Bills Target Predatory Lending
GRAND RAPIDS — House Democrats recently introduced a package of bills designed to purge predatory lending practices from the subprime mortgage market, as well as provide Michigan consumers with more protections as the subprime market continues to implode.
The proposed Michigan Home Loan Protection Act would ban predatory lending practices, such as making loans without requiring that borrowers prove their ability to repay the loan. The law would prohibit lenders from charging excessive late fees and from charging fees for a payoff statement. It would prohibit the financing of any points and fees that hide the true costs of the loan, as well as prepayment penalties. Furthermore, the legislation would: require “vulnerable” borrowers to receive independent counseling; protect homeowners’ equity by prohibiting home refinancing unless there is a tangible net benefit to the borrower; protect consumers from being steered toward high-cost loans when they actually qualify for a traditional loan; and give injured and aggrieved homeowners legal recourse.
The question is, can those types of activities actually be policed and enforced? Eric Burgoon, LaSalle Bank Group senior vice president of the retail mortgage division in Grand Rapids said enforcement would be almost impossible. And putting laws on the books that can’t be enforced just lets the bad guys keep on doing what they’re doing, he said.
“If somebody is unethical and doesn’t follow the rules, this type of legislation is not going to make them change their ways,” Burgoon explained.
The government can legislate certain things and prevent honest people from doing bad things, but there are still going to be people who do things they shouldn’t, concurred Keith Avery, a loan officer with Clark Financial Group LLC in Grand Rapids and a member of the National Association of Responsible Loan Officers.
Michigan wouldn’t be the first state to pass legislation of this sort. When Georgia and Maryland introduced similar anti-predatory legislation a few years ago, large national banks and mortgage lending outfits simply ceased doing business there, Avery recalled. He thinks the same would happen here. When mortgage lenders leave an area, there are fewer mortgage product options and consumers end up paying more for the same thing, Burgoon added.
“In general, I think what’s being proposed here is not good for the consumer because we’ve seen what has happened in other states when the ability to do certain types of mortgages is restricted and product offerings are restricted,” Burgoon remarked.
Michigan already has a couple of laws that were designed to help minimize predatory lending, but they have no teeth because there’s no enforcement action on them. Too, the federal Truth in Lending Act is on the books but not enforced by either state or federal governments, Avery noted. There are misleading ads for mortgages in the newspapers, on TV and the Internet every day, even though they are in violation of the law.
“If they enforced Truth in Lending laws, they could cut down on a lot of problems because it prevents people from advertising untruthful or misleading information,” Avery said. Basically, a predatory lender would have to get caught and turned in for the law to be enforced.
Lead sponsor of the bills, state Rep. Marc Corriveau, D-Northville, said the state can prevent more residents from losing their homes by holding lenders accountable.
“Foreclosures are taking a toll on our communities and our economy in Michigan,” Corriveau stated. “Setting basic standards for home lenders will help reverse the skyrocketing rate of foreclosures in Wayne County and across Michigan.”
Also a supporter of the Michigan Home Loan Act, state Rep. Mary Valentine, D-Norton Shores, said the idea is to prohibit certain actions on the part of lenders so they can’t take advantage of consumers. She believes “there has to be something on the books” to protect people from predatory lending practices.
“Michigan’s hard-working families dream of owning their own home and will stop at nothing to achieve that goal,” Valentine said. “Unfortunately, there is an epidemic of unethical predatory mortgage lending going on that has devastated the lives of too many of our homeowners.”
Burgoon said he wouldn’t refer to predatory lending activity as an “epidemic,” but as an industry issue that has been around for years. In recent press releases, both Valentine and Corriveau seem to link Michigan’s high foreclosure rate to predatory lending. The biggest factor in foreclosures has been the general economy, in Burgoon’s estimation. He said when people undergo a life-changing event, such as losing a job, they can easily lapse into mortgage delinquency. He believes that to a lesser extent, some very aggressive, very creative, low-down-payment mortgage products have contributed to consumers’ woes.
Gail Madziar, vice president of communications for the Michigan Bankers Association, stressed that predatory and subprime loans are not synonymous. Subprime loans exist for borrowers who don’t have stellar credit and don’t qualify for a less expensive prime loan because of their credit risk. Without the sub-prime market, many people with less-than-perfect credit would never be able to own a home. Typically, coercive, unfair or deceptive terms and conditions distinguish predatory lending from sub-prime lending. If it sounds too good to be true, Madziar said, it probably is.
“Eighty-five percent of subprime loans are good; we’re just talking about a small percentage that turn out to be unsuccessful,” Madziar explained. “The predatory market is a whole separate issue and one we’d definitely like to see taken care of.”
She noted that bank mortgage lending activities are highly regulated and routinely examined every 12 to 18 months by state and local government officials who look at the safety and soundness of all the bank’s portfolios. According to Madziar, banks don’t engage in predatory lending. Banks try to establish relationships with mortgage customers in hopes of attracting further business from those customers, so they strive for a successful mortgage relationship, she said. A predatory lender, on the other hand, would be more likely to make a loan, take the fees and be gone. A predatory lender isn’t concerned about servicing consumers and what’s going to happen to their loans two years down the road, she added.
Many consumers have added to the problem by making poor, uninformed financial decisions. But can laws help consumers make wiser choices? Madziar said she doesn’t know if laws can regulate education and understanding, but that education is the key.
“Financial literacy is the No. 1 thing above all other things that will help stop predatory lending,” Madziar said. “When people are educated and understand exactly what their mortgage lender is offering them and what they’re being promised, they’re much less likely to get into a problem down the road.”
One thing the lending industry can do a better job of is making clear and fully understandable disclosures, Burgoon suggested.
“If there was a way to simplify the loan process and make it more understandable to the average consumers, I think there could be some improvement made.”