As the complaints of predatory lending by consumers rise, Connecticut and other states are taking the lead to protect homeowners and homebuyers from deceptive and manipulative mortgage lending practices.

In 2001, three states – Connecticut, Texas and Virginia – enacted legislation to address the problem of predatory lending, and set the stage for other states to follow in addressing the situation.

Since Connecticut is a multi-state lender, meaning locally-based mortgage companies can loan across the nation and outside states can loan to Connecticut residents, mortgage industry professionals said it is essential to have laws in place that are understood and abided by other lenders.

“Being a multiple-state lender, [mortgage lenders] loan money all over the nation and we need to be intimately aware of laws done state-to-state. The acceptance of these laws in multiple states opens these doors to do business in other states. There have been issues and problems with predatory lending, but overall, life is going on in the states that have predatory lending laws,” said Joseph Amoroso, senior vice president of Homestar Mortgage Service in Shelton. “The Connecticut law forces lenders to disclose to the consumer that this particular loan they are applying for could jeopardize their home and they could lose equity in their home. It makes the consumer aware that the particular type of loan they are taking can jeopardize what they’ve worked for, and the law sets parameters in place, including closing costs and fees.”

Connecticut enacted the Abusive Home Loan Lending Practices Act in 2001, which deals with predatory lending by restricting balloon payments, default charges and prepayment penalties. It bans mandatory arbitration clauses, call provisions and a series of other practices associated with predatory lending.

‘Difficult’ Definition

Predatory lending occurs predominantly in the subprime mortgage industry. Subprime loans have higher-than-normal interest rates and are designed to serve Americans whose poor credit prevents them from qualifying for conventional mortgages. While subprime lenders fill a legitimate need, some are giving the industry a black eye with malicious and deceitful predatory practices. But even with legislation and regulation in place around the country, one question still remains: How does one identify predatory lending?

“Predatory lending initially came up as an issue without that name, because what is predatory lending? How do you define it?” said Gerald Noonan, president and chief executive officer of the Connecticut Bankers Association. “There was testimony on a few bills in the [Connecticut] General Assembly dealing with predatory lending and abusive lending that was spurred by mortgage companies coming in and out of the state. But, no bills were enacted. The small loan companies and non-bank lenders were the primary target and the supporters of the status quo [market].”

In the most simplistic definition, predatory lenders provide high-cost loans to borrowers who they know qualify for conventional loans, engage in equity stripping or charge exorbitant rates or fees. Many lenders believe that predatory lenders specifically target communities that tend to be less informed about the mortgage loan process, and those who lack the resources to fight back when they are cheated.

“The definition is difficult partly because it includes the traditional subprime borrower, but all in all, the statute did what is was supposed to do. It affected us … but we agreed that it was a small price to pay because every time we tried to adjust the definition for our benefit, it opened the doors to others for predatory lending activities,” said Noonan. “The rules we have are fair and balanced and those that objected to it in other states used us as a model [to write their own laws]. We haven’t had a lot of complaints, so I think it’s working.”

Noonan said predatory lenders prey on the elderly, uneducated, minority and low-income demographics, forcing the legislation that was enacted and also requiring Connecticut Department of Banking oversight of lending activities to banks and bankers in the state.

According to Amoroso, the legislation is well intended but can also provide some frustrations for members of the mortgage industry.

“The mortgage industry is forced to comply with this [legislation] and when a mortgage company is forced to comply, there is a cost that goes along with that. There is enormous software cost, for example, because we had to code in all the state laws for each state that we do business with and for us to live up to the legislation that is put in place in each state,” he said. “However, [legislation] sets the stage for the future of our industry – now that these laws are in place for the state level, it sets the tone and says we are cognizant about what is happening in the industry.”

But Amoroso added that legislation alone will not curb abusive lending practices and said education is the No. 1 deterrent against predatory lending scams.

“Education can combat predatory lending. Education is the best defense against predatory lending,” said Amoroso. “There are only a handful of people that are taking advantage of people and if the consumer knows who they are, those people would go out of business. But education is difficult and the subject of mortgages is boring to some people.”

Amoroso said he thinks mandatory education classes, such as first-time homebuying classes, fee tutorials and Web site listings, should be lawful for consumer compliance.

“In the current law, the onus is on the lender, but I would like to see some on the consumer,” said Amoroso.

All in all, members of the mortgage industry agree that predatory lending is a malicious practice and should be stopped for the common good of the consumer, and the integrity of the industry overall.

“Some feel it’s gone too far … it’s a new battle and it’s only been a decade since we’ve had interstate banking. Like anything, the state Legislature tends to grab issues and be impulsive on passing legislation. Everybody jumps on the bandwagon and a year later, it’s a non-issue,” said Noonan. “But overall, everybody wants to stop a bad thing and everyone’s view on how it can be done is different.”