Push grows for national antipredatory guidelines. (Broker Business).

SUBPRIME LENDING IN GEORGIA WAS markedly reduced soon after that state's Fair Lending Act went into effect last October. Complying with the growing number of state and local antipredatory-lending laws has gone from merely being confusing to prompting worries about legal liabilities for mortgage

Such concerns were behind the founding of the Coalition for Fair and Affordable Lending (CFAL). CFAL is an industry consortium working to gain national standards for nonprime lending.

Firms representing more than one-third of the subprime industry have joined CFAL, says Executive Director Wright Andrews Jr. He is a seasoned lobbyist and senior partner in the Washington, D.C., law firm of Butera & Andrews. Scott McAfee, president and chief executive officer of Woodland Hills, California--based WMC Mortgage Corporation, serves as CFAL's chairman.

Today's situation has grown out of a larger impasse, Andrews notes. Officials from the Department of Housing and Urban Development (HUD) held meetings with mortgage industry trade associations and consumer groups during 1997 and 1998. Their stated goal was to reform existing origination practices. But "the process broke down," Andrews recalls.

Frustrated, consumer groups began working with state and local legislators to pass high-cost lending reforms. Because of this history, Andrews says that "some consumer groups don't trust anybody in the [mortgage] industry." But he is hoping there will be legislation in Congress by next year "that some consumer groups will support."

As a starting point, CFAL backs Ohio Republican Rep. Bob Ney's newly introduced Responsible Lending Act. It bans the sale of single-premium life insurance, and seeks to control loan flipping by allowing refinancing within a year of origination only if doing so benefits the borrower. But many consumer groups such as the National Community Reinvestment Coalition remain opposed to federal preemption of state and local laws.

More court cases

Andrews says consumer groups prefer keeping lending standards somewhat undefined in the laws, thus allowing future court decisions to set appropriate practices for mortgage companies. CFAL members want antipredatory-lending laws to provide clear guidelines, and the ability to correct lending errors without being subjected to punitive fines. Andrews adds that greater lender uncertainty will mean higher rates for consumers, as lenders price in the cost of ongoing court battles.

Andrews cites as an example the legislative test that refinancing must provide a "tangible net benefit" to a borrower in order to be legal. Defining such terms could take years--and numerous court cases.

CFAL is ready to prohibit the sale of single-premium credit life insurance, and to restrict lending when a set debt-to-income ratio is exceeded. Lenders also should be prevented from profiting from foreclosure sales or raising rates when a loan goes into default, Andrews argues. He contends that subprime lenders have "democratized credit" by supplying it to the "millions of Americans who are higher risks" due to credit blemishes, an inability to document their finances, or low down payments. Severely restricting subprime lending would hurt deserving consumers who then couldn't obtain credit, says Andrews.

Reports of predatory lending practices "are greatly exaggerated," says George Yacik, vice president of SMR Research Corporation, Hackettstown, New Jersey. "It's not anywhere near as prevalent as the headlines would have you believe." As evidence, he cites data compiled under the Home Mortgage Disclosure Act (HMDA), which showed that 64 percent of all subprime applications were rejected in 2001. "These lenders are choosy," and not seeking to fund loans that will soon become delinquent, Yacik says.

Subprime lending makes up 5 percent to 10 percent of total mortgage originations and outstanding dollar amounts, Yacik estimates. He adds that subprime loan rates have an average premium of less than 400 basis points over rates given to prime borrowers. Spreads over conventional conforming rates have been on a downward trend for several years, Yacik explains, due to competition between lenders, the willingness of subprime borrowers to shop and self-policing by lenders that want to do business responsibly.

Fannie Mae Chairman and Chief Executive Officer Franklin Raines delivered a speech in February before the AARP board of directors--a lobbying group behind several of the state antipredatory-lending laws. "Lenders should not be allowed to make loans a borrower can't repay, loans that are being flipped or loans that have unnecessarily high fees and points," Raines said. But Fannie Mae also "supports national policies" to reach those ends, he said.

Raines added, "The challenge in outlawing predatory lending is to drive out the bad money without driving out the good money--especially in places where we've been struggling to get the good money to go." Lenders and consumer groups share the same goal of prohibiting predatory practices, but continue to have different roadmaps for getting there.

Howard Schneider is a freelance writer based in Ojai, California. He can be reached at howard@mmnl.net.