State lawmakers wrestle with abusive lending
In the three months since Iowa Attorney General Tom Miller launched a foreclosure hotline, nearly 6,000 Iowans have called for help. The calls come to the Iowa Mediation Service, which Miller hopes will be able to negotiate with lenders to help borrowers keep their homes. "We're trying to do it on a mass basis," Miller says. Foreclosure rates for homes purchased using non-standard, high-interest loans have reached historic highs in Iowa and around the USA.

State lawmakers wrestle with abusive lending
By Donna Leinwand, USA TODAY

In the three months since Iowa Attorney General Tom Miller launched a foreclosure hotline, nearly 6,000 Iowans have called for help.

The calls come to the Iowa Mediation Service, which Miller hopes will be able to negotiate with lenders to help borrowers keep their homes. "We're trying to do it on a mass basis," Miller says.

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Foreclosure rates for homes purchased using non-standard, high-interest loans have reached historic highs in Iowa and around the USA.

States and communities, confronting unoccupied homes and decreasing property values, are trying to curb abusive lending practices before they snare would-be home buyers and rescue homeowners already caught in the crisis.

At least eight states— Colorado, Connecticut, Louisiana, Maine, Minnesota, New Mexico, North Carolina and Rhode Island — passed laws in 2007 to curtail predatory lending.

The California Legislature is considering a law that would require many local mortgage lenders to translate loan documents into Spanish, Chinese, Tagalog (the principal language of the Philippines), Vietnamese or Korean if one of those languages had been used to negotiate the loan.

Baltimore last week sued Wells Fargo Bank in federal court for allegedly steering black home buyers into high-interest loans with non-traditional terms. The lawsuit says the city is facing an "unprecedented crisis" of mortgage foreclosures in predominantly black communities.

Baltimore Mayor Sheila Dixon said in a statement those foreclosures are depressing property values and decreasing tax revenue. Wells Fargo, in a statement, denied the charges.

Early this year, the Senate banking committee plans to consider legislation by Sen. Chris Dodd, D-Conn., that bars mortgages that include financial penalties for people who want to refinance and pay off their debt early.

It also prohibits brokers from steering borrowers to more expensive non-standard loans if they qualify for a prime loan. The law would increase penalties for lenders who violate the standards.

"Going forward, it seems to me if the states and feds can't figure out a way to clean up this industry, shame on us," says Miller, who led a group of state attorneys general in a class-action lawsuit against Ameriquest Mortgage over allegations of bait-and-switch tactics.

The company settled the lawsuit in 2006 for $325 million.

'Overwhelming problem'

New laws may offer little help to people already tied up in the bad loans, which grew from new types of mortgages aimed at first-time home buyers with imperfect credit.

The people targeted for complicated high-interest loans have expanded from first-time minority homeowners and low-income elderly to include middle-class borrowers, AARP attorney Nina Simon says.

"There are extraordinary numbers of these (cases) all over the country, says AARP lawyer Jean Constantine-Davis, who handles many of the complaints that come to the advocacy group for retired people.

Public interest lawyers say they are overwhelmed by the sheer number of cases and frustrated by weak consumer-protection laws that rely on the buyer to beware.

"It's not just a growing problem, it's an overwhelming problem," says Navid Vazire, a staff attorney for the Foreclosure Prevention Project at South Brooklyn Legal Services.

"We're forced to turn most people away even if they have meritorious cases because we don't have the capacity. We're turning away more and more people."

The pending cases illustrate a broad range of issues:

•The AARP Foundation sued 12 banks, real estate and mortgage companies in August on behalf of eight first-time, minority home buyers for allegedly selling them defective homes in New York for inflated prices and then steering them to expensive loans.

•A mortgage company employee persuaded an 82-year-old man to refinance his Brooklyn brownstone by promising a 1% interest rate, according to a lawsuit filed by Vazire's group.

"They tricked him into signing documents that didn't reflect those terms," Vazire says.

The 1% interest rate lasted one day before climbing to 8%.

•A man purporting to be a "foreclosure prevention specialist" allegedly persuaded a 60-year-old widow in San Pablo, Calif., to sign over the title of her home in exchange for $6,000 to get her mortgage out of default, according to a lawsuit filed against him.

The man allegedly used the equity in the home to secure two loans and demanded the woman pay $330,000 to buy her home back, according to the lawsuit filed by Housing and Economic Rights Advocates, an organization in Oakland.

Barriers to change

Individual cases can be challenging and are unlikely to motivate big lenders to change, says Bob Gnaizda, general counsel for the Greenlining Institute in Berkeley, Calif., a research and advocacy center.

"The best thing would be for a few of the great plaintiff class-action lawyers who have put so much money into changing the tobacco industry, the asbestos industry, to think about bringing class actions relating to predatory lending," he says.

States and cities would take on questionable lending practices more aggressively if federal law didn't limit them, Miller says. Iowa bans pre-payment penalties but cannot enforce its law against nationally chartered banks or their subsidiaries. Only the federal government can regulate federal banks and their offshoots.

"We think it doesn't make any sense at all in terms of protecting the citizens," Miller says. "States should be able to enforce state law."
http://www.usatoday.com/news/nation/2008-01-13-mortgage-laws_N.htm