How to Weaken Predatory Lending Protection - Make it a Federal Law
by Marvin Wolf, Esq.

It’s called federal pre-emption. That’s when a federal law overrules a state law. Sometimes pre-emption is good, sometimes it’s bad. A bill introduced in March 2005 and currently pending in Congress, supposedly aimed at predatory lending practices in the mortgage lending industry, and ironically titled the Responsible Lending Act (H.R. 1295), is about as bad as it gets.

A Republican from Ohio, Rep. Bob Ney, has sponsored this bill, which weakens consumer protection while pretending to strengthen it. While the bill is being marketed as an anti-predatory lending act, it might actually destroy many of the protections New Jersey residents currently have under the Consumer Fraud Act, the New Jersey Law Against Discrimination, the Home Ownership Security Act, and even the Licensed Lender Act. One section of the bill, Section 106, would amend Section 111 of the Truth in Lending Act and states that it “shall supersede any provision of the law of any State to the extent that such provision of law attempts, directly or indirectly, to regulate, or has the effect of regulating, mortgage lending activities…” This would effectively prevent states from passing or enforcing most laws against predatory lending.

Predatory lending can occur when the loan benefits the lender more than the borrower, such as when a broker “steers” a loan into a sub-prime loan at a higher interest rate even though the borrower would qualify for a normal loan at a lower rate. Most predatory lending takes place in the sub-prime mortgage market. One example is when a mortgage company promotes a mortgage refinance to a distressed borrower and tacks on excessive or unnecessary fees (sometimes as much as 5% of the loan amount) that are designed to lead the borrower into foreclosure. Other signs of predatory lending are abusive prepayment penalties, loan flipping (financing a loan that actually provides no net benefit to the borrower), the selling of unnecessary insurance products, requiring mandatory arbitration of disputes in hostile foreign forums and broker kickbacks (a payment to the broker that is hidden by the legal term “yield spread premium”).

New Jersey has been at the forefront in fighting predatory lending tactics. In states which lack anti-predatory lending laws, abuses such as abusive prepayment penalties can be five times more likely to occur, according to the Center for Responsible Lending.

Since predatory lending disproportionately impacts people of color, other minority communities, the elderly and low income borrowers, this new bill, by pre-empting state law such as The New Jersey Law Against Discrimination, could result in higher loan costs and lead to more foreclosures in the very communities that are most vulnerable to such practices while preventing New Jersey from passing new laws or even using existing laws to protect them.

In contrast to the racially-charged approach taken by Rep. Ney, a Democrat from North Carolina - Rep. Brad Miller - has sponsored a competing bill, H.R. 1182, which would not pre-empt state law, but rather include many of New Jersey’s current protections and expand them to the entire United States.

However, since Republicans now control Congress and the White House, it will be an uphill battle to stop enactment of this bill, since the rollback of hard-won consumer and civil rights protections seems to be intrinsic to the neo-conservative Republican agenda.

Marvin Wolf is a Newark attorney who specializes in consumer and bankruptcy law, real estate transactions and immigration. He practices in New Jersey and New York, and is admitted to the bar of the United States Supreme Court in Washington, D.C. He is a member of the National Association of Consumer Bankruptcy Attorneys, the Union, Essex and Middlesex County bar associations and has served as a volunteer consumer case arbitrator for the Better Business Bureau of Metropolitan New York. This article is intended to convey general legal information and should not be considered legal advice.