Originally published, San Francisco Daily Journal, February 8, 2005. Reprinted with permission.

Minorities, Seniors Should Cheer Predatory Lending Decision

Forum Column

By Jan T. Chilton

Last week’s California Supreme Court decision in American Financial Services Association v. Oakland, 2005 DJDAR 1236, should be hailed by both consumers and lenders. On this issue, their interests are closely aligned. Both benefit from the continued vitality of California’s crucial home loan market. Both seek to stop abusive practices in that market. The decision promotes each of these goals.

Yet consumer advocates have greeted the decision with howls of dismay. The statewide chairperson of the Association of Community Organizations for Reform Now issued a press release Tuesday calling the decision “horrible” and “just devastating,” and making the baffling claim that the decision struck down “the dream of homeownership for so many hardworking families” by “making it impossible for low- and moderate-income folks to buy homes in California.”

On the day the decision was announced, state Assemblyman Mark Ridley-Thomas asserted in a commentary (“Predatory Lending Practices Warrant Legislative Intervention,” Jan. 31 Daily Journal) that rampant abusive practices in the subprime home loan market “warrant meaningful legislative intervention.”

He decried “unrelenting legal challenges” by “elements within the financial services industry.” Failure to thwart suits such as AFSA v. Oakland, he said, “would mean the unraveling of decades of homeownership progress and protection.”

These lamentations are flat wrong. Anyone who thinks otherwise should give AFSA v. Oakland a second look. To begin with, the case does not leave borrowers without protection against abusive lending practices. There has already been “meaningful legislative intervention” to stop those practices. The state Legislature enacted a comprehensive statute for that very purpose in 2001. It is found in the Financial Code, Division 1.6, starting at Section 4970.

AFSA, a trade association of market-funded consumer finance lenders, filed suit against Oakland, not the state, and did not challenge the state legislation. Indeed, some AFSA members had worked closely with the state Legislature in helping to frame that act.

AFSA’s suit did not attack the idea of policing abusive lending practices. The suit could not “unravel decades of homeownership progress and protection.”

AFSA challenged only the notion that every local government in California might enact its own set of home lending laws, even if inconsistent with each other and with the comprehensive state law on the subject. AFSA sued Oakland to forestall proliferation of local ordinances regulating lending one way in Oakland, a different way in Fremont, a third way in San Jose and so on, all the way south to Los Angeles and San Diego.

“Regulation of mortgage lenders has historically occurred at the state, not the municipal, level,” the majority opinion in AFSA v. Oakland noted. Indeed, the ordinances in Oakland and Los Angeles were the first municipal intrusions into this field in the state’s 150-year history.

State dominance in this area is not only the historical reality but a present-day necessity. The Supreme Court said that “[e]ffective regulation of mortgage lending requires uniform treatment throughout the state,” and “California’s housing market is one of its most critical, and securities based on home loans in this market are sold not only on a statewide, but on a national level.”

Local ordinances, such as those of Oakland and Los Angeles, threaten to disrupt these secondary market transactions, interrupting the flow of loan capital to the state and dividing the state’s economy into tiny geographic markets, the high court found. According to the court, “[c]ommercial reality today” confounds any effective regulation of mortgage lending at the local level; centralized command at the state level provides an essential “regulatory lever.”

The ordinances in Oakland and Los Angeles also pose obstacles to the accomplishment and execution of the state law’s full purposes and objectives. The new state law, the Supreme Court said, draws a careful balance between two compelling and competing considerations: “the need to protect particularly vulnerable consumers from predatory lending practices and the concern of homeowners not be unduly hindered in accessing the equity in their own homes.”

“Local governments,” the court added, “should not be free to undermine the Legislature’s efforts in this area by striking different policy balances of their own.”

The Legislature concluded that more restrictive regulation would increase the cost and decrease the availability of home loans to those who need them most. It might “preclude borrowers from obtaining a loan based on equity in their home even though such loans can serve a legitimate need.”

Thus, local ordinances such as the one Ridley-Thomas drafted for Los Angeles “could have the unintended consequence of hurting those [it] was intended to help.”

Increasing homeownership is a worthy goal that AFSA and its members pursue. That goal will not be achieved by each city enacting its own restrictive lending ordinance, each differing from that of the next community.

The secondary markets, which have made loan funds available to so many California homeowners, will not tolerate the ensuing risk, uncertainty and unpredictability. Without the secondary market’s infusion of loan capital, Californians could not get home loans. That is what the state of Georgia learned when its Legislature adopted an overly restrictive law like the ones in Oakland and Los Angeles.

AFSA v. Oakland allows minority families, seniors and many other traditionally underserved groups to obtain home loans they need to buy or improve their homes, send their children to college, pay medical bills and otherwise put the equity in their homes to work for them. At the same time, the decision leaves intact the protections against abusive lending practices, which the state Legislature wisely enacted in 2001.

The dream of homeownership remains alive and well in California as a result.

Jan T. Chilton, of Severson & Werson in San Francisco, was co-counsel for American Financial Services Association in AFSA v. Oakland.