The Volokh Conspiracy
[Todd Zywicki, December 1, 2006 at 10:12am] Trackbacks
Montgomery County Anti-Predatory Lending Law Struck Down:

The Washington Times reports:

A Montgomery County judge yesterday struck down a predatory-lending law, saying it usurped state authority.

Circuit Court Judge Michael D. Mason said the law -- which cites "abusive prepayment penalties" and "excessive points and fees" as two indicators of discriminatory lending against protected classes of individuals -- is unconstitutionally broad.

"No matter how noble the purpose, a 'general' law is beyond the authority of the county to enact and is unconstitutional," he concluded in a 29-page opinion. "As drawn, it has substantial territorial effect beyond the borders of Montgomery County."

I haven't been able to locate the judge's actual opinion, so if someone has a link to it, I'd appreciate it if you would post it in the comments or email it to me and I'll post it as an update.

One issue that has arisen in the Watters v. Wachovia Bank preemption case, and which I addressed in my remarks at AEI the other day (video of the program is available here), is whether the OCC's preemption of state predatory lending laws is reasonable in light of the effect of such laws on the supply of credit to consumers. Apropos of that point, the story notes:

More than 50 local and national mortgage lenders -- including several Wall Street investment banks -- said the law made it too risky to do business in the county and withdrew their services in the weeks leading up to March 8, disrupting home sales and loan refinancings.

Tennessean (mail):
One wonders, of course, whether those local and national lenders truly find it too risky or whether they made a calculated political move.
12.1.2006 10:38am
MnZ (mail):
Tennessean,

I would not be surprised if this action was supposed to be a shot accross the bow of local governments. HToo many local governments are populated with individuals who are know very little about policy and about limits to their own authority. However, I question how effective lenders will be. For example, my local city council routinely has laws struck down because they overstep the authority given to them by the state. Since the taxpayers are footing the legal bills, the council doesn't seem to care.
12.1.2006 11:07am
CM:
The Ohio Supreme Court entered a similar ruling last week.
12.1.2006 12:09pm
ReaderY:
Agree there is a legitimate question of whether the matter is a local or a state one under state law.

That said, voters ought to have a right to decide, at some level, whether this sort of business is a sort of business they want.
12.1.2006 12:42pm
John (mail):
"More than 50 local and national mortgage lenders -- including several Wall Street investment banks -- said the law made it too risky to do business in the county and withdrew their services..."

Wait! Economic regulation has effects on behavior??!! Stop the presses!

For God's sake, what idiots we have in government.
12.1.2006 12:55pm
HLSbertarian (mail):

...voters ought to have a right to decide, at some level, whether this sort of business is a sort of business they want.


I fully agree. How about the level of, say, their household?
12.1.2006 1:11pm
RI Lawyer:
Both Massachusetts and North Carolina have enacted state anti-predatory lending laws and there has not been wholesale interruption of mortgage lending in either state. Rhode Island adopted a similar statute in the most recent session, which takes effect on December 31 of this year. Prior to the passage of the bill certain players in the mortgage lending industry raised the same alarms about credit drying up. To date, I am not aware of any reputable lender that plans to cease operations in Rhode Island. To the extent that the law causes some lenders who encouraged unsophisticated borrowers to get into risky and inappropriate lending loans to cease operations in the state, then the statute is doing exactlyt whay it is designed to do.
12.1.2006 2:32pm
David M. Nieporent (www):
To the extent that the law causes some lenders who encouraged unsophisticated borrowers to get into risky and inappropriate lending loans to cease operations in the state, then the statute is doing exactlyt whay it is designed to do.
To screw poor people?
12.1.2006 2:56pm
RI Lawyer:
David:

You missed the point - the law forces those looking to screw poor people to stops doing business in the state.
12.1.2006 3:56pm
David M. Nieporent (www):
No, RI Lawyer, you missed the point: the law forces those looking to do business with poor people to stop doing business, which is what screws poor people.
12.1.2006 4:14pm
Steve:
The law doesn't force anyone to stop doing business. It just forces them to stop doing business on exploitative terms.
12.1.2006 4:42pm
JerryW (mail):
"The law doesn't force anyone to stop doing business. It just forces them to stop doing business on exploitative terms."

But if I were a lender I certainly wouldn't want to be put in the position that some local judge/jury could define "exploitative terms"and then award damages. It would be much safe/cheaper to just stay out of the entire risky borrower market.
12.1.2006 5:39pm
Steve:
By that logic, I'm surprised there are any corporations still in business whatsoever, as virtually every jurisdiction has a statute prohibiting the loosely-defined subject of "unfair business practices." Why they stay in business and accept the fact that a local judge/jury might define "unfair business practices" and award damages is beyond me, I guess.

In any event, predatory lending statutes do not simply say "no exploitative terms, full stop." I was making a blog comment, not quoting a statute.
12.1.2006 5:54pm
markm (mail):
No predatory lending law has ever prevented lenders from "exploiting poor people" by making risky loans with extremely high interest rate. What these laws do is to shift the business from lenders that operate within the law and attempt to collect through the courts to lenders that operate outside the law, charge even higher interest and penalties, and use thugs for collection.

Such laws are not about "protecting poor people", but about self-righteous legislators and councilmen feeling good about themselves while ignoring the real effect of the law on poor people.
12.2.2006 8:47am
Azer:
Thanks to Anti-Usury Laws, banks and credit cards are not allowed have interest rates between 30-1000%. Many banks would be willing to offer loans to risky individuals at those interest rates. Instead, some people have to pay upwards of 1000% to a payday lender. How does that help poor people ?
12.2.2006 4:49pm
Lender (mail):
The banks which were ceasing to lend in Montgomery County didn't stop because they were opposed to taking risk or lending to poor people. All of these entities have a business model to make these loans and immediately securitize them or sell them to someone who is going to securitize them. As a result, the nature of loans which they are willing to make in any jurisdiction is primarily driven by the requirements of the rating agencies and Fannie/Freddie. The rating agencies have spent the last few years constantly reviewing a never ending stream of state and local predatory lending regulations and parsing out which loans they deem are securitizable - their primary concern have been provisions in the laws which provide for assignee liability or other creative damages provisions in the statute.

Montgomery County is far from the first locale to pass a law which drove lenders who need to securitize loans from the state. The state of Georgia did it a few years ago, then hastily amended their statute. A lot of other city statutes have also had to be revised.
12.4.2006 1:22pm

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