Anti-predatory lending law helping S.C. borrowers

THANKS TO South Carolina’s anti-predatory lending law, borrowers are getting better loans.

Critics claimed such laws would cause subprime credit to dry up and make it tough for high-risk borrowers to get loans. But a recent report by the Center for Responsible Lending in Raleigh debunks that. The report said borrowers in South Carolina and other states with tough laws protecting them are getting less costly loans and subprime lending is thriving.

In 2003, S.C. lawmakers, prodded by a small but game group of consumer advocates, did the right thing by approving a law that protects vulnerable consumers. Unsavory lenders — legalized loan sharks, if you will — had spent years ripping off unwitting consumers. One study found S.C. borrowers were losing $107 million a year to bad lenders. Among other things, the state law limits the repeated financing of loans; limits the amount in points and fees that can be financed in a high-cost loan; and prohibits a prepayment penalty on home mortgage loans up to $150,000.

The Center for Responsible Lending examined 28 states with laws against predatory lending, analyzing 6 million subprime mortgage loans made between 1998 and 2004. The study compared borrowers’ experiences in states with reforms with those of people in states without such laws. It found that in states with laws that go beyond federal protections, borrowers get fewer abusive loans, have ready access to subprime credit and pay about the same or lower interest rates.

The proportion of loans in South Carolina with abusive terms was 48.1 percentage points lower than in states without significant reforms. The number of subprime loans with abusive terms in the state dropped, while the number of nonabusive loans increased. The interest rate on a 30-year, fixed-rate mortgage was 0.41 percentage points lower than in states with no significant law. The rate of a 30-year adjustable rate mortgage was 0.23 percentage points lower. The decrease could save thousands of dollars.

Meanwhile, the nation’s subprime mortgage market has grown from $34 billion in 1994 to $516 billion in 2004. Subprime lenders play a key role in providing credit to higher-risk borrowers who would otherwise not be able to get loans. Most predatory lending occurs in the subprime market. Anti-predatory lending laws are aimed at bad actors, not lenders who deal fairly.

The report should end an attempt in Congress to pre-empt state laws and approve federal legislation that would allow abuses to continue. The measure is stuck in committee, and it should die there. Congress must not tamper with states’ ability to protect borrowers.

In 1999, North Carolina passed the first comprehensive law regulating predatory mortgage lending. It was needed because abusive practices were rampant, despite Congress’ passage of the Home Ownership and Equity Protection Act in 1994. The federal act was supposed to address abusive lending practices by providing extra protections for home loans made at a high cost. But the law only addresses refinancing, not initial home purchases. Also, lenders could still impose abusive prepayment penalties or repeatedly finance loans.

In North Carolina, a decline in predatory loans saved borrowers an estimated $100 million in the law’s first year. Laws passed by South Carolina and others also are making a difference, which is why Congress should butt out. If it does anything, Congress should close loopholes in the Home Ownership act to protect consumers in states with weak protections, or none at all.

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