Circling the sharks
Legal opinions differ on whether Sacramento can ban predatory lending practices
Sacramento political leaders are considering following a controversial new trail being blazed by the Oakland City Council that bans the predatory lending practices being used against the city’s poor, elderly and minority communities.
But first, they must sort through conflicting legal opinions that question whether cities have the right to crack down on subprime mortgage lenders—institutions that make higher interest loans to those without perfect credit ratings—who take advantage of the desperate or naïve by charging excessive fees, requiring expensive and unnecessary insurance policies, misrepresenting loan terms, “flipping” loans into high interest rates or other unethical practices that have come under fire from activists in recent years.
Such tactics can rob borrowers of any home equity they’ve accrued, forcing them to pay more in interest than principal, or in some cases even forcing borrowers into homelessness when inflated monthly payments or surprise demands for balloon payments exceed their means.
Oakland’s city attorney issued an opinion claiming that city has the right to ban such practices within its borders, while Sacramento City attorney Sam Jackson has taken the opposite view, claiming only the state or federal governments have such authority. And while the city attorneys in both Los Angeles and San Francisco wrestle with the issue, the California Legislative Counsel’s Office last week issued an opinion that cities like Sacramento have the right to regulate lenders.
These conflicts and gray areas played out before the Sacramento City Council’s Law and Legislation Committee last week, a hearing at which Jackson bristled at the notion that his opinion is being questioned: “Tell the Legislative Counsel to keep its nose in its own business.”
At issue is whether state and federal law pre-empts local governments from regulating lenders, and all sides agree that is an uncertain and unprecedented question that will likely be decided in court, where industry groups like the American Financial Services Association (AFSA) have pledged to challenge measures like the Oakland ordinance.
The only question for Sacramento city leaders is whether they are concerned enough about predatory lending to join the fight, and that is a question they will answer in coming months.
The push for reform in Sacramento is being led by City Councilwoman Lauren Hammond, with members of Association of Community Organizations for Reform Now (ACORN) serving as her foot soldiers, offering up the studies, support and sordid stories to help make the case that city residents are being exploited.
Hammond got the City Council to direct staff last October to draw up an ordinance that would prohibit the city from doing business with any financial organization that has ties to those who employ predatory lending practices (see “Preying on Predators,” SN&R, November 23, 2000).
Hammond’s request languished with city treasurer Thomas Friery, who publicly questioned its wisdom, but who nonetheless developed a proposed ordinance, which came before the committee last week. As now written, the ordinance would define predatory lending practices, ban the city from doing business with organizations that engage in such practices and develop a public education campaign to inform would-be borrowers of their rights.
Yet Hammond and the activists now want more. Since her original request, predatory lending has become a hot issue, with state and federal legislative hearings attacking the problem, ACORN aggressively pushing for reform in cities across the country, and Oakland opting to up the ante with an outright ban on the practices.
“We’ve moved the ball forward on this issue,” said ACORN’s Brian Kettenring.
And so it was that Hammond stood before the Law and Legislation Committee last week, urging her fellow councilmembers to go beyond the ordinance on their agenda, and to join Oakland and perhaps other California cities in confronting a problem that the state and federal governments have apparently failed to substantively address.
“I urge the staff to draw up a regulatory ordinance,” said Hammond to the cheers of a room filled with ACORN members and supporters, most donning red shirts with the message, “Stop the Loan Sharks.”
How far has the ball been moved? Whereas once the concept of predatory lending was only a vague notion defended on the grounds of “let the buyer beware,” today even the lending institutions have been forced to acknowledge the problem and pledge reform.
“No one on our side of the fence is defending these practices,” said Sacramento attorney Mark Harris, who is representing AFSA in fighting both the Sacramento and Oakland ordinances, in both cases offering to sponsor consumer education programs to counter the practices.
Addressing the city committee, Harris said predatory lending is not something cities have the authority to ban. He agrees with Jackson that the legal doctrine of “pre-emption” prevents cities from regulating entities that a higher level of government has claimed as its realm. Yet the Oakland and Legislative Counsel opinions hold that while subprime lenders are regulated by the federal government, the lack of efforts to control predatory lending practices make it a realm open to regulation by cities, as long as such regulations don’t conflict with federal law.
Harris also challenged as vague and broad the city’s currently proposed measure to withdraw city funds and contracts from lenders that the treasurer certifies as engaging in predatory lending.
“It may create a climate that will interfere with the access to subprime capital,” Harris said, touching on a sensitive issue, because even Hammond is wary of doing anything to hurt the market for institutions that offer loans to those with less-than-perfect credit ratings.
And while most agree that regulation of predatory lending practices would best be done at the state or federal levels, Hammond and the activists on hand all expressed doubt about whether that will ever happen, given the hundreds of thousands of dollars in campaign contributions which financial services companies have heaped on lawmakers.
“There is no one else who is going to help us but the council,” said ACORN member and predatory lending victim Alicia Gathers, echoing others who noted that several major reform bills have been killed in the California Legislature in recent years.
Faced with conflicting legal opinions and concerns over the approach of the proposed ordinance, the Law and Legislation Committee continued the matter until its October meeting, when this simmering conflict threatens to boil over, despite some committee members’ appeals for activists and industry to find a compromise.
“My mom is a senior and she gets calls [from lenders] everyday,” City Councilwoman Bonnie Pannell said at the hearing, “so I know predatory lending is a problem.”