Predatory Lending Solutions: You want ‘em, We got ‘em

Mark Winston Griffith

Predatory Lending Solutions: You want ‘em, We got ‘em

Showing once again where the true source of leadership on banking issues is, the New Yorkers for Responsible Lending, a coalition of more than 130 organizations from across New York State, unveiled a model bill on Wednesday that would make it harder for predatory lending abuses to flourish.

The following are excerpts from a statement released by NYRL summarizing the model legislation:

At its core, NYRL's model bill includes an ability to repay standard, and addresses specific abuses in the subprime and exotic mortgage lending markets.

Key provisions of the model bill are as follows:

I. FOR ALL LOANS
* All lenders and loan officers shall be required to demonstrate the borrower's ability to repay
the loan.
* Repayment ability for adjustable rate mortgages (ARMs) shall be determined both at the introductory rate, and at
the reset rate, and be based on a repayment schedule that achieves full amortization
over the life of the loan.
* Monthly payments for determining affordability shall include principal, interest, real
estate taxes, homeowner's insurance, assessments, and mortgage premiums.
* Lenders shall benefit from a rebuttable presumption that the loan was made with due
regard to repayment ability, if the lender demonstrates that at the time the loan was
made the borrower's total monthly debts, including amounts owed under the loan, did
not exceed fifty percent of the borrower's monthly gross income, and the lender
followed residual income guidelines established by the Veterans Administration. For
adjustable rate mortgages, the law takes into account the fully indexed rate for the
loan.
* Mortgage brokers shall be considered to be acting as the agent for the borrower, with
specified duties to the borrower.

II. FOR ALL SUBPRIME & EXOTIC MORTGAGES
* The law prohibits the following terms for all subprime and exotic mortgages:
* Balloon payments;
* Negative amortization;
* Prepayment penalties;
* Default interest;
* Mandatory arbitration;
* Modification and deferral fees;
* Financing of credit insurance;
* Loan flipping;
* Refinancing of special mortgages; and
* Yield spread premiums
* Lenders and brokers shall be required to disclose taxes and insurance payments, with each
disclosure of monthly payments. Lenders shall also provide borrowers with disclosures that
encourage them to obtain qualified mortgage counseling and compare loan rates and fees.
* Lenders shall be required to escrow property taxes and insurance.

III. REMEDIES
* The law is enforceable by the NYS Attorney General, Banking Superintendent, or any party
to a loan covered by the law.
* Actual and statutory damages may be awarded; statutory damages shall be $5,000 per
violation or two times actual damages (whichever is greater). Injunctive relief to stop
unlawful practices, as well as declaratory and other equitable relief as the court deems
appropriate, may be granted. The court may award reasonable attorneys' fees to a prevailing
borrower.
* The loan transaction may be rescinded if the lender is found to have violated prohibitions
against making unaffordable loans and/or negative amortization loans.
* Borrowers may assert defenses against loan purchasers ("assignees") that they could assert
against the original lender.
* The law includes good faith exceptions. No violation of the law shall be found if the lender:
* Notifies the borrower of the compliance error and provides and an opportunity to cure,
within 30 days of making the loan; or
* Can show that it failed to comply with the law because of bona fide error.

What's needed now are state representatives bold enough to adopt this measure and introduce it as legislation. Will the real leaders please stand up?

Comments

I am also concerned about predatory lending, however, I am very concerned that some of the suggestions Mr. Griffith made could be throwing the baby out with the bath water.

* Borrowers may assert defenses against loan purchasers (assignees) that they could assert
against the original lender.

Would essentially mean that mutual funds and institutional investors could not invest at all in New York State mortgages. Currently, an investor in mortgages assumes that 90% or so of the people do not default on their mortgages, and that of those who do default, roughly half of the outstanding loan balance is recovered. Actual losses to a normal lender would be assumed to be less than 6%. If the investors in a mutual fund investing in mortgages could lose 100% of loans because of the loan originator failed to do something, the interest rates (on all mortgage loans) would have to be far higher than they are now to compensate for that risk.

A person can borrow money in several ways. You can borrow money based on your promise to pay it back, having good character, and a job. Credit card companies will lend you money, and they will charge you 18% interest per year. An alternative is to borrow money based on putting up collateral (real estate) that the lender could reasonably expect to use to recover most of the borrowing if you default. In that case you can borrow money from a mortage lender and pay 7 or 8% interest. If New York passes a law which sometimes prevents lenders from recovering their loan from the property, you are essentially moving from from the later category into the former category.

You could respond that the lenders are evil people, but one of the problems is that the eventual lenders are pension funds, mutual funds, insurance companies, etc. which do not actually originate or service the loans, and are not even in a position to get involved in litigation about what was an honest mistake, etc. These guys will just very quickly establish rules that every mortgage originator must certify "0 % New York State" for every pool of mortgages. Georgia had a similar law a few years ago, and it lasted (to the best of my recollection) about 6 weeks before it was repealed while essentially no one could get mortgages.