states have struck an effective balance -- subprime volume in states with reforms is similar to that found in states without significant protections. Among the 28 APL states evaluated, relative to states with no protection, 20 revealed no statistically significant effect on the overall subprime volume, six revealed an increase in the loans, two revealed a decrease.
- In APL states with the strongest laws, borrowers' interest rates are no higher for subprime mortgages, but they are often lower. Opponents of legislation to fight predatory lending also often contended that the regulatory burden and increased legal risk would cost lenders and that cost would be passed onto consumers.
Instead, Responsible Lending found, "By reducing excessive fees, that bring no added value to consumers and by reducing the prevalence of abusive loan terms, it appears that state laws may have produced a more competitive lending environment."
When 30-year fixed-rate mortgages were examined, Responsible Lending found no significant difference in the interest rates of eight APL states compared to non-APL states; interest rates were lower in 19 APL states and higher in one APL state. Similar findings surfaced when loans with adjustable rate mortgages (ARMs) were examined.
"While the absolute value of the majority of these differences is less than 0.25 percent or 25 basis points, a decrease of just 0.20 percent would result in savings of $10,000 on a subprime, 30-year home loan held to maturity ... $1,000 over a more common three-year average loan life," Responsible Lending found.
Responsible Lending says some current federal legislation, if passed into law, could wipe out the benefits found in state laws. Any federal protection should be minimum protection without supersede state law or preventing stronger state laws because states have revealed they are better equipped to respond.
"For example, if a state experiences a rash of foreclosures as a result of 'innovative' predatory lending practices, the state would be in a much better position than the federal government to act swiftly and appropriately to address that particular situation.
If HOEPA had preempted states from passing laws back in 1994, then North Carolina (as the first APL state) never could have prohibited the financing of single-premium credit insurance, a predatory practice all but wiped out in the U.S. mortgage market through advocacy that began with that law."
"The direct experience of states with strong and comprehensive laws offers a rare preview of how specific legislative approaches affect the marketplace," the report concludes.
