Revenge of the lenders

How far will lawmakers go to calm mortgage industry's concerns?

Georgia legislators have a choice during the next few weeks. Will they bow to corporate pressure and eviscerate the toughest predatory lending law in the nation, or will they take a more conservative approach that balances the mortgage industry's concerns against its long history of abuses?

The furor over the Georgia Fair Lending Act, which faced stiff opposition from industry groups before the General Assembly session began, stems from Standard & Poor's Jan. 16 decision to stop rating mortgage-backed securities in Georgia. S&P's decision stands to affect the availability of credit in the state. Financial institutions regularly purchase 1,500 to 3,000 home loans at a time, bundle them and issue securities backed by the bundles. Groups such as insurance companies and investment funds then purchase the securities as investments. That injects more money into the market, which the lending institutions can then use to make more loans.

S&P's decision was prompted by its concern that holders of all Georgia home loans could be held liable for any laws broken by the people who originally made the loans — so-called assignee liability. In a likely effort to force quick action from the Legislature, the lending industry has claimed that even groups that buy the mortgage-backed securities can be held liable under Georgia law. That's hotly disputed by AARP lobbyist Kathy Floyd and William Brennan, an expert on predatory lending and program director with the Atlanta Legal Aid Society Inc. They say the Georgia law only focuses on actual holders of the loans. A reading of the bill indicates they're right.

Brennan says the answer to S&P's concern is to simply remove assignee liability for standard home loans, but leave it in place for so-called covered and high-cost loans. Such a move would undoubtedly make it more difficult for people with less than perfect credit to get a home loan and drive some lending companies out of the state. Because of the exploitative nature of the business, however, Brennan says it's a price worth paying.

Just don't expect the Legislature to follow his recommendations. They'll be facing enormous pressure from the lending and mortgage banking industry, which found the perfect opportunity to attack the Fair Lending Act after S&P's decision.

Two alternatives have been discussed at the Capitol. One would address only assignee liability, the other, floated by Sen. Casey Cagle, R-Gainesville, would gut major portions of last year's legislation. During the last two years, Cagle has accepted campaign contributions from at least 11 financial institutions, a number of which have been identified as predatory lenders. Cagle was also one of only two Senate votes against the Fair Lending Act when it passed in 2002.

Of course, righteous indignation isn't a good fit for an industry with such a sleazy and financially unstable reputation. In last month's Forbes magazine, for example, investment advisor A. Gary Shilling attacked the health of the industry and warned investors to "avoid stocks of subprime lenders. When nonpayments become a deluge, the subs will be underwater."

The unknown in this fight is Gov. Sonny Perdue. It's no secret that the post-Sen. Trent Lott Republican Party doesn't have the best record on race relations. And in Georgia, Perdue's already on the hook for bringing the Confederate battle flag to a vote. Getting behind an attempt to gut a law that aims to protect poor people who often happen to be minorities would go a long way to establishing a record that can be used against him. Sure, black voters are unlikely to show up in big numbers to pull the lever for Bush in 2004 or Perdue in 2006, but backing only cautious changes to the Fair Lending Act is less likely to energize the Democratic base.

So far, Perdue isn't saying what he plans to do.

"Any changes that the governor would recommend would be based on the desire to keep this as the strongest predatory lending bill in the U.S.," says Perdue press secretary

Kimberly King. "What he's seeking to do is to address S&P's issues."

So far, neither Moody's Investors Service or Fitch Ratings has followed S&P's lead.