Legislative Memo

T 518.465.7511





Sub-prime lending



March 18, 2002


This legislation would place unreasonable new regulatory burdens on lenders and expand the opportunities for individuals to bring private rights of action to escape repayment of borrowed money. Ultimately this bill would impede the extension of credit to borrowers across the state. The Business Council opposes it for these, and a number of other specific reasons, including:

Rate Regulation

The Business Council joins with every group who has written on S. 5005 in condemning the practice of predatory lending - loan flipping, lending without regard to the ability to repay and other abuses. AARP has stated that "taking a loan should not mean losing your home". Nor should it mean that giving a loan mean that lenders lose their shirt.

Good legislation and regulations find the proper balance between the free-market tenets of our society and the legitimate protections afforded to its citizens. This legislation sets such a shockingly low threshold as to what constitutes potential predatory practices that it suggests all lenders are equal to the lowest common denominator and all borrowers have somehow been unwittingly tricked into a business transaction they neither understood nor benefited from. Part 41 of the New York Banking Department's Regulations were carefully crafted to find the proper balance and it is far superior to the provisions contained in S. 5005.

The state Senate has been a champion of rate deregulation over the past twenty years. Its actions have recognized that rate regulation is inefficient, ineffective and counterproductive. It has done so for a wide range of industries, including electricity pricing, hospital pricing and a wide variety of insurance products. Just last year, the Senate sought to deregulate commercial lines of insurance. All those markets are the better for this action.

This bill puts the state legislature back in the business of determining rate thresholds. It sets a substantially lower interest rate threshold than was set by Congress when it passed the Home Ownership and Equity Protection Act (HOEPA) in 1994. Those standards were used as guidance in the writing of Part 41, by a Banking Department widely-regarded for its oversight of the financial institutions they oversee. S. 5005 ignores the definition of "high-cost loan" as defined by Congress and the state Banking Department and sets a new, wholly unreasonable level.

This new level will: 1) bring some conventional loans into the category of high-cost loan; 2) provide potentially new liability exposure to secondary mortgage brokers and 3) eliminate a potential source of funds for many higher-risk borrowers.

If the Senate believes greater protections should be granted consumers we urge that they be done within the thresholds established by Part 41.

Credit risks effect credit costs

Thousands of borrowers in New York State, for a variety of reasons, have credit problems. That does not mean they do not have credit needs. While their credit problems might mean higher costs of financing loans, it should not mean denying them access.

Why might this happen? Some lenders do not now make Part 41 loans because compliance costs are high and legal risks from unintentional errors may be too great. Do we now want to lower the bar further and potentially drive more lenders out of the market that exists between the conventional market and the market floor of Part 41? People need money for cars and college; where will they get it?

There are a variety of specific provisions that we question:

Part 41 effectively deals with each of these questions by providing assistance to the borrower for their counseling needs, and setting limits on how much in the way of upfront charges and insurances can be financed.

Arbitration, liability and damages

Coupled with bringing thousands of new loans under the umbrella of high-costs loans, this bill significantly expands liability exposure. This is particularly troubling in a state desperately in need of civil justice reform. This bill:

This bill can only result in more litigation, more damages and more lawyers preying on credit-troubled citizens to further their own financial interests. Let's help the elderly.

Let's go after unscrupulous lenders. Let's not do it by letting predatory lawyers rewrite the rules.

We urge the Senate to reject this legislation which in its current version over-promises consumers and undercutslegitimate lenders.