What is Prohibit Predatory Lending Act for?

The Prohibit Predatory Lending Act was a bill that was proposed in the House of Representatives in March 9, 2005. It was sponsored by Rep. Bradley Miller of North Carolina, along with 67 other co-sponsors. This law was designed mainly to protect consumers and borrowers from unfair lending practices by amending the Truth in Lending Act. The bill was meant to impose restrictions and limitations on high-cost mortgages, prohibit unfair and deceptive practices by creditors and mortgage brokers, and to further public education about predatory lending. According to the proposed bill, a high cost mortgage is a loan where the APR of the home loan exceeded 8 percent of the Treasury bond yield or incurred more than 5 percent of the loan amount in closing fees. The bill, if passed, would also limit balloon payments, “lending without due regard to ability to repay” (what we now know as “subprime lending” and “liar’s loans”), a reining in of late fees and requirements for pre-loan counseling. Though the Prevent Predatory Lending Act was introduced in March 9, 2005 as HR 1182, it was never signed into law.

However, a similar law was passed on the state level in North Carolina, the home state of the representative who championed the federal bill. The 2007 NC Predatory Lending Law (HB 1317) was hailed by many as a resounding success in consumer protections. The 2007 anti-predatory lending bill updated North Carolina’s existing anti-predatory lending law which was passed in 1999, after 50,000 or so North Carolinians fell victim to predatory lending. Strong evidence was presented that certain lenders were systematically targeting families who could not afford high cost loans, such as minority and low income families and elderly homeowners who had little equity in their homes. The main provisions of the law were:

The prohibition of prepayment penalties for mortgages under $150,000
Bans on “flipping” or refinancing an existing home loan over and over to collect fees and strip the home of its equity
Ban on financing upfront, single premium insurance

The law also enacted many measures proposed in the federal bill, including a cap on high interest rates (10% above the comparable Treasury bond rate) and a ban on prepayment penalties longer than 30 months or more than 2 percent of the amount prepaid. The North Carolina law also has provision prohibiting certain subprime lending practices and negative amortization loans.

According to studies, the law will save NC consumers $1 billion in home equity over the next 5 to 10 years.

In spite of the success of the North Carolina anti-predatory lending bill, the federal government didn’t enact a major anti-predatory lending amendment until July 21, 2010, long in the wake of the subprime housing crisis. HR 4173 sponsored by Barney Frank in the House and Chris Dodd in the Senate was called the Dodd-Frank Wall Street Reform and Consumer Protection Act created a new Consumer Financial Protection Bureau that will function much like the FTC and the FCC do, but with close regard to the financial industry. Among the mortgage law reforms, the federal bill:

Establishes a federal standard for home loans and compels lenders to duly investigate whether borrowers can repay their loans
Prohibits incentives which encourage subprime lending or steers lenders to recommend more expensive loans for borrowers
Requires disclosure of potential variable mortgage rate upswings to prevent “payment shock”

The bill also created the Office of Housing Counseling, which will engage the public to help educate homeowners, renters and borrowers.

In some ways, the Prohibit Predatory Lending Act that was introduced in 2004 but never saw the light of day was an important precursor to North Carolina’s anti-predatory lending laws and the federal consumer protection act most recently passed in July 2010. While the impacts have yet to be measured, we can only hope as consumers that the law will be as successful on a national level as it was in North Carolina.