A new study by a North Carolina consumer advocacy organization says that state laws designed to block "predatory" lending -- including one in New York -- are successfully preventing abuses while still keeping credit available to those who need it.
The Durham-based Center for Responsible Lending (CRL) reported Thursday that states with the strongest laws against harmful practices have had the largest declines in loans with so-called predatory terms in recent years.
In many of the 28 states with some form of law, predatory loans dropped by almost one-third, the group said. The states with the strongest laws include Massachusetts, New Jersey, New Mexico, New York, North Carolina and West Virginia. Massachusetts had 600 fewer abusive loans a month as a result of its law.
At the same time, contrary to dire warnings from lenders before the laws were passed, the new restrictions have not caused a drop in the number of "subprime" loans available, the report says. Instead, the market in 26 states, including New York, stayed even or outpaced states with no protections.
And borrowers in states with the anti-predatory lending laws pay about the same or even lower interest rates for subprime mortgages -- even though legislative reforms mostly target fees and other terms, not the rates. In fact, in both New York and Massachusetts, borrowers with a $200,000 mortgage can save up to $3,000 over the first three years, according to the CRL.
Subprime refers to legal, legitimate loans to borrowers with bad or no credit records, who can't qualify for traditional "prime" loans and have no other access to credit. Not all subprime loans are predatory, but all predatory loans are generally an extreme form of subprime lending that the CRL estimates cost homeowners at least $9 billion a year.
Abusive practices can include excessive rates and fees, prepayment penalties, "balloon" payments, and costly credit insurance that can burden borrowers with loans they can't afford. As a result, the borrowers end up paying far more than their homes are worth or lose them in foreclosure.
"Predatory lending is a cancer that should be wiped out," said Keith Ernst, the CRL's senior policy counsel and co-author of the report. "We've reached a new stage in the debate over predatory lending laws. It's clear that state laws improve substantially on federal law and protect people who would otherwise be in danger of losing thousands of dollars -- or even their homes."
New York's law, which took effect in April 2003, covers all mortgages, includes protections against excessive points and fees, restricts prepayment penalties, has other high-cost loan protections, and provides remedies for homeowners. It does little to prohibit "flipping," or harmful refinancing with no benefit to the borrower. "New York is definitely in the top tier of laws," Ernst said.
But the group and its backers in various states also claimed that ongoing efforts by the industry and Congress to establish a national law against predatory lending could wipe out the gains in states.
Several bills are pending in Congress, led by a bipartisan bill sponsored by Reps. Bob Ney of Ohio and Paul Kanjorski of Pennsylvania, that would "pre-empt" or supersede any of the state laws. Activists, politicians, and attorneys general in those states are outraged by such proposals, saying they wouldn't protect consumers as well as the local laws.
"Congressional proposals that would roll back state laws are headed in the wrong direction," Ernst said. "Our findings suggest that Congress should adopt the strongest state provisions and allow states to tailor other provisions to fit their individual needs."