N.Y. Subprime Ruling Good for Borrowers and Lenders

Article excerpt

Earlier this week a New York State court struck down a local law regulating subprime mortgage lending in a decision that should cause the financial community to breathe a sigh of relief.

In November 2002 the New York City Council passed (over Mayor Bloomberg's veto) a law prohibiting any entity engaging in "predatory lending" from doing business with the city.

This sounds like a reasonable proposition, but the devil was in the details. Local Law 36 defined predatory lending to include practices that are completely legal under state and federal law, including a New York State law passed that year. Furthermore, the local law defined predatory lenders to include entities far removed from any mortgage lending, such as affiliates and purchasers of securitized mortgages.

By setting standards that went well beyond federal and state law, Local Law 36 would have forced financial institutions to either forfeit their ability to make some perfectly legal subprime mortgages (directly or through affiliates) or forfeit any opportunity to provide financial services to New York City.

If financial institutions chose to continue offering all legal subprime mortgages, the city would have fewer such institutions with which it could do business. If financial institutions chose to continue doing business with the city, consumers with poor credit would have fewer institutions from which they could obtain a mortgage. In other words, the law guaranteed that either the city or its citizens would have to obtain financial services in a smaller -- and likely less competitive and more expensive -- marketplace.

Moreover, the law tested an important legal principle: Can a city regulate financial institutions by claiming that it is merely regulating its own purchasing decisions? There could be little doubt that if New York could use its financial muscle to set new standards for mortgage loans, other cities would follow suit -- creating a patchwork quilt of local standards for national financial institutions to follow.

Mayor Bloomberg sued the council and the city comptroller over Local Law 36, arguing that it curtailed mayoral prerogatives over city purchasing decisions. The American Financial Services Association intervened as a co-plaintiff in order to demonstrate that the local law was preempted by state and federal banking law.

The AFSA explained in its pleadings that this case was not about whether predatory practices are wrong; it and its members strongly oppose such practices. …