WASHINGTON – Sen. Paul Sarbanes, D-Baltimore, introduced legislation Wednesday aimed at stopping “predatory” mortgage lending to low-income homeowners.
The “Predatory Lending Consumer Act” is needed, Sarbanes said, to counter growing evidence that homeowners with low incomes or poor credit history are being targeted with loans that have hidden fees and frequent refinancing. Both practices can crush the borrower with debt and often force the property into foreclosure.
“Predatory lending plays on hopes and dreams of home ownership to cheat people of their wealth,” said Sarbanes, the ranking Democrat on the Senate Banking, Housing and Urban Affairs Committee.
“In my mind, nothing can be more cynical.”
The bill aims to protect consumers by strengthening and extending restrictions on loans where the interest is below the prime rate. Rep. John LaFalce, D-N.Y., the ranking Democrat on the House Banking and Financial Services Committee, introduced the bill into the House. He said he is hoping to prevent lenders from underwriting property without regard to a borrower’s ability to repay the loan.
“This type of lending strips people of their property,” LaFalce said. “It has reached epidemic proportions.”
According to Sarbanes, “predatory” lending occurs when a lender profits by attaching premiums for products like credit life insurance and credit unemployment insurance into the loan’s total amount.
When the borrower has trouble with the increased payments, refinancing is offered, but not without prepayment penalties. By the time the refinancing occurs, the lender has made substantial money, while the homeowner stands to lose home equity or even their property.
The bill would attempt to end such practices by amending the 1994 Home Ownership and Equity Protection Act to lower the interest rate on high-cost mortgage refinancing, and restrict the financing of fees and points, payment penalties, single premium credit insurance and balloon payments.
Sarbanes said the bill would not restrict lower-income families’ access to credit, and is designed to benefit both lenders and borrowers.
“This legislation will keep credit available,” Sarbanes said. “The bill allows lenders to recover the costs of making their loans, while leaving the door open to borrowers to repair their credit and move to lower cost loans.”
Both lawmakers said they are hopeful for quick action on the bill, which also has support from Housing and Urban Development Secretary Andrew Cuomo, numerous consumer action organizations and civil rights groups.
“Right now we’re opening the issue up and laying out the horizon,” Sarbanes said. “We need to bring together a broad coalition and make them understand how important this legislation is.”