Leave Lender Guidelines Alone!

Predatory lending laws get proposed by ambitious Attorneys General (like Lori Swanson of Minnesota)and I come off sounding like one of two things:  an industry apologist or a libertarian whacko.  I suppose  I’m much more of the latter than the former but I’d ask you to see past  both my industry and political afflictions and read why legislated loan guidelines just don’t make sense.

Predatory lending legislation, while well-meaning, ends up penalizing the very people whom it was meant to protect.  Banks and lenders simply refuse to lend in areas where the government legislates loan guidelines.  Ask a Cleveland Realtor about the exodus of sub-prime lenders from their fair city some 3-4 years ago.  Georgians will tell you that some lenders simply stopped lending in Georgia until the state addressed their predatory lending legislation.  North Carolina celebrates it’s sixth year of “success” of its benchmark predatory lending bill with a rising foreclosure rate and few lenders prepared to give borrowers a second chance.

I posted Predatory Lending Legislation Can Prey Upon the Responsible over on  Bloodhound Blog .  Here I suggest that proposed predatory lending legislation penalizes the 96% of the consumers who borrow money and are not in in trouble.  If you outlaw negative amortization loans  (as North Carolina did for high-cost borrowers) or prepayment penalties (as many states have done),  lenders just won’t lend in your state.  That is patently unfair to the consumer who does know how to manage her affairs.

Dan Green, fellow former Philadelphian, (like me) and author The Mortgage Reports  points out how the IL HB 4050 failed the consumer. A down-on-his-luck borrower may lose over $100,000 in equity, equity he spent a long time building, because the government decided that he needed protection from those big, bad banks.  Sad, indeed.

Should state governments take the stance that if lender’s won’t play by their rules they should just get the hell out of their state?  They will, which reduces a consumer’s options, lowers liquidity in an already illiquid market, and ultimately drives home values lower.  That, hurts responsible homeowners.

I applaud new Minnestoa Attorney General, Lori Swanson for her zeal to flush out the despicable practice of predatory lending.  I implore her commission members to focus on penalization of the rogue originators rather than legislated loan guidelines.  Minnesotans can’t afford the latter.