( - promoted by Chris Bowers)
I am writing regarding Matt Stoller's post about predatory lending and the Barney Frank bill that is to come to a vote this week in the House. In fact, this weekend Barney Frank and I had a heated exchange at the National Consumer Law Center's annual conference in Washington. I think you should know why I was so angry at Congressman Frank, and why it is important that his bill is stopped or strengthened.
First, a little background on myself and the issue. I spent 30 years at Community Legal Services (CLS) in Philadelphia, largely with a focus on consumer law. CLS has more lawyers working on saving homes from predatory mortgages than any other law firm in the country. I have personally represented or advised hundreds of victims of the subprime scandal, and I have testified before the Senate Banking Committee and the Federal Reserve Board. For years, we have been warning about the dangers-both to our neighbors and to the larger economy-of the out-of-control subprime mortgage market. While it is good to see the Congress finally taking up the issue, I have strong reservations about the work product that is making its way to the floor for a vote. An already weak bill is getting weakened even further, and it is undercutting the hard work that activists have made on a state level for the past ten years.
Here are my principal worries about this bill, and why I am so upset at the role Rep. Frank is playing:
1) It is America's homeowners, not the investment machinery that has caused the current crisis, that need protection.
The Frank bill does define new and important standards in mortgage lending. However, two of the most important restrictions--on lending without regard to repayment ability or "net tangible benefit" to the borrower--Chairman Frank has apparently decided to immunize holders of the loan from any of the remedies that would apply to these two restrictions. In other words, as long as you didn't actually make the loan, you are not responsible if it later turns out that these new standards were violated, that, for example, the borrower is a senior citizen on Social Security and that the loan was unaffordable or purposeless from the beginning.
This makes no sense. It is my experience that the original lender is NEVER the entity that is foreclosing, and is often out of business at the time the abusive quality of the loan is discovered. To be meaningful, any lending standards applied to the front end of a loan must be enforceable against subsequent holders of the loan, particularly when the homeowner is being threatened with a foreclosure. Given that it is precisely the secondary market that has driven the demand for the abusive loans now going bad, it is unconscionable that this very market would be protected from irresponsible and destructive lending practices.
2) The mortgage industry itself is using this bill a vehicle to provide Wall Street and investors pre-emption against the state laws that have, in the absence of Congressional action during all these years, provided the only legal protection against predatory lending.
Currently, the Frank bill not only insulates the secondary market from the new ability-to-pay and net-tangible-benefit standards, but also, amazingly, pre-empts any state law that currently provides such protections as against secondary holders. Many states, such as North Carolina and New Jersey, have passed laws providing protections in those areas. The industry is now trying to crush those laws. Here in Pennsylvania, the Banking Department has announced a new regulation that would prohibit mortgage lending that occurs without verified evidence of the borrower's ability to repay the loan. This is the first state effort to address the problem since the legislature pre-empted a strong, Philadelphia anti-predatory city ordinance in June 2001. This important first step will hopefully remove from Pennsylvania the scourge of the so-called "no-doc" loans where income is fabricated on a loan application the broker or lender gets the borrower to sign at the closing table. My hope has been that this new regulation would create a foreclosure defense in those circumstances where that occurs. If the Frank bill passes, however, that defense may be pre-empted-at least that's what the foreclosure firms will argue.
Insulating the secondary market is the wrong thing to do. And at the very least, more expansive protections at the state level should be encouraged, not destroyed. While the GOP Congress spent years ignoring the issue, advocates and activists worked hard all over the Country to tackle predatory lending. The irony of a Democratic Congress now pre-empting our efforts is a bitter bill to swallow. Please help us insist that there is no federal preemption of our laws. If this kind of preemption is the quid pro quo for a federal bill, then I say, to hell with a federal bill.
I will check in periodically to see if I can answer any questions that you might have.