Georgia predatory lending law kicks in

Georgia’s new predatory lending law – which is either praised or vilified as the toughest in the nation, depending upon which side is describing it – is already having an impact on the state’s mortgage lending market less than three weeks after it took effect.

Several financial entities, including the government-sponsored Freddie Mac, have indicated they will stop making or buying high-cost mortgage loans in Georgia because of the strict provisions in the new law. That trend, in turn, could limit the credit available to the low-income consumers that the law is intended to protect, according to critics of the new statute.

Supporters of the new law, on the other hand, argue that it’s much too early to pass judgment.

“It’s a good law,” said Sen. Vincent Fort (D-Atlanta), one of the prime movers of HB 1361 in the last session of the General Assembly. “At the very least we ought to let it stay in place for two or four years to see what the effect is.”

The law enacted under HB 1361 attempts to curb some of the practices of subprime lenders who make high-interest home equity loans to persons who are considered too much of a credit risk to borrow from conventional sources. These borrowers, many of them elderly or moderate-income homeowners, often lose their residences to foreclosure as a result of these loans.

The fair credit law restricts or prohibits pre-payment penalties, balloon payments and loan flipping, and requires lenders to provide credit counseling to borrowers who take out these high-cost loans.

Opponents of HB 1361, primarily Georgia’s mortgage brokers, warned that passage of the legislation would hurt low-income borrowers because lenders would stop making those kinds of high-cost loans in Georgia.

Freddie Mac – which buys mortgages from lenders, packages the mortgages into securities and then sells the securities to investors – has said it won’t buy any more high-cost loans in Georgia. Companies such as Countrywide Home Loans have announced they’ll stop making those kinds of loans here.

“Subprime lenders are scaling back their business in Georgia, where a rigorous predatory lending law has recently gone into effect,” reported the trade publication Inside B& C Lending, which covers the subprime mortgage business. “Many of them also plan to stay as far away as possible from loans deemed to be high-cost under that statute.”

Another trade publication contended that the predatory lending law “will result in the drying up of credit in the subprime market. . . the law could result in fewer Georgia loans making their way into securitized pools in the months ahead. . . . the harsh restrictions the law places on high-cost loans will eliminate the secondary market for these loans.”

B. J. VanGundy, a lobbyist for Georgia’s mortgage brokers when HB 1361 was under consideration by the Legislature earlier this year, echoed those predictions.

“It’s going to put a damper on things,” VanGundy said. “I heard one lender say, ‘We’re not doing small loans anymore – anything under $80,000 we’re not going to touch.’ People are scared of this law. They’re all afraid of the lawsuits to come. Every mortgage broker and lender in the state is hunkering down and trying to avoid lawsuits. One lender has stopped lending on owner-occupied residences and will only lend on investment properties.”

The financial penalties for running afoul of lending laws can be steep. Georgia Attorney General Thurbert Baker announced recently that Household Finance had agreed to a nationwide settlement over its subprime lending practices in which it will pay consumers $484 million, with about $9 million of that amount going to Georgia consumers.

The Household settlement was largely negotiated by the National Association of Attorneys General before Georgia’s new lending law went into effect, but it still “sends a strong message to every lender in Georgia that they must comply with the safeguards for Georgia citizens in our new predatory lending law,” Baker said.

A major concern of the new law’s supporters is how rigorously it can be enforced by the state’s Department of Banking and Finance. The law’s provisions, for one thing, won’t apply to banks that are nationally chartered.

“I think the Department of Banking and Finance has to make the transition from being a strict regulatory agency to being a consumer protection agency as far as HB 1361 is concerned,” Fort said.

“We’re just giving this law some time to settle in,” said David Sorrell, the acting commissioner of banking. “We’re taking this law very seriously and we’ll devote the resources we can. We will ask the General Assembly for additional funding if we need to. Time is going to tell.”

Sorrell noted that “if you’re a nationally chartered bank, you’re regulated by the Office of the Comptroller of the Currency, not the state of Georgia. A national bank can refuse, legally, to send us documentation because we have no jurisdiction.”

Sorrell said his department will forward consumer complaints about national banks to the OCC and will follow up on those complaints if necessary. Of the 388,000 home loans that were made in Georgia last year, 76 percent of them were made by lenders who fall under the jurisdiction of the state banking department, he added.

Financial industry lobbyists are expected to make a strong push in the upcoming legislative session to scale back some of the lending law’s restrictions and penalties.

“The major issue now is that we know there’s a coordinated campaign within the industry to undo 1361,” Fort said.

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