Md. loses suit over mortgage penalties

State predatory-lending law doesn't apply to national banks, judge says

Issue is loans paid off early

April 19, 2005|By Laura Smitherman | Laura Smitherman,SUN STAFF

A Maryland predatory-lending law that limits how much banks can charge borrowers for paying off a mortgage early can't be applied to national banks that operate in the state under a ruling issued last week from a federal judge in Baltimore.

The ruling came in response to a lawsuit brought by National City Corp., a Cleveland bank that does mortgage lending in Maryland through two subsidiaries, National City Mortgage and First Franklin Financial.

The bank has collected about $4 million in prepayment penalties in Maryland over several years. National City sued Maryland last year when a state agency questioned the practice after consumers complained.

The case goes to the heart of a policy debate between state regulators and federally chartered banks. The states contend their consumer protection laws apply to mortgage companies that lend to their residents.

But the nationally chartered banks say they prefer to be governed by a single federal law, rather than by numerous state laws. Congress might wade into the fray this year with legislation setting national standards.

U.S. District Judge Catherine C. Blake sided with National City in her ruling Friday, saying that Maryland can't enforce certain state lending laws against national banks and their operating subsidiaries.

In particular, she said, the state can't enforce a law that restricts prepayment penalties, which are assessed when consumers sell their homes or otherwise pay off a mortgage before its term is up. The penalties typically apply only during the first few years of a loan.

Charles W. Turnbaugh, Maryland's commissioner of financial regulation, said he's considering appealing the ruling, but National City has won similar cases in other states.

"We think it's in the best interest of Maryland consumers that we appeal the decision, but no final decision has been made," Turnbaugh said.

National City spokeswoman Amber Garwood said, "We're very pleased with the decision, but at this point we prefer not to comment further."

The Office of the Comptroller of the Currency, the federal agency that regulates national banks, exempted those institutions from many state consumer-protection laws last year. Turnbaugh and Maryland Attorney General J. Joseph Curran Jr. joined officials from other states in opposing the move.

The federal agency, which has its own anti-predatory lending rules, filed an amicus brief supporting National City in the Maryland case.

Consumer rights activists say the federal agency, which collects fees from national banks, is beholden to the industry and that lending regulations should be crafted by elected officials, not bureaucrats in Washington.

"Federal law should be a floor, not a ceiling, and states can go beyond that," said Kathleen Keest, senior policy counsel at the Center for Responsible Lending, a nonprofit that studies lending practices.

Borrowers lose an estimated $9.1 billion annually from predatory mortgages, including exorbitant prepayment penalties, according to the center. In a recent study, the center found that borrowers in minority neighborhoods are more likely to get hit with a prepayment penalty.

Those penalties are stipulated in up to 80 percent of sub-prime mortgages, which have higher interest rates because the borrowers have blemished credit histories. Only a small percentage of loans to consumers with good credit carry prepayment penalties.

"I've seen penalties of as much as $10,000," Keest said. "They're used in the sub-prime market to keep people trapped in a high-priced loan."

Banks say sub-prime lending has permitted people to own homes who would not have qualified for a mortgage a few decades ago. The banks also say prepayment penalties help prevent "flipping," the practice of quickly buying a property and selling it at a price far in excess of its worth.

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