Crackdown on Unscrupulous Lenders OKd

The Los Angeles City Council gave preliminary approval Friday to an ordinance that significantly alters the way some home loans are made in the city, cheering advocates who say the law will help prevent unwitting homeowners from losing their homes and equity to unscrupulous lenders.

“The ordinance gives those who are nervous about the sharks roaming around our neighborhoods a sense of relief and protection,” said Councilman Mark Ridley-Thomas.

Capping an 18-month effort, the unanimous vote hands a major victory to Ridley-Thomas, who proposed the ordinance, and the Assn. of Community Organizations for Reform Now, which lobbied hard on its behalf.

The ordinance addresses “predatory lending” -- high-interest, high-fee loans to homeowners who lack the ability to make the payments. The victims -- often older people, poor people and people of color -- sometimes lose their equity and their homes.

Such loans are offered by “sub-prime lenders,” those that primarily deal with borrowers who lack the “A” rating needed to borrow from prime lenders.

Housing advocates say lenders often target those who lack the financial savvy to understand the deals. People who don’t speak English also are likely to fall victim.

Across the country, cities and states, including California, have passed laws to address the problem.

But the California law, which went into effect in July, falls short of what is needed to address the conditions in Los Angeles, advocates said.

At a hearing Thursday, banking industry representatives argued that more time was needed to assess the effects of the state law. Others argued that the ordinance would chase lenders out of the city, hurting the very people it intends to help.

“This proposed ordinance is premature and too risky,” Melissa Richards, general counsel for the California Mortgage Bankers Assn., said Friday.

But virtually every member of the City Council spoke of constituents struggling with unscrupulous lenders.

Councilman Ed Reyes said the new law should not concern good lenders “because they aren’t doing anything wrong.”

Added Councilman Dennis Zine: “If the industry had policed itself, we probably wouldn’t be here.”

The issue of predatory lending has been a key concern for Ridley-Thomas, dating to his days as the head of the Southern Christian Leadership Conference.

The Sacramento-bound Ridley-Thomas has been packing his bags for the state Assembly with one hand and with the other pressing for an ordinance.

“This kind of public policy serves the interest of people who most need it,” he said. “Our silence only makes us complicit.”

All 11 council members present voted to pass the ordinance. . It must go before the council again for a second reading but will need only eight votes to be approved.

The unanimous vote Friday drew loud applause from a council chambers packed with members of the Assn. of Community Organizations for Reform Now and local unions.

Helen Coleman, who said she had lost her five-bedroom Los Angeles home because of a predatory lender, called the vote an early Thanksgiving gift to the city’s homeowners.

The retired city worker became an activist after her ordeal, dedicating her time to passing the ordinance to prevent others from living her experience.

“I am so happy,” said Coleman, on the verge of tears.

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Differences in L.A., State Laws

The Los Angeles City Council’s preliminary approval of an ordinance that addresses “predatory lending” -- high-interest, high-fee loans to homeowners who lack the ability to make the payments -- caps an 18-month effort. Key differences between the state and local law:

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State Law

* Coverage amounts: Covers all loans of $250,000 or less.

* Sub-prime loans: Defines “sub-prime loans” -- the kind covered by the law -- as any with an annual percentage rate more than eight percentage points above U.S. Treasury notes.

* Credit counseling: Requires lenders making covered sub-prime loans to provide the borrower a written “Consumer Caution and Homeownership Counseling Notice,” which suggests that the borrower consider consulting a qualified independent credit counselor regarding rates, fees and provisions of the loan.

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Los Angeles Ordinance

* Coverage amounts: Applies only to refinance loans. Covers loans of more than $250,000, but the top limit would vary with market conditions.

* Sub-prime loans: Defines “sub-prime loans” as those with an annual percentage rate that is more than six percentage points above U.S. Treasury notes, or loans with points and fees that exceed four percentage points of the total loan amount. As a result, the Los Angeles ordinance would apply to more loans than the state measure.

* Credit counseling: Prohibits lenders from making high-cost loans unless they receive written certification that the borrower has received face-to-face credit counseling in the borrower’s primary language. Borrowers can waive counseling, but must do so in writing.

* Foreclosure protection: Allows the borrower to assert violation of the ordinance as a defense against foreclosure. There is no comparable provision in the state law.

Source: Los Angeles city attorney’s office