Wednesday, March 1, 2006

More than 30 mortgage lenders have limited or stopped loan activities in Montgomery County, Md., because of a discriminatory lending law scheduled to go into effect Wednesday.

The law, which the Montgomery County Council approved 7-2 in November, prevents lenders from marketing “high-cost home loans with exorbitant and unnecessary fees” to families on the basis of race, national origin, sex or religion. It increases the maximum fine for discriminatory lending from $5,000 to $500,000.

Opponents say the law is too broad and ultimately harmful to consumers, who will have fewer loan options as even reputable lenders pull out of the county rather than risk hefty fines.

“They’ve chased us out of the county,” said Ric Edelman, president and chief executive officer of Edelman Financial Services, which has stopped lending in the county. “If they don’t change this rule, consumers will not be able to get mortgages; people are going to lose their jobs. The county economic scenario will deteriorate rapidly if the real estate industry grinds to a halt over this poorly worded legislation.”

The legislation cites “abusive prepayment penalties” and “excessive points and fees” as indicators of predatory or discriminatory lending but does not further define the terms “abusive” or “excessive.”

Violators can be fined up to $500,000 in damages for “humiliation and embarrassment, based on the nature of the humiliation and embarrassment, including its severity, duration, frequency, and breadth of observation by others.”

Seven mortgage lenders and brokers have joined a lawsuit filed by the American Financial Services Association (AFSA), a D.C. trade group, that challenges the county’s authority to regulate mortgage lenders.

Montgomery County Circuit Court Judge Michael D. Mason will decide in a hearing Tuesday whether to grant an injunction that would stop the law from going into effect until a trial is held.

Tom Shaner, executive director of the Maryland Association of Mortgage Brokers, a trade group, estimated that the 31 lenders limiting or pulling their services from Montgomery County provided about 20 percent of the funds for lending in the county.

“We’re going to defend the law vigorously,” said David Weaver, spokesman for County Executive Douglas M. Duncan, who is running for Maryland governor. “We certainly believe that Montgomery County enacted a fair and reasonable law and a law that mirrors federal law. We’re hopeful that we can resolve this and we can guarantee that there’s fairness in lending.”

Mortgage lenders, however, warn that the law is scaring reputable companies from buying or purchasing loans in the county. Among those pulling their services are at least three Wall Street firms — EMC Mortgage Corp., a subsidiary of Bear Stearns Cos. Inc.; the Nomura Group; and Aurora Loan Services, a subsidiary of Lehman Brothers — fueling fears that lenders will run out of funding sources.

“There’s only so many reliable sources that mortgage lenders like us have to sell our papers to,” said Bob Pettit, president and owner of Benefit Funding Corp. of Beltsville, which does one-third of its business in Montgomery County. Although the company continues to do business there, Mr. Pettit said he has warned loan officers to be cautious.

Other lenders, such as National City Mortgage, are continuing consumer loans but no longer will participate in third-party loans.

“While we intend to maintain a retail lending presence in Montgomery County, we are concerned with the ambiguity of the ordinance. As such, we are in the process of temporarily suspending our business with third-party mortgage brokers and bankers on loans originated in Montgomery County,” the company said.

As a result of lenders leaving the county, mortgage companies say the law could hurt those it was designed to protect.

“Economics 101 would dictate that less competition means costlier loans to the client,” said Eric Gates, president of Apex Home Loans Inc. in Bethesda.

In addition, Mr. Gates said, the law may wreak havoc on homeowners or buyers who have secured or are in the process of securing loans with companies pulling out of the county after the law takes effect.

The legislation was sponsored by council members Tom Perez, Mike Subin and Nancy Floreen. Council member Steve Silverman, who is running for county executive, voted in favor of the legislation, as did George Leventhal, Phil Andrews and Marilyn Praisner. Council members Mike Knapp and Howard Denis voted against it.

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