Congressmen are on the war path against predatory lending and mortgage fraud. On March 16 Congressmen Bob Ney (R-OH) and Paul Kanjorski (D-PA) introduced a bill against abusive mortgage lending practices, competing with the Prohibit Predatory Lending Act of 2005, modeled after a 1999 North Carolina anti-predatory lending law, introduced a week earlier by US Congressional Representatives Brad Miller (D-NC), Mel Watt (D-NC), and Barney Frank (D-MA).

Ney and Kanjorski’s project won approval of the appraisers but was rebuffed by some consumer organizations.

"For the appraisal community this bill addresses the toughest issues we have raised over the last several years," said Don Kelly, Vice President of Public Affairs of the Appraisal Institute. "We have been calling upon Congress to take up the serious problem of client pressure on appraisers and enhancement of state regulatory bodies and this bill goes right to the heart of the problem. This is a good bill for consumers and a good bill for appraisers."

Appraisers welcomed the idea of introducing a new federal standard to prevent appraiser intimidation and to step up accountability and enforcement practices of federal and state appraiser regulators.

On the contrary, the Center for Responsible Lending, a nonprofit, nonpartisan policy and research group, negatively reacted to the bill claiming that it does not adequately protect consumers from predatory lenders that, by CRL estimates, take away $9 billion a year from homeowners.

The bill, in the opinion of CRL, has numeous loopholes. Fees like pre-payment penalties or yield spread premiums, effectively kickbacks to brokers for generating business, are not included in the fees that are counted to determine whether a customer is protected by the law. This opens up an opportunity for the mortgage lenders to raise these fees to exhorbitant levels to offset lower fees in other categories, and still get away from penalties imposed by the law.

Loan-flipping, extension of repeated loans to homeowners, is prohibited only for high-cost loans while Miller-Watt- Frank bill forbids this practice on all loans. Under the Ney- Kanjorski bill, mortgage lenders can charge excessive upfront costs that eat into the homebuyer’s equity as they are subsequently rolled over into the principal of the loan. Although it prohibits charging pre-payment penalties in the first three years of the loan term, the bill does not impose a limit on prepayment penalties, that come sometimes come up to as much as 4-5% of the loan.

"The numerous loopholes in this bill show a lack of understanding of how predatory lending steals the home equity of thousands of American families every year," said Mark Pearce, president of CRL. "We simply can’t afford the costs that come with it: The boarded-up houses in struggling neighborhoods, the hard-earned gains of working-class people wiped out by predatory lenders. At bottom, that is what this debate is all about."

Other consumer groups such as Washington, D.C.-based U.S. PIRG, support CRL’s opposition to the bill.

The Miller-Watt-Frank bill, actively backed by consumers, has one more advanatage: it bans mandatory arbitration on all mortgage loans, whereas the Ney-Kanjorski proposal prohibits it only on high-cost loans. The law has been praised for being modeled after NC’s law that is believed to be the best consumer protection in the nation.

Some have been questioning whether the North Carolina anti-predatory law has really been that effective in protecting consumers. A November 2002 working paper from the Credit Research Center of Georgetown University’s McDonough School of Business has found a 14% decline in the number of closed-end mortgages extended to high-risk borrowers in the state of North Carolina, immediately following the passage of the law. The study based on the data from NC’s nine largest mortgage lenders demostrates that the decline was experienced only by the state’s high-risk borrowers, while borrowers in the similar categories in other states were unaffected.

Still, everybody agrees that predatory lending has to be ruled out. Almost all predatory loans are made in the subprime category to borrowers who cannot get a prime-rate mortgage loan due to poor credit history. That being said, it does not mean that all loans in this category are abusive and have excessive fees. Sub-prime borrowers are more likely to default on their loans, and lenders naturally charge higher rates and fees to compensate themselves for the risk. A loan becomes predatory when the relationship between risk incurred and premium charged over the prime rate is broken. Anti-predatory legislature projects have tried to restore a positive relationship between price and risk, trying to affect the underlying cost structure of the mortgage loan.