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:
- It reinserts the state legislature back into the business of regulating credit rates, something it wisely abandoned two decades ago.
- It blurs the distinction between people with a good credit history and those with a sub-standard history.
- It encourages costly litigation by eliminating the opportunity for arbitration, providing a new private right of action and providing new affirmative defenses for the borrower.
- It encourages abuses in foreclosure actions, by suggesting to borrowers that they may be able to escape repayment because "the monthly payments on the loan were unaffordable at the time of the loan closing".
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:
- Where will people get the money to pay for closing costs for a second loan?
- Do all consumers need mandatory counseling?
- If a person wants to purchase insurance should they die, lose their job or become disabled, why are they not allowed to finance it?
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:
- Needlessly prohibits mandatory arbitration. Part 41 addressed mandatory arbitration clauses. "No high cost home loan may be subject to a mandatory arbitration clause that is oppressive, unfair, unconscionable, or substantially in derogation of the rights of the consumers.
Arbitration clauses that comply with the standards set forth in the Statement of Principles of the National Consumer Dispute Advisory Committee...shall presume not to violate this subdivision". This provides an important protection to the consumer. Arbitration is a widely recognized method for resolving disputes and is used frequently across the United States to deal with a variety of labor, business and construction disputes. Part 41 recognizes the balance that needs to be struck in using arbitration and provides broad protection for consumers, particularly by making provisions for the use of National Standards. The Banking Department and Attorney General have the power to bring action against unscrupulous lenders who engage in outright fraud in the use of oppressive arbitration clauses.
- Bill exposes lenders to increased liability and invites consumer default. The notice provision in the case of a potential foreclosure proceeding is particularly troubling and invites litigation initiated by credit lawyers. There are numerous opportunities in the notice, for borrowers to claim new defenses against foreclosure, most of which provide little or no specific definition. One potential defense states that the consumer paid "excessive" fees. Another says the monthly payments were "unaffordable". Then there is the potential defense that "you received little benefit from the new loan".
Should the branch manager of a small local business lose their opportunity to collect the principal they lent because of the aggressive tactics of a small band of credit lawyers who will use these potential defenses to try to wipe out a person's debt?
The bill also provides for an affirmative defense on the part of the borrower in foreclosure proceedings, shifting the burden of proof to the lender, thereby, encouraging excessive litigation. This could prove to be a boon to those who wish to escape their repayment.
- New Damage Awards. The bill provides that lenders, who violate the new law are responsible for actual damages, statutory damages equal to twice the total amount of points and fees and costs and reasonable attorney fees.
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.