Predators Turn Prey in Lending Laws

"It's the lending industry's equivalent of the Superfund, because the liability risk runs with the loan," said Laurence Platt, a Washington lawyer, referring to the federal law that requires companies to clean up polluted sites they own, even if they weren't the ones that polluted it.

Platt, a partner with Kirkpatrick & Lockhart who represents many mortgage bankers, said the problem with the Georgia law is that an investor who buys a bundled package of mortgages, or a mortgage-backed security, could be purchasing a ticking time bomb, if some of the borrowers decide to sue at a later date.

"Someone could buy a loan for $100,000 and later find out he not only has to give back the $100,000, but pay millions of dollars in punitive damages when they didn't do anything wrong," said Platt.

Credit agencies, so far, are taking a dim view of the Georgia law. Standard & Poor's and Moody's Investor Services say they will no longer issue rating for mortgage trusts that include home loans written in Georgia.

Supporters of the Georgia law dismiss the complaints of the industry as needless scare tactics. They contend the new state laws are needed to crack down on abusive practices like mandatory arbitration clauses and prepayment penalties, which current federal home lending laws largely ignore.

"If Congress were to put serious protections in place for borrowers, the need for [state] pre-emption wouldn't exist," said David Swanson, a spokesman for ACORN, a housing advocacy group.

Indeed, the debate over the Georgia bill comes at a time that some state regulators are taking a more aggressive stance against home lenders -- even in the absence of new legislation.

California officials, for instance, are threatening to strip Wells Fargo of its license to write mortgages in the Golden State, claiming the nation's fourth-largest bank has failed to reimburse mortgage holders for improper fees and interest charges. San Francisco-based Wells Fargo, however, is challenging the state's authority in federal court, contending existing federal housing laws prohibit it from regulating its lending practices.

Meanwhile, Washington observers say that even in a Republican-controlled Congress, the Ney bill will have a tough time gaining sufficient support.

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