RALEIGH - No act of the past decade has brought greater national attention and acclaim to North Carolina lawmakers than their groundbreaking efforts to attack predatory mortgage lending. The original 1999 reform legislation (which requires unbiased financial counseling before borrowers can be sold certain types of "high cost" loans) and its progeny have saved thousands of North Carolina families from the financial ruin and indignities that accompany losing one's home. The law has served as a model for several other states. A 2007 update targeting the subprime industry will help further.
Unfortunately, in a strange twist of politics, progressive members of Congress appear to be advancing legislation that would dramatically weaken the North Carolina law. At last report, it was unclear whether members of our congressional delegation could prevent this result.
The proposal in question is H.R. 3915 -- the "Mortgage Reform and Anti-Predatory Lending Act of 2007." The bill is co-sponsored by North Carolina Reps. Brad Miller and Mel Watt (and others) and is inspired by the state law. One of its chief objectives is to import some of the key consumer protection components of North Carolina law (including new and important rules for loan originators) into the federal statutes. Recently, members of the House Financial Services Committee gave initial approval to the measure.
As with most consumer protection laws in the highly complex world of mortgage lending, the key to producing success in the real world is good enforcement. Government can have all the laws in the world on the books, but if no law enforcement official or private attorney has the ability (or any incentive) to sue to enforce them, they are sure to have little or no impact. That's where opponents of H.R. 3915 weighed in recently.
Recognizing the popularity of mortgage lending reform, industry opponents opted not to launch a frontal attack on the bill. Instead, lenders succeeded in inserting language into the so-called "master amendment" to the bill that both "guts" the enforcement sections of the bill and pre-empts states such as North Carolina from enforcing significant portions of their pre-existing laws.
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THE ISSUE IS COMPLICATED, BUT IMPORTANT. Here's how it works in very basic terms:
When bad actors make predatory loans to borrowers, they rarely keep the loans to service themselves. Instead they sell them right away on the secondary market to another business that's often referred to as the assignee.
Under North Carolina law, borrowers retain the ability to sue assignees. In other words, the original predatory lenders cannot launder the loans by simply selling them. Similarly, big assignees who buy up lots of loans cannot avoid potential liability by claiming that they had nothing to do with the original violation.
The result of this simple rule is a powerful self-enforcement incentive. Because big assignees will be on the line for the sins of the original predators, they have a tremendous incentive to self-police.
Under the amendments to H.R. 3915, however, remedies for consumers against assignees are effectively nonexistent. This is especially true if the assignee is a "trust," since trusts would be completely exempt from liability in almost all circumstances.
Not only does the amendment eliminate liability for assignees under the proposed federal law, it pre-empts such provisions in state laws. Under the new amendment, North Carolina's existing common law rule that permits borrowers to go after assignees would be effectively repealed by an act of Congress.
Note here that most subprime loans in North Carolina are held by trusts, and it's usually trusts that commence foreclosure proceedings.
In effect, if it is passed into law as it currently reads, the federal bill would eviscerate the very state law that inspired it in the first place.
At last report, Reps. Watt and Miller have been apprised of the lenders' scheme to gut their legislation while undercutting good state laws at the same time. Consumer advocates are working hard to get both members remove the amendment -- or to even hold up the legislation if that's what it takes to stop the lending community's backdoor scheme. Advocates are also hopeful that Gov. Mike Easley and Attorney General Roy Cooper, two of the chief architects of North Carolina's law, will speak up against the federal bill in its present form as well.
Let's hope that before it comes to that, the House leadership weighs in on this critical matter and forces the big money- lending lobbyists to back down from their scheme to undermine an important bill that could help millions of families.
Rob Schofield is director of research and policy development at N.C. Policy Watch (http://www.ncpolicywatch.com).