Ohio's method of dealing with predatory lending may soon be a national model -- though not in a particularly commendable way.
Yes, the state that responded to a startling rise in bum loans and foreclosures by banning reforms could become the birthplace of the nation's new lending policy.
Meet Republican Congressman Bob Ney of St. Clairsville, who is best known for pushing the House cafeteria to offer "freedom fries" and "freedom toast" instead of their more familiar French counterparts. He's introduced the Responsible Lending Act, which would, oddly enough, eliminate the freedom of states and cities to regulate lending.
Now before a House subcommittee, Ney's bill purports to replace state and local lending reforms with federal protections. It would bar lenders from tacking certain kinds of expensive insurance onto loans. It would also prevent them from dishing out loans in which the total debt payments surpass 53 percent of a borrower's income, or from repeatedly refinancing mortgages just to generate fees.
But the downside, say consumer advocates, shows up in the fine print. Companies that buy loans from other lenders could not be sued for violations in those loans, unless they're blatant. Since many predatory loans are bought and sold repeatedly -- with the original lenders conveniently declaring bankruptcy -- screwed borrowers would essentially have no recourse.
And even in the unlikely event that borrowers do find someone to sue, Ney's bill provides mortgage companies with special protections from class-action suits. Instead of simply proving that a bank was engaged in systemic fraud and establishing how much that fraud had cost consumers, the bill would force lawyers to document the actual damages to each and every screwed borrower, creating so much paperwork that a class action would be virtually impossible, according to Margot Saunders of National Consumer Law Center in Washington.
"The Predator Protection Act of 2003." That's the name Charles Bromley, director of the Housing Research and Advocacy Center, has given Ney's bill. "It'll let these guys continue to do what they do."
And in Cleveland, what they do is becoming a huge problem.
The scam works like this: Predatory lenders use pressure tactics, confusing paperwork, and outright lies to make loans to people with low incomes or tarnished credit. But the terms are often so egregious that borrowers can't repay. Thus, their homes fall into foreclosure -- usually after their bank accounts are drained.
From 1995 to 2002, foreclosure filings in Cuyahoga County more than tripled, rising from 2,200 to about 7,700. Stephen Bucha, head magistrate of the county's foreclosure department, blames increased borrowing, an up-and-down economy, and, most of all, high-interest lending for what he calls a "huge increase in volume."
"It's like a cancer," says Cleveland Councilman Mike Polensek. "Every year it's gotten worse and worse . . . Those empty [foreclosed] houses can sit there for a year or three years" -- becoming eyesores at best, crack houses at worst.
Even Ney's rural home county of Belmont, on the West Virginia border, has seen foreclosures more than double since 1998.
In the absence of federal protections, states and cities have been passing anti-predatory laws on their own. Yet this seems to concern government officials more than the rise in foreclosures. "You're creating this massive patchwork of -- potentially -- hundreds of state and local laws," says a Ney spokesman, who asked to remain anonymous. (Ney office protocol prohibits the printing of his name in the paper.) "You could yank the efficiencies right out [of the lending market] and make loans more expensive."
That's the argument Ohio lenders have been making since 2002, when they persuaded the General Assembly to bar cities from regulating lending. Cleveland passed a law anyway, in April 2002, banning most high-interest, high-fee loans and a host of predatory practices. Lenders -- along with the state Attorney General's office -- are now challenging it in court. Ney's bill would take Ohio's Bigfoot approach to the national level.
Yet Cleveland passed the law only because state and federal governments have been "co-opted" by lenders, notes Polensek. "All of the efforts I've seen at the state and federal level are to circumnavigate . . . the growing trend in this country's municipalities to take action."
In place of state and local regulators, Ney's bill would create a 15-member national board to write lending policies. But it would be heavily stacked in favor of the mortgage industry, which would get 11 seats.
The logical assumption is that the board would create rules benefiting lenders, not consumers. Ney's spokesman counters that the industry members would come from different parts of the lending world -- mortgage brokers, realtors, insurers, etc.
Consumer groups say the bill heralds the beginning of the mortgage industry's big push to install its brand of reform. The industry gave $12.5 million in campaign contributions to federal candidates in the 2002 elections -- more than 10 times what it gave 10 years earlier.
One beneficiary has been Ney. During the 2002 election cycle, the banking, real estate, and securities industries -- all of which could benefit from less regulated lending -- kicked $139,000 into his campaign chest.
That's not a loan, so Ney won't have to pay it back -- unless he already has.