Banks fear overreaction to mortgage crisis

Bankers are cautioning state lawmakers and regulators not to go too far in passing legislation to address the mortgage crisis and lending abuses, lest they unwittingly increase the cost of borrowing for consumers.

(Buffalo News) -- Bank executives say they recognize that some increased regulation on mortgage lending is almost unstoppable given the attention focused on the high rate of foreclosures and losses nationwide. Several bills are pending, including one pushed by Gov. David Paterson, and another that passed the Assembly.

“We recognize that the state wants to act in this area. We want to work with the state,” Michael P. Smith, president and CEO of the New York Bankers Association, said in a meeting last week with The Buffalo News editorial board.

“If we do it right, we could set the standard for the rest of the country.”

However, bankers are lobbying hard to ensure that any changes won’t impede the proper functioning of the lending market.

“We’re worried there will be legislation that will make it more difficult and more expensive to extend credit in New York state,” said Mark Czarnecki, president of M&T Bank Corp.

In particular, they’re not objecting to the imposition of new requirements or the prohibition of certain practices on so-called “non-traditional” mortgage loans — such as high-cost subprime loans to borrowers with bad credit.

But they are concerned about how those loans are defined, to make sure traditional prime loans aren’t accidentally included if the threshold is set too low.

Also, they are firmly against a suggested one-year moratorium on foreclosures. That bill passed the Assembly early this month, and is pending in the Senate Judiciary Committee.

New York already has the longest foreclosure process in the country — averaging 445 days. That’s designed to protect homeowners by giving plenty of time to work out alternatives. Extending it by another 365 days, bankers said, would make it harder for banks to keep homes occupied and prevent abandoned properties from becoming derelict.

“We pride ourselves on taking care of the houses in foreclosure. We’ll do anything to keep somebody in the house,” Czarnecki said. “Put another year in foreclosure, and bad things tend to happen.”

“Instead of delay, we support bringing the borrower in as quickly as possible and trying to work things out,” Smith said.

The campaign by the bankers’ trade group demonstrates how much the strong lobby has shifted from its usual stance of preventing more regulation to damage control.

Nationally, Congress and the Bush administration are considering options for helping struggling homeowners, using entities such as the Federal Housing Administration, Fannie Mae and Freddie Mac.

The Federal Reserve Board also recently took public comments on proposed new rules to tighten the reins on all mortgage providers throughout the country. Smith said those regulations — which have similar provisions to the state legislative proposals in Albany — are likely to be adopted this summer.

“If the cost to comply goes up dramatically, banks may decide not to be in the business,” said Peter G. Humphrey, president and CEO of Warsawbased Financial Institutions and subsidiary Five Star Bank. “We do support some kind of regulation. We just think it should be done in a responsible way.”

Besides the moratorium proposal, there are two key bills fighting for attention: Paterson’s program bill and the Responsible Lending Act of 2008, sponsored by Assemblyman Darryl Towns, D-Brooklyn, chairman of the Assembly Banks Committee.

Towns’ bill, which passed the Assembly early this month, is supported by consumer advocates, who want to strengthen an anti-predatory lending law enacted in 2002.

The governor’s bill is still in committees in both houses.

Both bills would provide more protections to consumers on high-cost and “non-traditional” loans, including banning: balloon payments, prepayment penalties, penalty interest rates after default, and “negative amortization,” in which monthly payments are so low that the balance grows over time. In addition, insurance premiums couldn’t be financed, and mortgage brokers could not get undisclosed payments or “yield spread premiums” for making costly loans.

The bills would also require lenders and brokers to consider a borrower’s ability to repay, and to fully document a consumer’s income and assets. Taxes and insurance also must be escrowed. The bills would require brokers to act in borrowers’ interests. And they would prohibit brokers and lenders from influencing appraisers.