Industry Pressures City to Relax Subprime Lending Law

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Industry Pressures City to Relax Subprime Lending Law

By KATE BERRY

Staff Reporter

A Los Angeles city ordinance on predatory lending remains in limbo nearly a year after being approved by the City Council, as subprime mortgage lenders pressure the city to remove the law’s tough liability provisions.

The ordinance, which was passed in December 2002, puts limits on the interest rates, fees and prepayment penalties that can be charged to borrowers who do not qualify for prime loans.

But lenders want to change a provision in the law that would allow borrowers to sue lenders and financial institutions that purchase pooled loans if any of those loans violate the law.

At stake are billions of dollars in loans made in Los Angeles by subprime lenders.

In the next few weeks, the City Attorney’s office plans to send a report to the City Council’s housing and economic development committee with suggestions on how to proceed on the ordinance, said Richard Bobb, a deputy city attorney.

“We’re working on the rules and regulations to implement the ordinance and we’re learning how the ordinance could be better and clearer to all parties,” Bobb said.

The Housing Department has not yet conducted an impact analysis on how many borrowers would be affected if the ordinance goes into effect.

In an effort to pressure the city to change the law, the California Mortgage Bankers Association sent letters last month to the three major ratings agencies.

Earlier this year, when ratings agencies refused to rate loans in the state of Georgia, elected officials voted to remove the liability provision from the predatory lending law.

Fitch Inc., the only ratings agency yet to respond to the Los Angeles ordinance, said it will not rate bonds backed by pools of home mortgage loans covered by the Los Angeles ordinance because it is unable to quantify the risk to investors if they are sued.

Lenders in Southern California are painting a worse-case scenario if the liability provision is not removed.

“The law will virtually eliminate the ability to do any kind of refinancing, even with a prime loan,” said George Eshaghian, general counsel at WMC Mortgage Corp. in Woodland Hills. “Almost every single loan, including loans that would be traditionally considered prime, will start to hit these thresholds.”

The Los Angeles ordinance currently defines high-cost loans as those with an annual percentage rate at least 6 percent above the comparable yield on Treasury securities roughly 11 percent overall, at today’s rates. In addition, a high-cost loan is defined as having total points and fees that exceed 4 percent of the total loan amount, or $1,500, whichever is greater.

Past misdeeds

The subprime lending industry has been fighting an uphill battle since 1999 when it came under attack after an Irvine-based mortgage lender, First Alliance Corp., went out of business amid allegations that it defrauded 4,500 customers, some of whom lost their homes because of high rates.

In July, First Alliance’s investment banker, Lehman Brothers, was found guilty by a jury of aiding and abetting the fraud.

Lehman was ordered to pay 10 percent of the $51 million verdict leveled against First Alliance, which also paid $75 million in fines for Federal Trade Commission violations.

Because predatory lenders typically target the poor and elderly, cities and states across the country began enacting predatory lending laws to halt the practice including in Oakland, where virtually all subprime lenders have since stopped doing business.

Legal wrangling has held up the Los Angeles ordinance.

In February, the American Financial Services Association, a Washington trade group that represents consumer finance companies, sued the city. Though the lawsuit was preempted by state and federal regulations, the city attorney’s office chose to wait for the outcome of a lawsuit already on appeal in Oakland, which also had been sued by AFSA.

Last month, a state court upheld Oakland’s predatory lending ordinance; AFSA has appealed to the state Supreme Court.

For now, the City Council has several options.

It can wait for the Supreme Court to take action in the Oakland case, which could occur within 60 days to 90 days. Or it can proceed with the original language of the ordinance or make amendments to it, Bobb said. (The ordinance’s original sponsor, Mark Ridley-Thomas, has left the council and is now in the state Assembly.)

The rules and regulations of the ordinance must be published by the city’s Department of Housing for 30 days before the law takes effect.

Embattled Start – L.A.’s predatory lending ordinance at a glance.

Passed: Late 2002, by unanimous vote

Status: City Council is awaiting a draft report from the City Attorney’s office with recommendations on implementation

Sponsor: Former City Councilman Mark Ridley-Thomas, now in State Assembly (48th District)

Purpose: Protect borrowers from predatory mortgage loans that could cause them to lose their homes

Affected: Home loans with points and fees above 4 percent of the loan and an overall interest rate of roughly 11 percent or higher

Prohibits: Lending without regard to a borrower’s ability to repay; also requires borrowers to receive “reasonable and tangible” benefit when refinancing, and receive home loan counseling by a third party

Key Controversy: Assignee liability provision, which leaves purchasers of pooled loans subject to lawsuits by borrowers

Other Statutes: Oakland, Philadelphia, Georgia, North Carolina

Opponents: American Financial Services Association, California Mortgage Bankers Association

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