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Measure takes aim at lending predators
Legislature OKs bill curbing loan abuses

Thursday, May 25, 2006

Reginald Fields, Plain Dealer Bureau


Columbus - After meeting behind closed doors for two weeks, it took a joint legislative committee just 30 minutes into a public hearing on Wednesday to agree on sweeping new measures cracking down on deceptive mortgage loan officers.

The full House and Senate then followed suit, each overwhelmingly approving Senate Bill 185, sending it to the governor, who is expected to make it law.

Statehouse leaders promised a tough-minded bill to deal with predatory lenders, and most involved - from lawmakers, to consumer groups, to lending institutions - agree this bill does just that.

"I believe that it is the best piece of consumer protection legislation of any state in the nation," said House Speaker Jon Husted, a suburban Dayton Republican. "But we didn't go too far in making it an unfriendly place to conduct business."

But Dayna Baird, a lobbyist for mortgage lenders, isn't so sure. Baird, of the Ohio Financial Services Association, believes the bill does go too far in its effort to root out bad lenders and will ultimately hurt small businesses.

"The best analogy I can draw is that it's a little bit akin to suspending the whole class for the bad actions of one entity," said Baird, who believes the measure is filled with vague provisions that will invite lawsuits.

Under the bill, the mortgage lending industry for the first time in Ohio will be subjected to the state's consumer protection law, and brokers and lenders will have to work in "good faith" for the home buyer.

It is targeted mainly at sub-prime lenders, who tend to serve clients who have poor credit history or low incomes. Banks, which are federally regulated, are not directly affected by the bill.

The bill lists six items Ohio would consider "unconscionable" acts by loan officers under the Consumer Sales Practices Act, including: enforcing unreasonable contract terms; failing to weigh whether the borrower can afford the agreed-upon mortgage payments; and taking advantage of an illiterate person.

Instead of the term "fiduciary duties," the bill employs the less onerous phrase of "broker and lender duties." It all means roughly the same thing: Brokers must promise to shop around for the best possible deal for their borrower, while lenders can't cheat the borrower.

If they do deceive the home buyer, the bill gives the attorney general and county prosecutors powers to press criminal charges while the consumer can sue for uncapped damage awards.

"I don't think there was enough work on the part of the industry to clean themselves up, but I think this bill will give them that incentive to be fair and more honest with their borrowers," said Bill Faith, of the Coalition on Homelessness and Housing in Ohio.

The bill also prohibits non-written promises from loan officers to customers, forbids collusion between loan officers and property appraisers, limits pre-payment penalties, and establishes a database and Web site with names of any loan officer who violates the law.

It will also require several new disclosures, one warning borrowers when they are about to sign a loan that's more than 90 percent of the property's value, another alerting consumers they can back out of a deal until closing.

Baird, representing lenders, said some provisions are untested anywhere in the country and will likely end up in court.

For example, Baird cited the proposed CSPA measure requiring lenders to be sure borrowers can afford the loan. For people with adjustable rate mortgages, Baird said it can be impossible to predict if a consumer will be able to afford the loan years later when the interest rate changes.

"The fear is all of these things will end up in litigation, which drives up the cost of doing business," she said.

Husted said the law would not take effect until January 2007, giving the market a chance to adjust to Ohio's new rules and time for lawmakers to make corrections to the legislation, if needed.

Ohio is one of the country's leaders in home foreclosures, and many lawmakers have attributed part of that problem to predatory lending.

Lawmakers first tried to rush through the bill in March before their spring break but failed when the Senate strongly rejected House changes to the bill.

For the past two weeks, members of the two chambers and their staffs have been meeting privately. A six-member, joint legislative committee hammered out the details but did none of its work in the public's eye.

State Sen. Joy Padgett, a Coshocton Republican, the bill's sponsor, chaired the joint committee.

2006 The Plain Dealer

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