Law targeting ‘predatory’ lending misguided, anti-business

Gov. Baldacci has graced us with yet more restrictions on business. This time the law is designed to protect Maine’s heretofore defenseless (and clueless, apparently) citizens against “predatory lenders.” This is an all-too-typical effort by nanny-state government to “do something” once the media has identified a crisis. Lest you be inclined to dismiss it, AP reporter Glenn Adams reminds us this “crisis” is both “looming” and “national.”

We’ll put aside for the moment the utter failure of subprime mortgage foreclosures to bring down the whole economy as widely predicted. Has anyone considered that the mortgage consumer is already the most protected consumer in America?

Take the “victim” in the AP article, Donna Gillette, who spun her tale of woe for Maine legislators earlier this year. She admits she had money-mismanaged her way into a poor credit score. She admits the lender notified her before the closing that the terms of the loan were changing to include a higher interest rate. Then she went to the closing anyway, signed all the disclosures and agreements (and anyone who has been to a closing knows how many times one has to assert his understanding of the contract being freely entered) and left with her mortgage. She then let her three-day waiting period (an opportunity for canceling a deal completely afforded to mortgage borrowers and no other group of consumers that comes to mind) expire without so much as a peep – she admits she “did not protest” the arrangement.

Well, she’s certainly doing her share of protesting now. She wants everyone to believe she’s a victim of “predators.” And she found a disgracefully “overwhelmingly bipartisan” confederacy of dunces in the legislature willing to believe her.

Lenders are under great pressure to extend credit to low-income borrowers, who generally have poorer credit (for a variety of reasons) than higher-income borrowers. Naturally these loans carry greater risk of default, and lenders price this risk into the loan in the form of fees, interest and provisions protecting their large cash outlay in the event of default.

One such provision is their prerogative to “accelerate” the loan, meaning when a borrower stops paying, a lender can demand the entire balance owed. While this generally results in the sale of the property, it is hard to blame the lender for “taking a home and stealing a person’s whole life” (in the words of House Speaker Glenn Cummings). Seems upside-down to me: If I take money from a lender and don’t give it back as agreed, how is the lender the one who’s “stealing”? This is so obvious it is positively mind boggling to hear sentient adults saying anything else.

And yet … the government is here to help. How? By outlawing ‘acceleration.’ Suppose you loaned someone $100 and asked him to pay it back at $5 a week. He misses nine weeks in a row – would you demand your whole $100 back at once? Not in the new default-friendly Maine!

How else are lenders affected under the terms of this drafted-by-a-special-interest-group-in-North-Carolina law (now what was it John Baldacci said about those TABOR people and out-of-state influence)?

? They can’t offer you a “flip” refinance “with no benefit,” which would be like telling Coke they can’t sell to Pepsi drinkers on the theory that Coke is just trying to make a profit off someone who already has a perfectly good cola.

? Lenders lose control over pricing (via price controls in the law) based on risk and market conditions. See if you can remember a time when the government, which has its hands far deeper in your pockets than any business, accepted a cap on its fees. They won’t even accept a cap on an increase of their fees!

? Lenders have to make sure borrowers only buy loans they have the ability to repay. This highlights the big lie behind the whole issue: That lenders seek out default-prone borrowers to victimize. If anything, default-prone borrowers seek out generous lenders to front them money for houses for which they cannot pay. Where is the legislation to protect lenders from these “predatory borrowers”?

? Lenders must provide “mandatory counseling” for higher-rate loan customers. Ms. Gillette’s lender tried to counsel her that her poor credit was pushing her into a higher priced loan. She ignored the advice and signed, signed, signed, signed and signed again anyway. She was “emotionally attached,” at that point, you see, and would not be dissuaded. If only they could regulate want.

This legislation can have but one result: reduced options for low-income and credit-impaired consumers. Like so many other businesses, some lenders will decide to walk (run, more likely) away from Maine than try to profit in our stifling antibusiness climate. And like so many other government “solutions,” the people intended to benefit end up worse off. But at least politicians can take credit for “doing something.”

This rush to legislate and regulate is the result, according to the AP story, of a study showing foreclosures in Maine on the rise. Most folks would understand that foreclosures are just a symptom of general economic weakness, a weakness caused by, not remedied by, restrictions on business.

Paul Tormey is a resident of Orrington.