Industry Hits Back on Lending Abuse Laws: State Rules Drive Countrywide out of N.C. Subprime Market

By Bergquist, Erick | American Banker, January 26, 2001 | Go to article overview

Industry Hits Back on Lending Abuse Laws: State Rules Drive Countrywide out of N.C. Subprime Market


Bergquist, Erick, American Banker


Countrywide Credit Industries Inc. this month quietly pulled its subprime operations out of North Carolina, citing draconian restrictions in the state's law against predatory lending enacted last year.

The law "makes it prohibitive for someone to originate subprime loans," said Countrywide's managing director of loan origination, Greg Lumsden. "If we were to comply, there's no way we could make any money."

The development underlines the growing concern among lenders and financial services companies, some of which are mobilizing to stem a flood of local and state predatory lending legislation that could severely damage their subprime lending business.

To address the issue, the Mortgage Bankers Association on Thursday summoned eight top national lenders -- including Citigroup, Wells Fargo Home Mortgage, Bank of America, and Countrywide -- and 20 of the largest state mortgage banking associations to a little-publicized meeting in Dallas to develop a unified battle plan.

"This patchwork of local mortgage laws threatens to Balkanize the mortgage finance system," said Howard Glaser, head of government affairs for the MBA. "The subprime industry in particular would be disadvantaged by these prohibitions on products and services that can be offered to consumers who would otherwise be locked out" of a loan.

The coordinated effort also exposes a heightened anxiety in the banking industry in general over how to deal with an issue that has quickly become a public relations nightmare.

Though community and consumer activists have been tackling the issue for years, predatory lending burst onto the national scene only last year when Congress and the media began to pay attention.

The publicity proved effective for the activists' cause but has put lenders in a tough spot: Who, one might ask, would support predatory lending? Yet many lenders contend that they must be allowed to price their products for risk, a business practice they say has been confused with predatory lending.

Activists say the current spate of initiatives is the result of a failure by Congress to act. "The local ordinances are filling the void that Congress has created," said Bruce Marks, chief executive officer of the Neighborhood Assistance Corp. of America in Boston.

Josh Zinner, coordinator of the Foreclosure Prevention Project for Seniors at South Brooklyn Legal Services, said lenders have been getting a free ride. The high-cost loan business has gone unregulated on the state and local level for years, he said, and existing laws are not strong enough. The only way to prevent predatory practices is to create tougher legislation, he said.

Mr. Glaser countered that the measures are well-intentioned but misguided, motivated by local political pressures -- not by a lack of congressional attention. When city councils and mayors read newspaper headlines blaring about senior citizens losing their homes to predatory lenders, he said, they feel compelled to do something.

The resulting laws, however, are too restrictive and outlaw loans that help many lower-income borrowers buy a home, said E. Robert Levy, general counsel of the New Jersey Mortgage Bankers Association.

North Carolina's Prohibit Predatory Lending Act, which took effect in July, is designed to prevent a host of predatory lending practices, such as loan-flipping, balloon payments, the charging of excessive points and fees, and up-front financing of fees and insurance. …

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