Ruling limits state lender oversight Policing predatory lending now more difficult, Maine officials say

AUGUSTA – The United States Supreme Court ruled Tuesday that states may not regulate the mortgage-lending subsidiaries of national banks, a ruling Maine officials say will make it more difficult to protect Mainers from predatory lending practices.

“We are obviously very disappointed,” said Banking Superintendent Lloyd LaFountain.

He said the decision is a “setback” for consumers, but there are areas where the state still can act to protect consumers from predatory lending practices.

“States still do have authority to make regulations in respect to mortgage companies that are not subsidiaries of federal banks or federal thrifts, and to also regulate loan brokers,” said Will Lund, director of the Bureau of Consumer Credit Protection. “I think states should continue to try and regulate loan brokers and mortgage lenders that are subject to state laws.”

A 2006 study by Coastal Enterprises Inc., a nonprofit economic development organization in Wiscasset, and by the Center for Responsible Lending in Durham, N.C., looked at lending in Maine and found that first-time homebuyers are not the predatory lenders’ only target. The majority, about 65 percent of subprime loans, are taken out for refinancing purposes so the borrower can pay off other debts, often credit cards.

A subprime loan is one that is offered at a rate well below the prime rate, the benchmark that banks set for establishing interest rates for other loans. Subprime lending refers to the practice of making loans to borrowers who do not qualify for market interest rates because of problems with their credit history.

Data from the U.S. Office of the Comptroller of the Currency indicates that the practical impact of any state regulations is limited. At the end of March, there were 1,786 national banks in the United States, controlling nearly $7 trillion in assets, or about 70 percent of the commercial banking industry’s assets.

“States like Maine are leading the way by working to put in place tough new protections for homeowners,” said House Speaker Glenn Cummings, D-Portland, in a prepared statement. “This decision puts some of that responsibility on the shoulders of the federal government, and I am hopeful that it will pressure the feds to take action and deal with the epidemic in predatory lending.”

The Coastal Enterprise study found that between 2000 and 2004, Maine’s subprime loan market rose 436 percent to account for between 10 and 14 percent of the state’s total mortgage market.

Cummings has legislation in the drafting stage that builds on a 2003 law that bans mortgage points and fees exceeding 8 percent of the loan.

The new proposal, yet to be printed, would strengthen that law by setting a 5 percent limit.

The draft bill also would eliminate “mortgage flipping,” where lenders encourage refinancing to generate more fees for lenders; binding arbitration clauses, which deny the customer the right to take a lender to court; and prepayment penalties aimed at preventing customers from paying off their loan ahead of schedule.

Cummings said Congress should use Maine’s existing law and his proposal “as blueprints” for federal consumer protection legislation.

The court agreed with the national banks that argued their mortgage subsidiaries were subjected to a patchwork of state rules and regulations, when Congress had made it clear they should be regulated at the federal level. Maine had joined the other states in arguing the states have a role in protecting consumers.

“The federal government really isn’t set up to do licensing and compliance examinations like states are,” Lund said. “They really don’t have the capacity.”

He said state attorneys general and consumer credit offices have teamed up successfully to go after national companies that were engaged in unfair and deceptive mortgage lending practices over the last few years.