So You've Been Preempted-What Are You Going to Do Now?: Solutions for States Following Federal Preemption of State Predatory Lending Statutes

Brigham Young University Law Review, 2004 by Childs, Christopher R

IV. SOLUTIONS FOR STATES IN THE FACE OF FEDEIIAL PREEMPTION

Because federal regulatory agencies are prone to preempt state efforts, because federal regulation is incomplete, and because blanket federal regulation will not fully address the problem, it is important that states develop solutions that are effective in stopping predatory lending abuses, that do not interfere with federal financial institutions' lending powers, and that do not restrict regulations promulgated by federal regulatory agencies pursuant to their perceived regulatory powers. This Part provides two suggestions for states to curb predatory lending abuses in spite of these obstacles: the regulation of mortgage loan sellers and increased prosecution through state unfair and deceptive trade practices acts. Although other solutions to the predatory lending problem exist, these suggestions effectively address the problem and cannot be preempted by federal regulatory agencies.

A. Increased Regulation of Nonbank Loan Sales

As explained in Part II, the problem of predatory lending arises primarily because of unscrupulous, deceptive, and fraudulent sales tactics. Sellers of loans, just like any salesperson, have obvious incentives to sell loans-namely, they stand to profit. Because of this, unregulated nonbank sellers of loans-primarily mortgage brokersare a significant part of the predatory lending problem. Inadequate or nonexistent regulation, pricing structures that give mortgage brokers incentives to sell loans that may not be appropriate for particular borrowers, and the facts that brokers do not actually back the loan financially and do not take on the credit risk themselves, create a significant risk that some mortgage brokers will be tempted to engage in predatory lending practices. States can remedy this problem, at least partly, by increasing mortgage broker licensing and registration requirements and by providing better oversight and additional guidance through a regulatory agency.

1. Nonbank loan sellers are the main source of the predatory lending problem

Mortgage brokers-nonbank loan sellers-facilitate as many as two-thirds of all home loans91 and originate fifty percent of subprime loans.92 "[T]he growth of this industry has brought with it increasing complaints of mortgage fraud and predatory lending."93 Although brokers process and originate most home loans, regulation of brokers, which is done at the state level, is uneven or nonexistent in some cases. A group of state attorneys general, writing as amicus curiae in a recent case regarding an OTS rulemaking, claimed that

[b]ased on consumer complaints received, as well as investigations and enforcement actions undertaken by the Attorneys General, predatory lending abuses are largely confined to the subprime mortgage lending market and to iiondepository institutions. Almost all of the leading subprime lenders are mortgage companies and finance companies, not banks or direct bank subsidiaries.94

Not only do mortgage brokers facilitate most home mortgage loans and most subprime loans, the role of a mortgage broker in a loan transaction is extensive, giving unscrupulous mortgage brokers ample opportunity to engage in predatory practices. Mortgage brokers provide a service to those seeking a home loan by counseling with them, helping them select and qualify for a loan, shopping for the best rate among various lenders, and locking in the terms of the loan with the lender.95 Mortgage brokers also provide federally mandated disclosures, gather all documentation necessary to get the loan through the lender's underwriting process, order property appraisals and borrower credit reports, verify the borrower's source of income, facilitate the loan closing, and see the loan through until it is later given over completely to the lender.96 The broker usually provides all the necessary services required to generate the loan, with the exception of providing the loan funds.97 Typically, once the loan is closed and the broker is paid, his relationship with the borrower ceases and the lender is involved exclusively with servicing the borrower's loan.98