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Edgemont Neighborhood Coalition

From: Hirtle Stanley
Sent: Monday, December 12, 2005 4:54 PM
To: Comments
Subject: Edgemont Neighborhood Coalition comments on FDIC preemption of state consumer protection laws: RIN 3064-AC95

December 12, 2005

Robert E. Feldman
Executive Secretary
Attention: Comments/Legal ESS
Federal Deposit Insurance Corporation
550 17th Street NW
Washington, D.C. 20429

Re: RIN 3064-AC95

Dear Mr. Feldman:

Edgemont Neighborhood Coalition urges you to drop your proposal to preempt certain state consumer protection laws in connection with the lending and deposit activities of state-chartered banks. Your proposal would help strip states of their power to enforce and enact meaningful consumer protections for its citizens.

EDGEMONT NEIGHBORHOOD COALITION, INC.

Edgemont Neighborhood Coalition, Inc. is a nonprofit community organization located at 919 Miami Chapel Road, in Dayton, Montgomery County, Ohio. The group consists of residents of the Edgemont neighborhood, a low-income African American neighborhood in Dayton, who have associated in order to foster pride in their neighborhood and address the issues of crime, youth and adult joblessness, inadequacy of educational opportunities, affordability of utilities, and business and community development.

One issue of importance of the Edgemont Neighborhood Coalition, Inc. has been the availability of affordable financial services in the community. Edgemont has been active in Community Reinvestment Act activities in order that residents have access to mainstream financial services at mainstream prices, and not be relegated to high-cost “fringe lenders” such as “subprime” mortgage lenders, rent-to-own vendors, payday lenders, refund anticipation lenders, and pawnshops.

In furtherance of these goals, Edgemont has commented on proposed regulations by federal agencies and has appeared as amicus curiae in court cases involving payday lending and predatory mortgage lending. Edgemont has been a party in proceedings in the Public Utilities Commission of Ohio, and has also cosponsored conferences concerning payday lenders and their effects on the community. Edgemont supports the work of the National Community Reinvestment Coalition and of the Community Reinvestment Institute Alumni Association here in Dayton.

In addition to being a community organization, Edgemont Neighborhood Coalition, Inc. functions as a small business, operating an office, community garden and community computer center.

LOCAL CONCERNS

Ohio leads the nation in mortgage foreclosures. Montgomery County, Ohio, where Edgemont is located, leads the state in mortgage foreclosures. Numerous authorities, including an informal poll of the Buckeye State Sheriff’s Association, have identified predatory mortgage lending as a leading contributing factor to the high number of foreclosures in Ohio.

STATE CONSUMER PROTECTION LAWS ARE NEEDED

Predatory Mortgage Lending is a serious problem in Ohio and across the country. A recent Federal Reserve study of the new 2004 HMDA data1 confirmed two National Community Reinvestment Coalition (NCRC) reports2, which found that minorities continue to pay more for loans as they are more likely to receive high cost loans than whites. It is likely that price discrimination and steering are partially responsible, similar to what has been shown to occur in the car financing industry. Studies in Pennsylvania3 and North Carolina4 have shown that 20% of subprime mortgage loans, and 40% of subprime loans made in some Pennsylvania urban areas, ended up in foreclosure. A Freddie Mac study reported that anywhere from between 10% to 35% of subprime borrowers qualified for prime-rate loans.5
A study found that mortgage foreclosures in Montgomery County Ohio by identified subprime lenders increased at an annual rate that was more than double the annual rate of increase with lenders not identified as subprime lenders, while the subprime lenders whose sampled mortgages exhibited selected predatory characteristics accounted for 65% of the subprime foreclosures.6 Another study of three urban counties, including Montgomery County, found that subprime loans generated three times as many foreclosures as prime loans.7

Ohio is considering strengthening its laws to prevent unconscionable and deceptive practices by lenders, and take other steps to prevent the loss of homes to predatory mortgage lending. This is in tune with the tradition that consumer protection has been primarily a responsibility of the states, most of which have enacted laws against unfair and deceptive practices as well as other types of abusive lending practices.

An obstacle to protection of local homeowners has been the effort of regulators of the various federal-related lending institutions to preempt these state consumer protection laws. There is presently no strong federal law against unfair and deceptive lending practices to substitute for state laws. Instead Federal banking and thrift laws have been interpreted to permit these lenders making the state with weak state consumer protection laws their home state and export the laws into other states. This not only harms the victims of these lenders, but gives political and economic cover to other lenders who seek the same exemptions.

Your proposal continues on this path. It would allow FDIC-chartered banks to skirt strong consumer protection laws in states in which they make loans and follow weaker laws of the state in which they are headquartered. If the FDIC enacts this proposal, state-chartered banks will be tempted to place their headquarters in states with weak laws and then “export” these laws to other states in which they make loans. The end result would be a regulatory race to the bottom and the stripping away of states rights, leaving consumers without strong protections against predatory lenders.

In addition FDIC does not have the same regulatory power that OCC or OTS do. State chartered banks are creatures of State law. FDIC has some regulatory power to promote safety and soundness of state chartered banks. While certain federal laws give FDIC specific preemptive powers over state chartered banks,8 FDIC does not have the extensive statutory power that the OCC has over national banks and OTS has over federal savings banks, which are federally chartered. Even the extent of OCC and OTS claims of power to preempt state consumer protection laws continue to be challenged in court.

Congress stated in 1994 that it did not intend to weaken the authority of states to protect the interests of consumers, nor to change the substantive theories of preemption that existed in law at that time. H.R. Conf. Rep. No. 103-651 at 53 (1994), reprinted in 1994 U.S.C.C.A.N. 2074, 2076.9

CONCLUSION

All of the studies show that predatory lending is a widespread problem throughout the country. States must have the authority to clamp down on predatory practices.

In addition, in the last year federal regulators have been chipping away at important consumer protections. Now is not the time to weaken laws for state-chartered banks.

Ultimately, this proposal will further undermine the gains American communities and consumers have made in community development and wealth building. The family home is the center of family life, as well as the center of efforts of government programs to build and stabilize neighborhoods.

I strongly urge you to drop your proposal and to remind state-chartered banks that they have a moral and civic responsibility to respect the will and the rights of the states to protect its citizens. State-chartered banks can also do more to see that affordable loans, priced appropriately to borrower risk but without any additional exploitative costs or features, are available throughout our communities.

Thank you for your consideration of my comments.

Sincerely,

Stanley A. Hirtle
Attorney for Edgemont Neighborhood Coalition
Advocates for Basic Legal Equality
333 W. First St. #500
Dayton OH 45402
937-228-8104

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1 Federal Reserve, New Information Reported under HMDA and Its Application in Fair Lending Enforcement, available at http://www.federalreserve.gov/pubs/bulletin/2005/3-05hmda.pdf

2 Preapprovals and Pricing Disparities in the Mortgage Marketplace, (June, 2005) available at http://www.ncrc.org/pressandpubs/press_releases/documents/HMDApricing_Report.pdf and Fair Lending Disparities by Race, Income, and Gender in all Metropolitan Areas in America, (March, 2005) available at http://www.ncrc.org/pressandpubs/press_releases/hmda05report.php

3 The recent Pennsylvania foreclosure study was able to look at all subprime loans originated in certain counties in calendar years 1998 and 1999, and then determine how many were the subject of a foreclosure filing in the four year period from 2000 to 2003 inclusive. The study authors found that subprime mortgages were foreclosed upon at a rate varying from 20% in most counties to 40% in one Philadelphia area county. The Reinvestment Fund, Mortgage Foreclosure Filings in Pennsylvania (2005), www.banking.state.pa.us/banking/lib/banking/robert/statewideforeclosure/mortgage_forclosure_filings.pdf.

4 Univ. of North Carolina researchers found that 20% of subprime loans originated from 1998 to 2000 were the subject of at least one foreclosure filing in the six-year period 1998 to 2003. Of those loans, 60% resulted in a foreclosure sale or home loss within the study period and another 20% were still in foreclosure. Quercia, Stegman & Davis; The Impact of Predatory Loan Terms on Subprime Foreclosures: A Special Case of Prepayment Penalties and Balloon Payments, Center for Community Capitalism, Kenan Institute for Private Enterprise, University of North Carolina at Chapel Hill, (January 25, 2005), http://www.kenan-flagler.unc.edu/assets/documents/foreclosurepaper.pdf.

5 Engel & McCoy, supra, 80 Tex. L. Rev. at 1264, n. 20 citing Freddie Mac, Automated Underwriting: Making Mortgage Lending Simpler and Fairer for America’s Families Ch. 5, at nn.5-6 (Sept. 1996), http://www.freddiemac.com/corporate/reports/moseley/chap5.htm

6 Stock (the Center for Business and Economic Research at the University of Dayton), Predation in the Subprime Lending Market: Montgomery County Executive Summary, (October 25, 2001).

7 Bellamy, the Expanding Role of Subprime Lending in Ohio’s Burgeoning Foreclosure Problem (2001).

8 Section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDA), amending, 12 U.S.C. § 1831d(a) (state-chartered banks); 12 U.S.C. §§ 1463(g) and 1831(b) allows favored lender interest rate preemption and the exportation rights. In addition 12 U.S.C. § 1831a(j) of the Riegle-Neal Act allows branches of a state chartered banks to import the home state interest rate.

9 Congress directly instructed the OCC not to conclude that a state law is preempted unless “the legal basis is compelling and the Federal policy interest is clear.” Id. at 1076




Last Updated 12/13/2005 Regs@fdic.gov

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