New Anti-Predatory Lending Law Sinks Teeth Into Unscrupulous Mortgage Companies

AMY O. WILLIAMS | The Daily News
January 11, 2007

Of the handful of state laws that went into effect Jan. 1, one has the potential to protect Tennesseans significantly from predatory lending practices.

The Tennessee Home Loan Protection Act (THLPA) was passed by the state legislature in May. It is directed at making borrowers aware of the high-cost mortgage loans typically associated with predatory lending.

As of the first of the year, borrowers will be protected from such practices as balloon payments, which are defined as large, lump-sum payments scheduled at the end of a series of considerably smaller periodic payments.

"(The law) only pertains to high-cost loans," said Corky Neale, research and innovation specialist for the RISE (Responsibility, Initiative, Solutions, Empowerment) Foundation. "There is going to be a notification that is going to come as part of that high-cost loan package - and it's in big, bold type."

Big and bold

The biggest change the law brings about is the requirement that written notice to the borrower must be included in a high-cost home loan.

The notice begins by warning borrowers - in bold, 12-point type - "You should be aware that you might be able to obtain a loan at a lower cost." Borrowers also are advised to consult an independent credit counselor about the interest rate and fees associated with the loan.

"If you see that in a loan document, wow - you better beware that you've got a high-cost loan," Neale said. "That's a first signal to the prospective borrower that this is not the right loan for them to get the house that they want."

Once a lender has been flagged for offering a high-cost home loan, the Tennessee Department of Financial Institutions is notified. The borrower then has up to three years to bring a civil suit against the lender.

High-cost home loans are typically sub-prime loans, meaning they are loans extended to people with poor credit. Such borrowers now will be protected under THLPA.

"We know that people with sub-prime loans are at greater risk of foreclosure," he said.

A pound of cure

Through the Memphis/Shelby County Anti-Predatory Lending Coalition, Neale, who also works with the MemphisDEBT Collaborative, worked with lawmakers to get the legislation passed. Other organizations, such as the American Association of Retired Persons (AARP), the National Association for the Advancement of Colored People (NAACP) and the Memphis Area Association of Realtors (MAAR), among others, were essential in getting the law passed, Neale said.

The bill was sponsored in the General Assembly by State Rep. Larry Turner, D-Memphis, State Rep. Craig Fitzhugh, D-Ripley, and State Sen. Roy Herron, D-Dresden.

State Sen. Mark Norris, R-Collierville, supported THLPA when it was passed in 2006.

"The law was implemented to protect those subject to 'high cost' home loans, including first-time homebuyers or those lacking strong or established credit," said Norris, who represents District 32, which includes Dyer, Lauderdale, Tipton and Shelby counties.

The legislation was important, Norris said, because it discourages lenders from being unscrupulous and provides statutory protections for people who obtain mortgages in Tennessee.

"There were a lot of folks that were really working for this, and I think that it's a really good thing," Neale said. "Before this, we didn't have anything that tried to deal with predatory mortgage loans, and now we've got this, which is not absolutely the best in the country, but it's solid, so that we know that folks are going to be halfway protected."

Growing some teeth

The new law expands the definition of a high-cost loan, flagging loans that charge fees of more than 5 percent. A normal mortgage has about 1 percent or 2 percent in fee charges, according to the Memphis/Shelby County Anti-Predatory Lending Coalition.

Specifically, the new law will protect borrowers from so-called "predatory" lending practices, such as pre-payment penalties, which no longer may exceed 2 percent of the loan amount. Lenders also are restricted from setting up loans with negative amortization - a high-cost loan in which the principal increases over the course of the loan, leaving the borrower to pay more than his or her home is worth.

Laws such as THLPA are part of a nationwide trend to eliminate high-cost mortgage practices, Neale said.

In his research, Neale found that in 1999, North Carolina became the first state to put some real teeth into an anti-predatory lending law. That law targeted predatory lending practices for homeowners who were refinancing their homes.

"Their law was really very advanced," he said.

In 2001, a report issued by the Coalition for Responsible Lending in Durham, N.C., estimated the cost of predatory lending in the United States exceeded $9 billion each year.

After the North Carolina law went into effect, the number of predatory refinance loans in the state dropped significantly, Neale said, and he expects the same to happen in Tennessee.

Ultimately, Neale said he hopes the predatory mortgage lenders currently operating in the state will decide to take their business elsewhere - out of Tennessee.