Predatory Lending Issue Puts Subprime Lenders in a Bind

Article excerpt

Subprime lenders and their lawyers and lobbyists are in an awkward position. They worry that the current uproar over reports of alleged abusive lending practices will lead to onerous legislation. But they also worry that advocating caution will make them look like apologists for exploitative lending.

"Predatory lending is this year's privacy issue," said Larry Platt, a law partner at Kirkpatrick & Lockhart in Washington. "It's the issue that's hard to oppose, and all the federal and state agencies want to be seen as the protectors of the consumers."

Predatory lending has become the focus of three bills in Congress, a joint task force between the Departments of the Treasury and Housing and Urban Development, and numerous investigative articles in the media. Observers like Mr. Platt fear that regulation passed in the current environment will result in bad public policy.

"These are complex issues and it's important that we not create a regulatory posse that wants to hang private enterprise before a well-thought-out review of the issue," he said.

The predatory-lending debate is a classic example of the collision between public and private goals. Few would disagree that homeownership should be available to every American, but lenders say that their attempts to realize that goal while still delivering profits to their shareholders can hurt their public image.

While bringing capital to people who cannot get it represents a public good, banks and lending institutions, as businesses, must be allowed to price for risk, said David O. Beim, a professor at Columbia Business School.

Mr. Beim said mortgage lending represents a "morally ambiguous" area where government and private enterprise have come together for similar yet disparate goals.

"It's hard to distinguish between the bank that lends to foreclose and the bank that is simply trying to make more credit available under the Community Reinvestment Act," Mr. Beim said.

"Can government on one hand force banks to lend to riskier borrowers but then say they can't do it in predatory ways? Are Junk Bonds predatory? …