Even in the waning days of the legislative session last month, DFL state Sen. Sandy Pappas still hoped that lawmakers could hammer out a new law banning unscrupulous home loans. For the last three days of the session she and other lawmakers, advocates for the poor and elderly, and members of the banking and mortgage industries kept up intensive negotiations. Despite their diverse interests, the groups seemed eager to craft a bill.
At issue were specific practices that take place in the sub-prime mortgage market, which focuses on high-interest loans for people with low income or poor credit. The dubious practices, often described as "predatory lending," include making loans to people who clearly can't repay them; switching borrowers from low-interest government loans to high-cost, high-interest commercial loans; and encouraging repeated refinancing.
Pappas had already passed a version of the bill in the Minnesota Senate, with a 63-to-0 vote. But the state house of representatives hadn't voted on any version of the bill, and now, as time was running out, the interested parties were trying to negotiate a compromise. As the hours ticked by into the night of Saturday, May 18, Pappas grew increasingly nervous about changes that lobbyists for the bankers and mortgage companies were advocating to the house. There were so many details. "If you pass a bill at 1:00 a.m. on the weekend, you don't have time to have your legal experts look at it," she explains.
Moreover, one of the country's largest sub-prime mortgage companies, which had already been represented by local lobbyists, flew in a lawyer from Washington, D.C., for the Saturday negotiations, Pappas says. "They started to question parts of the bill we had already decided on, and we started to cover old ground," she recalls. Around 10:30 p.m., the negotiations stalled. There would be no predatory-lending law this session.
It's certainly tricky, offers Becky Gomer, director of Minnesota ACORN (Association of Community Organizations for Reform Now), which advocates for laws to protect low- and middle-income families from predatory lenders, to reach a consensus on the issues--especially since even the financial institutions themselves have different agendas. Many banks don't engage in predatory practices, she explains. But a few sub-prime lenders do. And it was their interests, she complains, that took control of the negotiations.
"I don't know why the bankers are sleeping with the enemy," Gomer says, noting that some banks may own subsidiaries that participate in predatory lending, while others might simply want to avoid regulation of any kind. "They really allowed the financial companies--really the predatory lenders--to represent what they wanted. Until the banks are willing to separate themselves from the predatory lenders, we're not going to really get anything accomplished."
But Dan Hardy, executive vice president and general counsel of the Mortgage Association of Minnesota, says there were as many reasons the negotiations failed as there were parties doing the negotiating. "I felt that all the consumer groups involved were legitimately concerned about the lending practices they felt are abusive, and I respect that," Hardy says. "For the most part, they made their case honorably.
"There were a lot of miscellaneous issues, a lot of dynamics at play," he continues, adding that his members would support a law designed to address the very specific problems of predatory lending. "There didn't seem to be the sense that this had to be done this year."
Though if you ask Pappas, there was plenty of urgency, and she's upset that as the deadline neared, the financial institutions didn't step up and support the legislation. "We blew our chance," she says. "Which is really too bad, because more people are at risk. They figure the state regulates it, the government is taking care of them. And we don't have laws against these practices."
If the state can't protect citizens against predatory lenders, who can? That's the question ACORN asked. Frustrated by the state's seeming inability to pass a law, the group's leaders started asking city councils, specifically in Minneapolis and St. Paul, to take up the cause. On May 15 ACORN met with St. Paul City Council members to discuss the predatory-lending problem and ask them to adopt ordinances curtailing the practice.
"The sentiment going into the policy session was that cities shouldn't get involved in the regulation of banks and businesses, that it's definitely a state thing to do," Gomer explains. "We agree. But the fact of the matter is, the state isn't moving. In the meantime, we're asking cities to step up to the bat and protect their citizens. The stronger the action is that comes out of both cities, the more clear the message to lenders that we're not going to tolerate it, and the more pressure it puts on the state to do something."
Gomer plans to keep asking city governments to draft ordinances precluding predatory lending. "The strategy is really to get it passed in as many cities as possible, so industry has to run around and there's a patchwork of regulations," she says.
St. Paul is tentatively interested in getting involved. After hearing from ACORN, the council asked the city attorney to present a report on whether cities legally are able to regulate mortgage lending on June 12. The main concerns are whether existing state or federal laws might prevent St. Paul from taking any action, according to Assistant City Attorney John Kelly, who is researching the issue. In addition he's looking at predatory-lending ordinances that have been passed in other cities around the country--in Oakland, California, for instance--and the challenges that have been raised against them. "We're just trying to get up to date on where Oakland is at, and what obstacles might exist for the City of St. Paul," Kelly says.
Council member Jerry Blakey would rather the City of St. Paul not be the entity to curb predatory lending. "I'd prefer not to pass resolutions or ordinances for the city. It's a state or federal issue," he begins. But if the state can't take action, Blakey agrees that St. Paul might have to. "People are losing their homes and losing equity. People in my neighborhood."
In absence of state law preventing predatory practices, Blakey says, he'd like to put together a working group of city officials, bankers, and lenders--those who do engage in predatory lending and those who don't--and try to work out a policing mechanism.
Another avenue Blakey is exploring is whether any of the financial institutions the city does business with might engage in unscrupulous loan practices. If the city discovers that the banks it works with--or the businesses those banks work with--are predatory lenders, it can issue an ultimatum: "What we could do is say, 'We're not going to do business with you,'" he explains. "That does give us control or authority."
If neither of those methods offers any relief, Blakey concedes that St. Paul might need to take on the role of regulator--something that is potentially troubling to financial institutions. "Cities are not in the business of engaging in regulating a segment of the financial institutions industry," says the Mortgage Association's Hardy. "They have a right to reflect on lending practices that are harmful to citizens. But at the end of the day does it make sense for them to regulate? I don't think so.
"The industry needs to sit down and evaluate the extent and nature of the problem and determine as an industry what we can do to support a fix," he suggests. "We know there's a problem, but what we don't know is who's the primary focus of the problem." Besides, Hardy argues, there are plenty of regulations already on the books; the state just needs the resources to enforce them.
Regardless of the level of resources, those standards aren't adequate, counters Minnesota Commissioner of Commerce Jim Bernstein. "There are some gaps in the law in Minnesota," he says. "You can do predatory lending. It's not just a question of we need more resources to enforce. We need tough laws in Minnesota to abolish the practices that are going on."
Although Bernstein says he was disappointed that the legislature was unable to pass a bill in this past session, he plans to continue to work with all sides over the summer to see if an agreement can be reached. That way, he says, even if this fall's elections revise the makeup of the legislature (or if a change in governor results in the appointment of a new commerce commissioner) perhaps an agreement could still move forward next year.
Bernstein doesn't want to have predatory-lending laws passed on only a city-by-city basis. "If we wind up with a patchwork set of ordinances and laws, that doesn't really work for anybody," he cautions. "But maybe that is the one thing that's missing, the stimulus for the legislature to pass strong predatory-lending laws next year."
And maybe, Bernstein says, the increasing pressure on governments--be it at the state or city level--to pass laws preventing predatory lending will convince the lenders to change their unscrupulous ways.
"Maybe they'll clean up their act, and maybe they'll go away," Bernstein says, more in jest than in earnest. "I can be a dreamer."
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