The measures are aimed at barring mortgage lenders from issuing loans loaded with provisions that take unfair advantage of poor and elderly people with weak credit ratings--provisions not usually applied to borrowers with strong credit ratings. Legislators in the states and localities that have passed the laws say they have been driven to act in light of skyrocketing rates of foreclosures against inner-city properties--an indication that lenders, including units of well-known financial companies, are routinely making loans that they know borrowers cannot afford.
Most of the recent legislation establishes a definition of high-cost loans and then prohibits using certain provisions in conjunction with high-cost credit. The ordinance passed by the Oakland City Council in July, for instance, places sharp restrictions on prepayment penalties and specifies that borrowers can seek injunctions against lenders that violate the measure. Dayton's ordinance prohibits "high-cost" loans with large final payments without written and oral warnings to borrowers but sets a relatively high threshold in defining high cost-- loans with interest rates 9 percentage points or more over the rate on Treasury securities of the same length.
Meanwhile, California legislators and Sacramento city officials are among those considering proposals on the same issue.
Although the laws aim to protect poor people who are refinancing personal debt, it is not clear how effective or successful local predatory-loan ordinances will be. Industry representatives claim the laws won't stop fraudulent loan originators from duping unsophisticated borrowers into inappropriate contracts. Instead, they suggest that legitimate lenders in the so-called subprime market are likely to curtail their business if deprived of the means to mitigate the risks they take. And that will harm inner-city residents. "Those who were just recently able to get into the credit markets will be limited once again as lenders become exceedingly cautious about getting too close to the lines," says Jeffrey Zeltzer, executive director of the National Home Equity Mortgage Association. "Otherwise- qualified deserving borrowers will lose credit."
There are legal problems as well. A financial industry group sued to block an ordinance adopted in Philadelphia in May; the Pennsylvania legislature then stopped implementation of it with a law of its own in June that bars localities from regulating financial institutions. Other suits are expected in other jurisdictions.
Even if the predatory-loan measures stand up in court, most advocates of local action say curbing predatory practices really is a job for Congress. "It would be better at the national level," says Councilwoman Marian B. Tasco, sponsor of the Philadelphia ordinance, widely viewed as the strongest measure passed. "Then it's uniform, across the board and across the country."
Although prospects for federal legislation have improved somewhat as Congress held hearings on the topic this summer, the issue still has less resonance in Washington than in city halls and state capitols.
