Banks are protesting a provision tucked into the omnibus appropriations bill that would allow the FTC to issue rules on cracking down on predatory mortgages and allow state attorneys general to enforce the language and all consumer lending covered under the Truth In Lending Act.
Sen. Byron Dorgan, D-N.D., inserted the language into the $787 billion spending bill because he believed that the country needs "more cops on the beat" to track predatory lending, which played a major role in the housing market collapse, according to his spokesman. The Senate is considering the omnibus this week, and is attempting to pass it and send it to President Obama for his signature by Friday, when the continuing resolution funding most of the government expires. (See related story, page 7.)
Lenders oppose the move the move because the Federal Reserve and banking regulators already have exclusive authority to enforce TILA violations for insured-depository institutions, including mortgages and other consumer transactions.
The Fed recently updated its rulemaking over mortgage lending after complaints that it was too lax during the housing bubble buildup earlier this decade. Under the new Fed rules, lenders would have to determine if the borrower had the ability to repay a loan, verify income and assets of a customer, and restrict prepayment penalties during the first years of a loan.
"Adding [the Dorgan language] to the existing regulatory framework will create confusion and uncertainty for all businesses that finance these transactions and provide credit throughout the country at a time when the housing market and the overall economy are already highly unstable," wrote a coalition of banking groups to Senate Majority Leader Reid and Minority Leader McConnell. The groups included the American Bankers Association, the Financial Services Roundtable and the U.S. Chamber of Commerce.
In addition, the groups complained that the provision could lead to an explosion of lawsuits by allowing state attorneys general to prosecute such violations, similar to actions that states took against the tobacco industry in the 1990s.
"Several states have already used contingency fees and other legal services arrangements with private law firms to 'outsource' their consumer protection enforcement responsibilities to private law firms, often with little oversight from either the State AGs or state legislatures," the groups wrote.
A Dorgan aide said the language would not change the fact that the FTC has no jurisdiction over banks, but it would apply to mortgage brokers and other nonbank entities that engage in unfair and deceptive acts.
Senate Banking Chairman Christopher Dodd has expressed concern about the Dorgan language to Senate Appropriations Chairman Daniel Inouye, according to an aide, but it is unclear whether Dodd would have the momentum to pull the language given the House has already passed the bill and that it is on a fast track in the Senate. Any changes the Senate makes would have to pass through the House again, and the Friday deadline adds urgency to passing the current omnibus wholesale. Nevertheless, one lobbyist said it is his understanding that federal banking regulators are working against the Dorgan provision.
Wrangling over the Dorgan language comes as House Democratic leaders attempt to revive legislation allowing bankruptcy judges to modify home mortgages, including reducing the principal of a loan. House leaders pulled the bill from a floor vote last week after members of the New Democrats and the Blue Dog Coalition expressed concern that it was not as restrictive as it could have been.
Democratic sources said that changes were discussed at a House leadership meeting Monday night with the intent of moving a new version of the bill through the Rules Committee on Wednesday. The banking industry has been asking for greater concessions, such as limiting eligibility to subprime and nontraditional loans, but that seems like a long shot.
Another idea is to have homeowners first determine if they are eligible for the Obama administration's housing plan, which would potentially lower interest rate payments for 9 million families, before being able to file for bankruptcy.