March 29–April 5, 2001

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The Loan Ranger

Councilwoman Tasco photo: Shoshanna Wiesner

Councilwoman Marian Tasco plans to introduce amendments March 29 to her controversial "predatory lending" proposal, including provisions that exempt traditional banks from the bill altogether and attempt to fix "pre-emption" issues that may have interfered with state and federal banking regulations.

But even with these amendments, banking industry sources oppose the bill and say a legal challenge is inevitable if it gets adopted.

Tasco insists she will bring her proposal to the floor for an April 5 vote, regardless of the grumbling.

Predatory lending is practiced by banks or mortgage companies that charge unreasonably high interest rates and exorbitant, unnecessary fees. The borrowers — often the poor, the elderly and people of color — are typically unable to obtain a traditional loan because of bad credit.

Tasco’s proposal identifies 13 lending tactics that would be outlawed as "predatory." They include "balloon" payments, defined as any scheduled payment that is more than twice the normal installment; lending without home-loan counseling from a city-approved counselor; and negative amortization, where the payment schedule causes the principal balance to increase.

The amended bill replaces the phrase "sub-prime loan" with "threshold loan." (The threshold is defined as a loan with an annual percentage rate that exceeds six percentage points of a first mortgage or eight percentage points of a junior mortgage. Fees exceeding $16,000 also trigger the threshold). This is because legitimate loans made to people with shaky credit are often referred to as "sub-prime" loans.

Tasco’s latest draft attempts to deal with pre-emption issues on three levels.

The federal Alternative Mortgage Transaction Parity Act permits lenders to use balloon payments, adjustable rates, negative amortization and pre-payment penalties. So Tasco’s bill now specifies that a loan is not deemed predatory "solely" because it contains these stipulations.

"But combined with ignoring whether the borrower has the ability to repay the loan, it could be predatory," says Irv Acklesberg, an attorney with Community Legal Services who helped write the bill.

The Pennsylvania Consumer Discount Company Act allows "consumer discount companies" to make very high interest loans — even up to 24 percent. Therefore, the council bill now excludes loans made under this act, unless they include additional "predatory" features.

Lastly, all traditional banks and savings and loan institutions are exempted from regulation under Tasco’s bill.

"Banks are not the ones making predatory loans," Acklesberg says, "but that doesn’t include their subsidiaries."

In response to the fact that home improvement contractors are often the "bird dogs" of sub-prime lenders, Acklesburg asserts, the bill includes a provision that would require all contractors to provide "warning notices" to their customers.

A provision requiring lenders and, if applicable, mortgage brokers, to submit "a certification of compliance" to the city’s Department of Records was changed so that title companies no longer have to file.

"Title companies don’t do a lot of analysis of loans, so they shouldn’t be on the hook," Acklesberg says.

This provision would create a citywide database disclosing all points and fees built into mortgages, allowing "the city to get a snapshot of what kind of lending is going on in specific neighborhoods," he adds.

Jeremy Rosenblum, a Ballard Spahr attorney who also chairs an American Bar Association committee focusing on pre-emption issues, counters that Tasco’s amendments are "not terribly significant."

"They are a dollar short and a day late," he asserts. "Councilwoman Tasco started with an ordinance that gave no recognition of pre-emption issues and tinkered with it."

The ordinance "begins by defining the universe of predatory loans by fee and rate," both of which lenders are legally permitted to set, Rosenblum notes. "It puts penalties or special requirements on lenders’ ability to exercise their federal rights."

He contends the bank exemption does not go far enough to protect legitimate lenders from being penalized — the "stick" in Tasco’s proposal would ban predatory lenders from doing business with the city of Philadelphia.

Even if banks are not penalized for making certain kinds of loans, Rosenblum characterizes the mortgage certification requirement as unfairly "costly."

Among his biggest criticisms of Tasco’s proposal is this seemingly innocuous sentence: "No person shall make, issue, or arrange a predatory loan, or assist others in doing so." Because of this language, Rosenblum says, title companies and appraisers will be afraid to do their jobs.

"When they are called up to perform these services, they don’t know if it is a threshold loan," he says. "There’s a good chance title companies won’t participate in providing services to threshold loans."

And as a consequence, Rosenblum concludes that "any credit" in Philadelphia will dry up.

Clearly, Acklesberg and others who perceive predatory lending as a serious problem in Philadelphia don’t subscribe to this interpretation of the bill.

Acklesberg says Philadelphia is experiencing an "epidemic" of home foreclosures because poor residents are tricked into taking out sub-prime mortgages that they cannot possibly afford to repay.

When unethical lenders threaten to leave the city should Tasco’s predatory lending bill pass next week, Acklesberg doesn’t feel a lot of sympathy.

"My response is, ‘I-95 is that way.’"

—Gwen Shaffer