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The Mortgage Bankers Association recently sent an urgent letter to Speaker John Husted, Ohio House of Representatives, expressing strong opposition to passage of SB 185. Following is a copy of that letter:
March 21, 2006
The Honorable Jon Husted
Speaker
Ohio House of Representatives
77 S. High St.
Columbus, OH 43215
Dear Speaker Husted:
We are writing to express our opposition to the passage of SB 185, the "Ohio Homebuyers Protection Act." We urge you to take action now and vote against this bill in its current form. We further urge you to consider enacting an alternative to this proposal that will help to address the issue of predatory lending in a way that allows the mortgage market to continue to efficiently and effectively operate in Ohio.
The Mortgage Bankers Association is the national trade association representing the mortgage banking industry that made $57.4 billion dollars in mortages to homeowners in the state of Ohio for home purchases, home improvements and home refinancings. We are concerned about the effect that this proposed law may have on the continued operations of the mortgage companies doing business in the state. More importantly, we are concerned about the impact that this proposed new law will have on the flow of mortgage capital and the availability of affordable home mortgage credit to the residents of Ohio.
We want to state for the record that the Mortgage Bankers Association and all of our member companies unequivocally condemn abusive and predatory lending practices. Quite simply, predatory lending threatens to undo the good work that our companies have done to increase homeownership opportunities in communities all across Ohio and the nation. These practices harm innocent borrowers and undermine trust in the financial marketplace. They put legitimate lenders at a competitive disadvantage to those who are willing to ignore laws and regulations.
MBA supports the establishment of a uniform national standard that contains strong consumer protections and objective compliance standards as a more effective approach than the current patchwork of state and local laws that now exists in our nation. A national standard is the better way to achieve our common goal of combating predatory lending.
A national uniform law would bring greater protection to consumers, enhance affordable mortgage credit, protect a well-functioning market and extend the dream of homeownership to more families in communities all across our nation. However, we do acknowledge that until such time as a federal predatory lending law is enacted, states and localities will seek to address this issue through the enactment of state and local laws, and for that reason we want to express our concerns to you about the potential enactment of SB 185.
SB 185 is not the answer that will help fight predatory lending in Ohio. The bill if enacted as written, although well intentioned, will have the unintended consequence of creating a "crisis of credit availability" by establishing an uncertain legal environment under which the mortgage lending industry will find it impossible to conduct business in the state.
Our first concern is that the proposed law would make mortgage transactions subject to Ohio's "Consumer Sales Practices Act" (CSPA). This law was passed more than 30 years ago as a law designed to protect consumers from unregulated general retail transactions like purchasing a toaster or television set. Expanding the CSPA to mortgage lending, which is a complex financial transaction that is already heavily regulated by state and federal law does not make sense. It would force judges to shoehorn mortgage transactions into a law that was meant to govern retail transactions.
Furthermore, if mortgages in Ohio were to be regulated under CSPA, it would create an uncertainty for mortgage lenders and investors and seriously hinder their ability to extend credit to consumers. Some examples of the uncertainty that is created by the CSPA include:
- the CSPA sets no clear guidelines for what constitutes a violation of the law and as it permits Ohio courts to make new law every time a suit brought under the CSPA is decided;
- the CSPA does not require a finding by an Ohio court that a violation of the law was made with intent or knowledge on the part of the alleged perpetrator. Rather, all it requires for the Court to find liability is that the conduct complained of has the likelihood of inducing in the mind of the consumer a belief which is not in accord with the facts, and it need not rise to the level of fraud, negligence or breach of contract;
- the CSPA vests broad discretion and flexibility in Ohio courts to fashion remedies to redress the wrong committed and reimburse the loss occasioned, making it very diffi cult, if not impossible to predict what sort of broad remedies a court might decide to impose for a violation; and
- the CSPA allows Ohio courts to find that an act determined to violate CSPA for one consumer can automatically be considered to violate CSPA for another consumer without any showing of deception or unfair bargaining position with regard to the consumer.
By allowing mortgage transactions to be governed by the CSPA,
SB 185 would create more ambiguity than clarity. It will require that subjective rather than objective judgments be made about prohibited practices and conduct. It will result in an inability to properly ensure compliance, the filing of frivolous claims, and lead to the development of an uncertain legal environment for mortgage lenders and investors.
In addition, SB 185 would also create further uncertainty for lenders and investors by imposing a new "fiduciary duty" towards certain borrowers. It would do this by requiring that brokers and lenders act in the "best financial interest" of the client. This is a very broad, vague and subjective standard. It is one that is entirely unworkable in the context of mortgage lending as the "best
financial interest" of any given consumer varies from consumer to consumer depending on that individual’s specific circumstances.
The elements involved in selecting a mortgage product are subject to a slew of options and consumer preferences. Thus, it would be impossible for a mortgage lender or broker to identify and objectively define the "best financial interest" of a consumer with any reasonable degree of certainty.
As representatives of the mortgage industry, we have witnessed situations in Georgia, New Jersey, the District of Columbia, and most recently in Montgomery County, Maryland, that are similar to the one presented now in Ohio by SB 185.
In all these instances, the legislatures in these jurisdictions attempted to address predatory lending by enacting laws that were full of broad, vague and ambiguous definitions and subjective standards. Lenders and investors in those mortgage markets then were forced to make legal and business decisions to exit or
significantly curtail their product offerings in those states and localities due to the uncertain legal environment that was created by the new laws. Secondary market investors were often unwilling or reluctant to purchase loans made in these jurisdictions.
In the modern mortgage market, the vast majority of mortgage loans are no longer made from bank reserves or monies derived from depository sources. Rather, mortgage loan capital is largely obtained from securitization and the sale of mortgage-backed assets to secondary market investors.
The capital that lenders use to fund mortgages is derived from the secondary mortgage market with national and international capital sources that include Fannie Mae, Freddie Mac, Ginnie Mae, Federal Home Loan Banks, and a wide array of private investors. Mortgage lending is therefore conducted on a truly national scope.
This highly functional secondary mortgage market is, however, greatly dependent on legal certainty and predictability. In short, secondary market investors must have the security of being able to purchase and trade mortgage-backed assets without undue complications and without excessive legal risk. In this sense, only well defined, standardized, objective and uniform lending rules will provide the capital markets with the foundation of necessary legal certainty that ensures enforceability of particular transactions while facilitating securitization and the flow of capital.
As a result of the actions taken by the legislatures in these states and localities, a "crisis of credit availability" developed in those markets. The availability of capital and credit flowing into those mortgage markets became limited. Loans were not able to be sold in the secondary market as that market requires that lenders and investors have a very high degree of legal and regulatory certainty. The elected representatives in those states and localities were then forced to revisit the laws they enacted and modify them so that lenders would return to their jurisdictions and continue to extend credit to their constituents.
SB 185 in its current form presents the same situation for Ohio’s elected representatives. The law as written does not provide the certainty or clarity that is required by the primary and secondary mortgage markets. This increased risk of liability for lending in the state will be just too great to continue lending or investing in mortgages made in the Ohio, and ultimately it is Ohio’s consumers who will be harmed.
Consumers will not see the strong competition among mortgage lenders that allows them to shop around for the best loan product at the best price. Their ability to choose the best product will be limited. Consumers will not be able to get the loan they need to purchase or refinance a home. Consumers will not be able to tap into the equity they have in their homes to get a loan that will help send their child to college or get the best healthcare for their aging parents. Consumers will have a harder time finding a homebuilder to build their home as well as a real estate agent to sell their home, as potential buyers will have a harder time finding a lender to give them a loan or will not be able to afford the rate on a mortgage because of the scarcity of credit availability.
However, there is still time for you to act to prevent a crisis of credit availability from occurring in Ohio as happened in Georgia, New Jersey, the District of Columbia and Montgomery County, Maryland while at the same time achieving the objectives being sought by SB 185 to strengthen protections for consumers in Ohio from predatory lending. We strongly urge you to consider enacting such an alternative.
The alternative that we recommend for your consideration is one that provides for the Ohio Attorney General to be granted the power similar to procedural powers already granted to the Attorney General under CSPA, but in this case that power would apply to the mortgage lending industry. This would provide the Attorney General with the new authorization to investigate and bring actions for violations by brokers and lenders of state and federal lending laws such as the Real Estate Settlement and Procedures Act (RESPA), the Truth in Lending Law (TILA) and the Home Ownership and Equity Protection Act of 1994 (HOEPA). This would also include the power to fine and revoke licenses of brokers and lenders for violations of these laws as well as the power to initiate criminal proceedings against predatory lenders if warranted. In addition, a consumer would retain the right to initiate a CSPA type action against any broker or lender who violated the state or federal mortgage lending laws.
Such a state law, utilizing the federal standards enumerated above would provide mortgage lenders and investors with the certainty that today’s primary and secondary mortgage markets require to operate. It provides lenders and investors with defined and objective compliance standards. It would prevent a "crisis of credit availability" from developing in Ohio while offering consumers strengthened protections against predatory lending.
In addition, we support inclusion in the new law of provisions that would provide for more consumer financial literacy to educate consumers about the complex residential mortgage industry,
financial decision-making, mortgage borrowing and predatory lending. We also support the extension of financial literacy education to primary education curriculum that would provide instruction in personal financial literacy, including personal economics, financial planning, financial decision-making and consumer credit. We also acknowledge that such financial literacy efforts will require a new source of funding and we support a proposal to fund these efforts through an add-on to the mortgage recordation fees in Ohio.
MBA and its member companies, including the Ohio Mortgage Bankers Association, stand ready to work with you to help fight abusive and predatory lending practices in the Ohio. It is important that we continue to identify ways to prevent abusive lending without undermining legitimate mortgage credit options.
All of us have a vested interest in protecting consumers by fighting predatory lending. Given our nation’s economy today, and the economy of the State of Ohio, homeownership is critical to most families’ efforts to build wealth and we must do everything we can to try to encourage the growth of homeownership for all.
If you have any questions or require additional information about this matter, please contact Paul Richman Senior Director of Government Affairs of the Mortgage Bankers Association at
(202) 557-2899.
Thank you for the opportunity to address this matter with you.
Most sincerely,
Mortgage Bankers Association
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