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Two years ago, Carmen Quintana, a 60-year-old widow who lives in the Bronx, decided to take out a home equity loan for $1,000 to help catch up on a few debts. Unfortunately, she knocked on the wrong door for help. Quintana went to the local office of Household Finance Corp., which unbeknownst to her was a notorious predatory lender. The loan officer told Quintana that they would issue the loan only if she consolidated her debts, turning her initial $1,000 request into a $23,187 loan. The officer also told her she needed Credit Life and Credit Disability Insurance, financed over a 15-year term. All told, the interest rate on the loan worked out to 25 percent. Household Finance has since paid a steep price for its unlawful tactics. In October, it agreed to pay a record $484 million to settle predatory lending charges brought by New York Attorney General Eliot Spitzer and 19 other state attorneys general. But the settlement has not helped Quintana. After two years of paying $477 a month without making even a dent in the principle owed, Quintana, seeing no other choice, sold her home of 20 years to pay off the debt. “They tricked me,” she said. Stories like Quintana’s are being heard with depressing frequency, spurred by the rapid expansion of the subprime mortgage lending market, which has quadrupled in recent years. Subprime lenders provide high interest rate loans to borrowers with bad credit or limited income, many of whom are minorities or seniors. The market has proved a prime breeding ground for unscrupulous lenders who prey on people like Quintana who are typically unsophisticated in financial matters. Next week, though, Quintana and others like her forced into dire financial straits by these scam artists may finally get some relief, when the state’s first predatory lending law will take effect. New York is the fourth state to pass such a law, following North Carolina, California and Georgia. About 25 other states have introduced or are considering similar bills. A number of cities, including New York, Los Angeles and Chicago, have passed predatory lending ordinances as well. Many of the laws restrict the terms of high-cost loans, which typically feature both high fees and interest rates, and subject lenders who violate the rules to liability. New York and Georgia are unique in that their laws put on the hook not only the lenders, but the Wall Street firms that trade these loans as well. New York’s new law covers loans with closing costs greater than 5 percent of the total loan or interest rates greater than 8 percent over the prevailing Treasury bond rate. The state law will capture much more of the market than did the federal law, the 1994 Home Ownership Equity Protection Act, or HOEPA, which covers loans with 8 percent or more in points and fees. Since its enactment, HOEPA’s limited purview has shrunk even further, because most lenders no longer even offer the loans covered by the act. Brokers and lenders who sell these high-cost loans to New Yorkers will be subject to a laundry list of banned practices. For example, they may no longer finance more than 3 percent of the borrower’s closing costs over the course of the loan or include balloon payments less than 15 years out. ASSIGNEE LIABILITY But the heart of the new law — and what has the investment community up in arms is a provision permitting borrowers to sue assignees, typically big investment firms who buy the loans and consolidate them in mortgage pools for sale in the secondary market. The industry is backed by a powerful group of Washington lawmakers who recently introduced a bill that would pre-empt state and local laws with what consumer advocates say is an even weaker federal law than what is already in place. Consumer groups say assignee liability is critical in the fight against predatory lending because many of the loan originators are shady individuals who flip the loans and disappear. They also point out that, under the New York law, assignee liability is limited to instances in which the borrower faces foreclosure and the damages are capped at the amount the borrower is being sued for. But the investment community frets that the law is unclear on assignee liability. By including incidental and consequential damages, which “could be anything, since they are open to the court’s discretion, you might as well take the cap off,” said Michael Williams, vice president for legislative affairs for the Bond Market Association, a Washington, D.C.-based trade group. Williams said the law would not curb predatory lending, but to the contrary, would lead to a host of other problems, including a drying up of credit available to subprime borrowers. He said that if investors pull out of the secondary market, the money available for subprime lenders would shrink. As a result, subprime borrowers, who generally do not qualify for standard loans, could suffer. William Farris, a lobbyist with AARP, a consumer group for seniors that played a leading role in the New York initiative, said that the scenario described by Williams was unlikely. He cited a Morgan Stanley survey last summer that found that tougher laws and revised lending practices were not crimping growth. “To our surprise, we found no evidence to support the view that regulatory pressure, the threat of legal action or changes to lending practices have dampened growth prospects,” the report concludes. “The law without assignee liability is not a bill because at the end of the day, if you cannot raise a claim against the person holding the note, you have no defense,” he said. Joshua Zinner, coordinator of the Foreclosure Prevention Project at South Brooklyn Legal Services, concurred. “The industry is just trying to create alarm bells around assignee liability,” he said. GEORGIA LAW REVISED The issue is critical to the success of the New York law. Georgia’s predatory lending law, which went into effect on Oct. 1, had to be hastily amended because the rating agencies refused to rate the creditworthiness of Georgia’s mortgage pools, saying they were too risky. The rating firms said the unlimited punitive damages the law provided for created too much uncertainty to place a value on the securities. Since many institutional investors will not trade unrated securities, the action of the rating agencies threatened the secondary market in Georgia loans, and in turn the credit available to subprime mortgagors. Faced with the prospect of a shrunken subprime market and the exodus of subprime lenders from the state, Georgia legislators rewrote the law to cap punitive damages. The rating agencies have since announced that they will resume rating the mortgage pools. The rating agencies have yet to announce whether they will continue to rate New York mortgage pools after its law goes into effect, but consumer advocates did not seem overly concerned. “Based on the position they took in Georgia, they should be able to rate the mortgages,” Zinner said. New York City’s predatory lending ordinance, which the City Council passed in November, also faces opposition, although from a different front. Under the ordinance, which was supposed to take effect in February, the city would not be allowed to do business with any lender, bank or underwriter of mortgage-backed securities that violates the high-cost loan provision. Enactment of the ordinance, however, has been pushed back pending an April 8 hearing in a lawsuit filed by Mayor Michael Bloomberg. He claims the City Council lacks the authority to direct the city in its business dealings and is pre-empted by state law in any event. Industry members were cheered by the mayor’s intervention. “We’re pleased with the mayor’s lawsuit,” said Zahra Jafri, president of the New York Mortgage Brokers Association, which is submitting an amicus brief in his support. “We were hearing that lenders would pull out of New York City.” But consumer groups had a different take. “We’re a little disappointed,” said Don Baylor, legislative director for New York Association of Community Organizations for Reform Now, or ACORN. “We were expecting a lawsuit but not by the mayor.” THREAT FROM WASHINGTON State and local predatory lending laws are also facing a threat from Washington, in the form of a bill sponsored by U.S. Rep. Bob Ney, R-Ohio, who is also the driving force behind the “freedom fries” name change in the House cafeteria. Ney’s bill, called the Responsible Lending Act, would pre-empt the growing numbers of state and local laws, putting in place an amended HOEPA, which he claims is tougher on predatory lenders than the older federal law. Industry lawyers support the federal initiative, saying it will relieve the administrative nightmare created by the patchwork of local rules. “You see this balkanization of regulation in which lenders are required to deal not only with 50 different state laws but also local rules,” said a partner in a law firm in Washington who asked not to be identified. “The cost of compliance is getting to the point where it is just not tenable.” Margot Saunders, managing attorney of the Washington office of the National Consumer Law Center, countered that the investment community has been coping with state and local laws for years. “They liked it so long as the state laws didn’t hamper them,” she said. But with the advent of the predatory lending laws, “all of a sudden, they are complaining about it,” she said. Saunders also disputed that the Ney bill would give HOEPA more teeth. “It’s a wolf in sheep’s clothing,” she said. “It purports to lower the HOEPA thresholds but it includes so many exceptions, it ends up covering even fewer loans than the existing law.” While the New York law is indisputably an enormous victory for the consumer groups combating predatory lending, the fight is far from over. “It’s the old ‘Tin Men’ movie,” said the Washington partner, referring to the film in which Richard Dreyfuss and Danny DeVito play rival aluminum siding salesmen who use sleazy sales tactics. “That’s the kind of behavior people think of, and undoubtedly there’s some truth to that,” he said. “The question is how big a problem is it and are these laws going beyond the problem to create problems of their own.”

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