Strong Compliance Systems Support Profitable Lending While Reducing Predatory Practices
WASHINGTON, D.C. -- When national mortgage finance companies claim that state laws clamping down on predatory lenders will cost borrowers a lot of money, don't believe them.
In a report released today, the Center for Responsible Lending estimates that the cost of complying with state predatory lending laws is about one dollar per mortgage. Compared to the $9.1 billion that predatory mortgage lending costs homeowners every year, the cost of weeding out abusive loans may be one of the best bargains in today's housing market.
Predatory mortgage lending strips hard-earned wealth from working-class families and leads to foreclosures that devastate neighborhoods. Since 1999, approximately 24 states have enacted laws to prevent predatory lending. (For a list of those states, see the attached table.) Many more states already have consumer protection laws on the books to ensure that borrowers don't lose their home to abusive practices. Some lenders want to gut these state anti-predatory lending laws and impose one weak federal standard.
The lenders claim they can't comply with multiple state laws, and imposing tough laws on predatory lending makes it more expensive to do business and hence makes mortgages more costly. The National Home Equity Mortgage Association, a lobbying group, claimed recently that an "uneven patchwork" of state laws "drives up costs." The lenders also claim strong state laws reduce the availability of credit. The Center's report refutes those claims.
As computer programs grow more sophisticated, assessing the risk of subprime mortgages has become faster and cheaper. Similarly, automated systems make compliance fast and affordable. The CRL report points out that strong compliance programs help lenders avoid foreclosure costs while boosting confidence among investors and customers.
Among other findings in the report:
- Since North Carolina became the first state to enact a predatory lending law in 1999, the subprime mortgage market nationally has tripled to $529 billion a year.
- States with predatory lending laws have had stronger growth than states without such laws: Between 2000 and 2003, subprime mortgage lending grew by 293 percent in states that have passed predatory lending laws, compared to 212 percent in states without anti-predatory lending laws. (See attached table.)
- Strong predatory lending laws boost profits because they prevent time-consuming, expensive foreclosures. Last year, every loan that foreclosed cost lenders, on average, more than $20,000.
Concerns about predatory lending in the subprime market and resulting foreclosures have prompted the Center for Responsible Lending, along with other prominent civil rights and consumer groups, to oppose H.R. 1295, the Ney-Kanjorski bill, legislation introduced in the U.S. House of Representatives and supported by the subprime industry. The proposal would preempt the ability of states to regulate mortgages at all, and fails to provide meaningful protections against predatory lending. Instead, it excludes many predatory practices from protection and includes loopholes that will make it easy for predatory lenders to avoid coverage.
As an alternative, the Center supports a bill sponsored by North Carolina Representatives Brad Miller and Mel Watt and Massachusetts Representative Barney Frank (H.R. 1182), which follows effective state laws as a model, providing a strong federal standard against predatory lending. Miller-Watt-Frank also lets the states –- often better and faster at combating new abuses –- enact their own laws in order to protect their citizens.
"It is clear that strong state laws against predatory lending laws are working," said Debbie Goldstein, Executive Vice President of the Center for Responsible Lending. "Subprime lenders continue to thrive in those states. And while some lenders operate nationally, housing is local. The effect of predatory lending is devastating to communities. One dollar per loan is a small price to pay for saving homeowners $9.1 billion annually. 
Note: Loan volume based on Home Mortgage Disclosure Act (HMDA) data. Subprime loans defined as any loan reported to federal regulators under HMDA as originated by a subprime lender identified by the U.S. Department of Housing and Urban Development for the year in which the loan was reported. For more detailed notes on this data, please refer to the full report.
Contact: Michael Flagg at 202-349-1862 or mike.flagg@responsiblelending.org