Beatrice Fee lost her restaurant and house after Spartan Home Loan duped her into a mortgage that cost her $85,000 to borrow $152,000 for three years, without reducing her principal. "This was not a loan company," said the 66-year-old resident of Marysville, a town north of Sacramento. "This was a loan shark."
Alma Valdez and Juan Arreola, the parents of three teenage boys, lost their home and life savings after a cunning lender called them one night and persuaded them to refinance their $140,000 mortgage. Valdez said the deal cost them nearly $10,000 in fees, allowed their interest rate to mushroom to 17% and forced them to skimp on food. "The kids just say, 'Eggs again, eggs again.' "
Countless stories like these persuaded California legislators to pass a law in 2001 to rein in predatory lending by, among other things, restricting lenders' ability to offer high-cost loans that obviously exceed a borrower's ability to pay. The law was one of about 100 similar state and local ordinances passed in the last four years.
California's law is too new for its success to be documented, but a study of North Carolina's 1999 anti-predatory lending law by the Center for Responsible Lending, a nonprofit advocacy group, found that the law saved borrowers $100 million in 2000. By and large, state and local laws offer much tighter consumer protections than those in a federal bill that proposes to strike those measures down. The bill's author, Rep. Robert W. Ney (R-Ohio), says he introduced HR 833 because the laws were a crazy quilt of conflicting regulations that discouraged lenders from serving high-risk clients. However, the North Carolina study concluded that low-income homeowners still had ample access to credit.
Ney says his bill would increase consumer protections by tightening federal curbs on high loan fees. The fine print, however, would open up new loopholes. For example, the legislation would allow lenders to avoid listing as loan costs some commissions paid by borrowers to brokers. Worse, the bill would limit lenders' liability more than current federal law. The measure, according to Margot Saunders, an attorney with the National Consumer Law Center in Washington, would preempt state and local laws "without advancing consumer rights in any way." There is nothing intrinsically wrong with having federal legislation in this matter, but it ought to substantially help consumers.
Legislators can't require that people pay more attention to the fine print in a mortgage deal. However, the state and local ordinances have clearly helped thousands of low-income homeowners avoid being trapped in deals with huge hidden costs.