Predatory lending laws and federalism

Mon Aug. 22, 2005 6:50 PM EDT

Carlos Watson's opinion piece for CNN on predatory lending does raise much needed awareness about a serious problem that, as he rightly argues, gets little attention from national politicians and the media. However, his call for national legislative action, not to mention political posturing, is misguided.

Recent studies from Harvard and the University of North Carolina, as well as reports from other financial experts, estimate that each year more than 10 million poor and elderly Americans are being scammed out of $50 billion in exorbitant fees and unconscionably high interest rates imposed by unscrupulous lenders.

...Surprisingly, no national politician is holding a primetime national press conference to discuss this epidemic. In an era in which steroid use and Terry Schiavo have taken center stage in politics and the media, it is noteworthy that no senator is threatening a filibuster, and no elected official has suggested a hunger campaign to protest the injustice of predatory lending.

...According to various studies, while most middle-class Americans borrow money at rates ranging from 5 to 15 percent, many poor and elderly people are being charged exorbitant fees and annualized interest rates of 50 to 100 percent -- or more -- when they buy televisions or homes, cash their paychecks or take out small loans.

The concept of high-interest loans is nothing new, but unscrupulous check cashing stores, payday loan facilities and rent-to-own facilities have grown dramatically over the last decade -- perhaps fourfold.

And significantly, it is not just corner shops in low-income neighborhoods that specialize in this practice. Indeed, New York Attorney General Eliot Spitzer recently announced that he is investigating some of the biggest names in global banking -- including Bank of America, Citigroup, Wells Fargo, and HSBC -- for steering minorities and others toward high-interest loans.

Especially with Republican majorities in both houses of Congress, national legislation would be weak at best, if not a boon for predatory lenders. I can almost hear the violins mewling in the background while the more bank-friendly members of Congress tell the sad tale of how hard it is to make a good profit off high interest loans to the working poor these days. The bank lobby would certainly make sure it had as many sympathizers as possible.

In California, for example, where state and local governments passed laws regulating the high-interest loan industry, one mortgage company in particular funneled enough money to pay off dozens, if not hundreds, of loans into both political parties' coffers.

A giant Orange County mortgage company accused of duping low-income homeowners has pumped more than $7 million into California politics since 2002, including contributions to Republican Gov. Arnold Schwarzenegger, Democratic Attorney General Bill Lockyer and dozens of other state legislators, members of Congress and political committees.

Ameriquest's top executive, Roland Arnall, also has been one of President Bush's top fundraisers, generating $12 million for the president's political efforts during the past four years. On July 28, Bush nominated Arnall, a billionaire who was ranked No. 106 in the 2004 Forbes magazine list of the wealthiest Americans, as ambassador to the Netherlands.

Since Schwarzenegger took office in 2003, he alone has pulled in more than $1.5 million from Ameriquest, Roland Arnall and his wife, Dawn. Ameriquest also has given $1.5 million to groups backing the governor's political efforts and, along with the Arnalls, has contributed $1.5 million to the California Republican Party.

The development of California's current predatory lending laws reveals another reason why national legislation could create a legal regime that's more lenient towards high-interest money lenders. Earlier this year, the Supreme Court of California, in a 4-3 opinion drafted by Janice Rogers Brown, struck down a local Oakland ordinance prohibiting predatory lending on the theory that a state anti-predatory-lending law preempted it. In American Financial Services Association v. City of Oakland, Brown disregarded express legislative intent to not include a preemption clause in the state legislation, which was more favorable to predatory lenders than Oakland's ordinance, and ruled that the state law was so expansive, it implied an intent to preempt any local legisation on the topic. Janice Rogers Brown's legal philosophy is a story for another post, but her approach to the law is the prevailing one on the Supreme Court right now. National legislation would by necessity fail to address the specific local loopholes predatory lenders have found and used to their advantage.

The amazing thing about predatory lending is that the transactions happen in the open and are usually completely legal. Plenty of legitimate businesses have cropped up in urban areas across the country whose sole purpose is extract crushing interest rates from poor, elderly debtors. These businesses adapt to lax laws, and exploit any loophole they can. Far be it from to predict how broadly the Court's going to interpret the Commerce Clause in any given situation, but even the Lopez five (or four plus Roberts) will have hard time arguing that predatory lending does not have a substantial effect on interestate commerce. This would allow them to hold that broad, vague national legislation preempts tighter state and local ordinances, which would ultimately not help your average American in need of a loan with manageable interest payments.

All this is to say, the laws surrounding high-interest lending beg for reform, but it is probably more effective at the state or local, rather than national, level.

UPDATE...Brad Plumer points out in comments that Mother Jones Magazine had an article about national predatory lending chains earlier this summer. He challenges my preference for leaving regulation to the states. What do you think?