The opinions expressed in the following article do not represent those of The Mortgage Press Ltd., the National Associaiton of Mortgage Brokers and NAMB's state affiliates.
If there's one thing the mortgage industry as a whole can agree on, it's that complying with the growing number of federal, state and local anti-predatory lending laws is a nightmare. If you are responsible for your company's compliance efforts, then in the now-famous words of our 42nd president, “I feel your pain.”
A uniform national standard for predatory lending abuse that preempts all state and local anti-predatory lending laws is needed to replace the existing mess. Without it, the industry will continue to be confounded in its attempts to comply, for years to come. Whether such a law is needed is not at issue; the question is whether it is possible to create a national standard that actually eases the compliance burden and also satisfies the pro-consumer forces. Although it seems like a workable concept, the idea is much more complex than most people realize and several roadblocks still exist before any such bill can become the law of the land.
Reps. Bob Ney (R-OH) and Paul Kanjorski (D-PA) co-sponsored HR 1295, known as the Responsible Lending Act of 2005. The bill, introduced in March, is currently being debated by the House Financial Services Committee. HR 1295 is similar to the bills introduced by Rep. Ney (and retired Rep. Ken Lucas) in previous years, in that it would provide for a single, uniform national standard for predatory lending that preempts all state and local anti-predatory lending laws, thereby creating a level playing field across the country for all lenders.
A tougher bill with no federal preemption provision, the Prohibit Predatory Lending Act (HR 1182), introduced by Reps. Brad Miller (D-NC), Melvin L. Watt (D-NC) and Barney Frank (D-MA), currently awaits direction. However, in a Republican-controlled Congress, its chances of survival are significantly lower than HR 1295.
While attempts to pass a preemptive national standard in Congress have failed in the past two legislative sessions, some believe that HR 1295 may become law in 2005. Perhaps the strongest evidence in support of this is the increasing acceptance of the need for preemption, highlighted by the Mortgage Bankers Association (MBA) Chair Regina Lowries testimony in late May, which focused attention on the need for such a law.
However, many industry experts contend that the current bill, like its ill-fated predecessor, doesn't have the widespread support it needs for passage.
Although the MBA supports the bill, support from some industry trade groups is noticeably missing; in fact, many politicians and industry leaders are opposed to federal preemption.
Part of this may be due to the political fallout that could be strewn on congressional candidates as we move into the 2006 election cycle. House Democrats might try to spin HR 1295 against Republicans that “cave in” to industry demands by passing what they view as an industry-friendly bill.
Outside the Beltway, many in the industry believe the bill's passage would actually create more problems than it attempts to solve. For example:
†The standards in HR 1295 represent a tough compromise for the industry. The bill has provisions that the industry wants, such as limitations on assignee liability, but it also has tough provisions that the consumer rights advocates want, such as tighter thresholds. Like all compromises, few are completely satisfied with the outcome.
†Currently, some states have no measurable predatory laws, and other states have laws that mirror the relatively easy Home Ownership Equity Protection Act (HOEPA) thresholds. Together, these total nearly half the states in the country. With the passage of HR 1295, lenders would have to apply the bill's tougher standards across all 50 states. So, for the first time, purchase-money and other transaction types would be covered in all states, in addition to refis, meaning, virtually all transactions would be subject to thresholds, and the thresholds are lower. This would have a profound impact on profitability and the ability to lend for many national and regional lenders who currently face substantial limitations only in the “tough” states. It could affect local lenders even more.
†National banks, which collectively represent a powerful force in the industry, would be the big losers under the bill, as they would be required to deal with its much tougher compliance requirements compared to HOEPA.
†The bill leaves the enforcement powers to the individual states. The result could be 50 different interpretations of the same law or, more likely, 50 different levels of enforcement. Some states, including those with well-funded banking departments, would be more vigilant than others.
Unfortunately, there are additional hurdles:
†Even if the bill were to pass in 2005, the steps that need to take place before the law could be enforced could take years. They include even more public hearings and the development of interpretive regulations by the Federal Reserve and a likely grace period before the law goes into effect. The law's preemptive effect on state and local laws during this period is unknown.
†Some states won't let the federal government strip away their existing predatory protections without a fight, and any challenges to the federal government's ability to make such a law could further delay implementation. For example, New York Attorney General (and 2006 gubernatorial candidate) Eliot Spitzer (D) has vowed to fight any national law that preempts New York's predatory lending law, despite settled case law going back to Marbury v. Madison, the landmark 1803 U.S. Supreme Court decision that held that the court's power of judicial review gives it the right to strike down any law that is found to be in direct conflict with the Constitution.
The bottom line is that even if you are crossing your fingers and hoping that HR 1295 passes this year, don't hold your breath. While a preemptive national anti-predatory lending standard would be a much-needed fix for the industry and ultimately for consumers, the current attempts to create one might not have the backing needed to make it a reality in 2005 or 2006. With too many unresolved issues, a lack of support from the industry as a whole and an upcoming election cycle, the bill may once again wither on the vine. Now is certainly not the time to shelve your anti-predatory compliance activities.
In the end, a new national standard may one day preempt state and local laws, condensing the anti-predatory lending compliance function to a single set of rules and giving compliance personnel around the country a reason to rejoice. However, any such law will lower existing thresholds and include purchase-money and other transaction types not covered under current law. As this would represent a substantial number of any lender's transactions, a viable strategy to deal with anti-predatory lending compliance will always be an important part of their origination process.
Roger Fendelman is a compliance attorney, specializing in federal and state fair lending laws. He currently serves as vice president of compliance for Interthinx. He may be reached at (800) 216-7062 or e-mail [email protected].