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Georgia lending law now toothless

February 28, 2003

New York may be next to crack down on predatory lenders

By Susan Romero
Inman News Freatures

Lenders have knocked the teeth out of Georgia's anti-predatory lending law, which for a few months was the toughest of any state in the nation.

The Georgia Fair Lending Act was based in part on model legislation drafted by AARP, which took an interest in the issue because 80 percent of seniors own their own homes and equity-rich elderly homeowners can be a preferred target for unethical lenders.

AARP in April 2001 kicked off a multiyear anti-predatory lending initiative that includes consumer education, legislative and regulatory reform advocacy at the federal and state levels and litigation on behalf of homeowners who AARP believes were injured by predatory lending practices.

Georgia in October 2002 enacted the toughest version of AARP's model state anti-predatory lending legislation. But Standard & Poor's dashed AARP's initiative onto the rocks three months later when it announced it no longer would rate mortgage-backed securities subject to Georgia law. S&P took that step because the law included an assignee liability clause that permits homeowners allegedly hurt by predatory lending practices to sue their lender or whoever purchased their loan, including holders of mortgage-backed securities.

Predatory lenders use unethical, illegal or unduly aggressive tactics to sell mortgage and home equity loans with inflated interest rates and fees to minorities, the poor and people with substandard credit.

S&P Assistant General Counsel Natalie Abrams called the assignee liability clause in Georgia's new law "draconian." She said the agency stopped rating securities subject to the law to protect investors who make investment decisions based in part on S&P's opinions.

"The liability under the Georgia Act transfers to whoever holds that loan--whoever touches that loan could, might potentially be liable. Therefore the issuer of the securities that S&P is rating might potentially be liable," she said.

S&P's decision triggered a flood of anti-GFLA sentiment from the financial industry, which argued that no one would buy Georgia loans and lending would evaporate in the state.

One federal agency said federal law preempts state law for federal savings associations and their operating subsidiaries. Another agency opened a 30-day public comment period on whether a federal preemption order should be issued for national banks operating in Georgia.

Countrywide so far is the largest lender that has ceased writing subprime loans in the state.

Kathy Floyd, advocacy director for AARP's Georgia division, disputes claims that banks have left the state. She said no one in the financial service sector has yet provided a substantial list of lenders no longer doing business in the state.

Meanwhile the state has ordered the two sides to negotiate a compromise.

"The governor and the speaker of the House have both said they want this solved by the end of (this) week," said Floyd.

AARP has endorsed state legislation that would amend the GFLA. The concessions in SB 53 would substantially weaken the new law and pull out the assignee liability clause's teeth by capping damages at the amount of the loan, getting rid of punitive damages awards and eliminating the potential for borrowers to engage in class-action lawsuits against mortgage-backed security holders.

"It is a definite compromise. (SB 53) addresses three issues, the assignee liability issue, it exempts Federal Housing Authority and Veterans Administration loans from the points and fees calculation, and it gives state institutions preemption if federal institutions are preempted. The banks got exactly what they wanted," said Floyd.

Another bill HB 142 also aims to limit the GFLA. Floyd said it's a workaround that lenders have been tinkering with since the GFLA became law.

"I am very worried that we are going to go from having the strongest legislation in the country to having a very weak statute. We're afraid that we're going to be back down here next year with another group of homeowners who have lost or are about to lose their home," said Floyd.

Georgia isn't the only state where the AARP model legislation has progressed and come under fire.

New York in October passed tough anti-predatory legislation drafted by AARP and New Yorkers for Responsible Lending. The law is expected to be effective in May.

The law includes an assignee liability clause on "high-cost" loans on which points and fees exceed 5 percent of the loan amount. Bill Ferris, state legislature representative for AARP in New York, said he is confident the bill won't be stripped down like Georgia's.

"The Georgia bill is very different from the New York bill. On its face, (the New York bill) has a lot of the same prohibitions, but the Georgia bill covers more of the mortgage loan market than does the New York bill," he said.

The New York state law prohibits financing unnecessary insurance products, limits use of balloon payments, curtails financing "excessive" points and fees, outlaws loan flipping, provides borrowers with a defense against foreclosure if the loan was made in violation of the law and holds institutions that finance predatory loans liable, according to an AARP statement.

Monday S&P announced it will continue to rate structured finance transactions that include mortgage loans originated under a New York City local anti-predatory law that became effective last week. Ferris said he believes the local law is as strong as the state law and therefore he doesn't foresee issues with ratings agencies.

"We see no need to change (the law). It protects (New Yorkers') pocketbooks by stopping the gouge in the subprime market, " he said.

But New York City Mayor Michael Bloomberg yesterday ordered a preliminary injunction to stall implementation of the city's anti-predatory lending law, which the city council passed in October. A hearing on the issue will be held April 8.

Bloomberg said the city council lacks the authority to determine which mortgage companies can do business in the state, according to news reports.

Copyright: Inman News Service



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