In the latest example of state lawmakers beating Congress and federal regulators to the punch, Maine has adopted a strong anti-predatory-lending measure that an advocate for mortgage brokers says will have the effect of “wiping out subprime lending in the state.”
Legislation passed unanimously by state lawmakers and signed into law Monday by Gov. John Baldacci broadens the definition of high-cost mortgage loans, places new restrictions on their use, and allows for criminal prosecution of violators.
Maine accounts for only a small percentage of subprime lending nationwide. But opponents argued that the bill would contribute to the patchwork nature of state and federal laws governing mortgage lenders.
Maine’s Homeowner Protection Act won’t apply equally to all lenders, as federal regulators maintain that states are preempted from supervising federally chartered banks and savings and loans. That’s a view that’s been upheld by courts. But states still have regulatory authority over mortgage brokers and state-chartered banks, which in Maine includes 21 of the top 25 subprime lenders in the state, according to a recent analysis by two nonprofit groups that supported the legislation.
According to the Center for Responsible Lending and Coastal Enterprises Inc., about a dozen states including Massachusetts and New Mexico have enacted anti-predatory-lending laws modeled after legislation adopted by North Carolina in 1999. Some in the lending industry maintain North Carolina’s laws, which are more stringent than federal regulations, have restricted borrowers’ access to credit.
Ed Jurenas, president of the Maine Association of Mortgage Brokers, said that some provisions of Maine’s new bill, such as prohibitions on loan flipping, are justified. But others go too far, and the new rules won’t apply equally to all mortgage originators, he said.
The bill “will have the net effect of wiping out subprime lending in the state of Maine, and that’s not going to be a benefit to consumers,” he said. The new restrictions, most of which will take effect Jan. 1, could hinder borrowers who want to get out of existing loans or purchase a home, Jurenas said — further depressing housing markets and exacerbating problems created for borrowers when home-price appreciation slows.
Market forces have “essentially corrected for the excesses of some subprime lenders,” Jurenas said. The bill goes beyond what’s necessary and “administers a death blow” to lenders who serve those with blemished credit.
The bill’s supporters, including the Maine Bankers Association and the Maine Credit Union League, said the bill is aimed at ending predatory practices, not restricting access to credit.
“We are proud to have played an active role in this legislation from start to finish and believe that Maine consumers will benefit from the measures included in this bill,” said John Murphy, president of the Maine Credit Union League, in a statement issued by the bill’s sponsor, House Speaker Glenn Cummings.
If tougher regulations at the state level have created an uneven playing field — as mortgage brokers and independent lenders subject to state supervision maintain — the same complaints are often heard from lenders regulated at the federal level.
When federal banking regulators last fall issued new guidance for nontraditional, “exotic” interest-only and payment-option adjustable-rate mortgages (ARMs), for example, they recommended that states implement similar underwriting and disclosure standards. Maine’s bill makes the federal guidance for nontraditional loans part of state law, and stipulates that the state will also adopt the guidance federal regulators have proposed for subprime loans.
More than 30 states have taken similar steps, but others — including populous states like California and Florida — have not adopted the federal guidance for nontraditional mortgages. That’s prompted lenders who are regulated at the federal level to call for Congress to establish a single uniform national standard that would provide consistent protections to consumers in all 50 states and U.S. territories. (see Inman News story).
Some federal laws and regulations, such as restrictions on high-cost loans found in the Home Ownership and Equity Protection Act (HOEPA), apply to all lenders. But some consumer advocates say HOEPA is too permissive, and is unevenly enforced by the states and several different federal banking regulators.
The Federal Reserve Board has scheduled a June 14 hearing to discuss whether the Board should use its rulemaking authority under HEOPA to address controversial practices in subprime lending, including prepayment penalties, the lack of escrow accounts for taxes and insurance, and the use of stated income or low documentation loans. The Board will also discuss the effectiveness of state laws that have prohibited or restricted those and other practices, and consider whether lenders should be required to consider a borrower’s ability to repay a loan.
In the mean time, states like Maine are moving forward on their own in an attempt to address the rise in delinquencies and foreclosures among subprime borrowers.
Following in the footsteps of states like Massachusetts and Connecticut, Maine’s anti-predatory-lending bill lowers the threshold for defining a loan as high cost. Under HOEPA, a loan is considered high cost if total points and fees exceed 8 percent. Maine’s anti-predatory legislation defines loans of $40,000 or more as “high rate, high fee” if points and fees exceed 5 percent. Loans of less than $40,000 will be considered high cost if points and fees exceed 6 percent.
Beginning Jan. 1, Maine will subject loans defined as high cost to additional restrictions, including a prohibition on prepayment fees and negative amortization. Lenders offering high-cost loans will be barred from financing points and fees into the loan itself, a practice that consumer groups say allows unscrupulous lenders to “strip equity” from borrowers by concealing the true cost of a loan. Borrowers applying for high-cost loans will be required to obtain financial counseling from a HUD-certified nonprofit.
The legislation also stipulates that subprime loans may not be offered to a “borrower unless a reasonable creditor would believe at the time the loan is closed that the borrower will be able to make the scheduled payments associated with the loan.” The bill defines subprime loans as those that meet the high-cost threshold, plus nontraditional pay-option or interest-only ARMs, and loans with rate spreads so high they trigger federal Home Mortgage Disclosure Act disclosure requirements.
Maine’s anti-predatory-lending legislation also includes several provisions that will apply to all mortgage loans, including prohibitions on loan flipping and restrictions on late-payment fees and accelerated indebtedness. The bill prohibits lenders from financing premiums or payments for credit insurance or debt cancellation agreements as part of the loan, or recommending or encouraging default on an existing loan in connection with a refinancing.
The bill’s other provisions include “good faith and fair dealing” requirements that apply to loan brokers, and language that increases the liability of investors who purchase high-cost loans from their originators.
Increasing assignee liability — making investors liable for violations committed by loan originators — could limit the willingness of Wall Street investors to buy high-cost loans originated in Maine, and make such loans more difficult to obtain, many lenders maintain.
Jurenas, who in addition to leading the Maine Association of Mortgage Brokers is the president of Vanguard Mortgage Corp., said there’s anecdotal evidence that wholesale lenders will stop making subprime loans in the state.
“The wholesale lenders that deal in the subprime arena, they are all reviewing this document in their legal departments,” Jurenas said. “An account executive with a major player in the state told me ‘I don’t know if we’ll be doing business in the state of Maine as of Jan. 1.’ “
In a Dec. 8 report to Maine lawmakers evaluating the proposed legislation, the Office of Consumer Credit Regulation recommended against expanding assignee liability.
“We feel that the State’s initial efforts at reform should be directed toward the front-line loan officers of loan brokers and lenders,” the report said. Secondary market liability issues “should be addressed later if necessary, and only after receiving specific input and after reviewing the effect of assignee liability laws enacted in other states.”
Proponents of the bill say its language limits borrowers to making claims on their own behalf, rather than as part of a group represented in a class-action lawsuit, providing protections for borrowers without exposing investors to huge claims.
“New Mexico and Massachusetts have adopted language that strikes the appropriate balance between preserving homeowners’ ability to defend their homes against illegal predatory loans and providing the secondary market with the ability to continue to purchase subprime loans without the fear of overbroad liability,” the Center for Responsible Lending and Coastal Enterprises Inc. said in their analysis of subprime lending practices in Maine.
According to that analysis, the dollar volume of subprime lending in Maine grew by 436 percent between 2000 and 2004, to $1.036 billion, with the highest concentration of subprime borrowing taking place in rural areas.
A 2003 study by University of North Carolina academics concluded the state’s anti-predatory-lending measures had no negative impact on credit availability, with subprime home purchase loans increasing by 43 percent after the law went into effect, a rate similar to neighboring states. During the four-year period studied, 1998 through the first quarter of 2002, the number of loans with prepayment penalties of three years or more dropped by 72 percent after the law’s passage, while neighboring states saw an increase in such loans.
Other reports, including an industry-sponsored study by the Credit Research Center at Georgetown University’s McDonough School of Business, found that the law had a negative impact on credit availability. The Credit Research Center report, which looked at a shorter time period when the law was being phased in, concluded that the number of subprime mortgages originated by nine major national lenders declined by 14 percent, with first mortgages to borrowers with income les than $25,000 falling “precipitously” in the fourth quarter of 1999.
“Significant declines occurred only in North Carolina and only among the lower-income borrowers,” the CRC study concluded. The study compared North Carolina to Virginia, South Carolina and Tennessee. “Neither the higher-income borrowers in North Carolina nor borrowers in the other states experienced significant declines. These observations are consistent with the model’s prediction that a law raising the cost and risk of making “high-cost” loans would reduce the availability of credit, particularly among the least-creditworthy consumers.”