The issue of predatory lending has captured the attention of legislators nationwide. At least 25 states have introduced bills this year to combat abusive lending, and Iowa Attorney General Tom Miller is pledging to do the same in Iowa.
In Davenport, a recent report on contract home sales has put the issue at the forefront of the city agenda. Alderman Bob McGivern called it "one of the most difficult issues we're going to deal with as a council."
Yet although the problems associated with contract sales have risen to prominence, it does not appear the city or state is close to a solution.
Measures passed by the Davenport City Council last week represent a start, but further steps and debate will probably be derailed by an agreement forged last week between the mayor and one of the major contract sellers, First Financial Group. The deal - which the city's largest contract seller, Oak Helm Partners, has also signed on to - involves voluntary inspections for one year. That agreement falls short of even a modest proposal by city staff and does not include local measures to stop the predatory lending that often takes place with contract sales.
Contract sales in Davenport create two different problems: housing stock in poor condition and loan arrangements that take advantage of people with poor credit. The former problem has prompted complaints from neighborhood groups, while the latter results in high interests rates, high fees, high default rates, and terms that make it difficult or impossible for borrowers to ever own their homes.
City staff, in a report released last month after two years of work, identified problems associated with two major contract sellers: Oak Helm Partners and First Financial Group. The report also suggested some possible solutions. (See "The Money Pit," River Cities' Reader, Issue 339, September 5-11, 2001.)
The report's recommendations, while sound, did not go very far. They suggest that the city implement a point-of-sale inspection program for companies that sell more than five homes a year on contract, a recommendation that was scheduled to begin its path through the city council this week at the committee level. But that only addresses the housing-quality component of the contract-sales problem.
The other four recommendations, passed in a single resolution last week, encourage the state to take various measures:
· defeat legislation that would exempt contract sales from mandatory rental inspections;
· extend consumer-protection laws to land-sale contracts;
· require all residential-real-estate contracts to be recorded within 10 days (instead of the current 180); and
· investigate contract sellers who might have violated existing laws.
Unfortunately, these are only suggestions. The city itself might be able to do more to reduce predatory home lending. As things stand now, it won't.
At the state level, there are a variety of approaches to combating the problems associated with contract sales, said Bill Brauch, director of the consumer-protection division of the Iowa Attorney General's office: enforcing existing state laws, enacting new state regulations or laws, and educating consumers.
"We're basically using all the tools available to us," Brauch said.
Yet what might be the most effective tool against predatory lending - legislation - would need to be steered through the Republican-controlled legislature during an election year, with some powerful lobbies working against it.
The result is that although both the state and city have clearly identified predatory lending as a problem in contract sales, neither is likely to take action to fight it.
Local Options
Four of the city's recommendations involve lobbying the Iowa legislature for changes in state law to enhance consumer protections. They were passed unanimously by the city council last week.
The most controversial proposal was one requiring inspections when properties are sold on contract, and it was expected to be considered at the Community & Economic Development Committee meeting this week.
But at a meeting last week, Mayor Phil Yerington, First Financial's Dan Lubell, and city staff hammered out a deal that will likely kill that proposal. Under the deal, First Financial and Oak Helm would agree to voluntary pre-sale inspections of their properties for a year. Greg Hoover, the city's director of housing and neighborhood development, said Oak Helm has also agreed to the deal, and Nancy Coon, a partner in the company, confirmed it. "We feel like we don't have anything to hide," she said. "We might as well do it voluntarily. ... I don't think they need an ordinance."
A resolution affirming the deal will likely be considered by the city council at its September 19 or October 3 meeting, and Hoover said he expects it to get the support of the majority of the city council.
Hoover called the program a "trial period to see the efficacy of inspections." If all parties are happy with the results, the program will likely continue, Hoover said. If one of the parties defaults on the agreement or decides after a year to discontinue the inspections, the city council would have to act if it wants to make them mandatory.
The agreement might effectively cut off discussion about problems associated with contract sales, especially predatory lending.
Ward 5 Alderman Wayne Hean said he still wants all concerned parties - including neighborhood groups, housing activists, and Oak Helm - at the table for any negotiations. He added that the deal between First Financial and the city ignores smaller contract sellers.
The proposal outlined in the report would have required point-of-sale inspections for companies that sell five or more properties per year on contract. Hoover said he thought the inspection requirement would affect between two and six contract sellers. The deal between Lubell and the city would limit the affected parties to two.
One key component of the deal is the voluntary inspections. The city has asked the Iowa Attorney General if Davenport has the authority to require point-of-sale inspections for contract sales. Attorney General Miller told the River Cities' Reader that a written opinion on the issue should be done by early next week. The opinion will likely address whether the city has under its home-rule authority the right to require the inspections, and whether targeting contract sales is a violation of the Constitution's Equal Protection clause. Voluntary inspections, obviously, would prevent any lawsuits seeking to block city-imposed ones.
But the deal will do little to address the problems of contract sales. Most importantly, the inspections would only be done for a year. Even if they accomplished a goal of more accurately assessing the conditions of property owned by Oak Helm and First Financial, there would be no guarantee that property conditions would improve over the long run. Any meaningful, long-term inspection requirement would need to be enacted by a future council.
But other proposals might not have had the desired effects, either.
City staff recommended that all contract sellers that execute five or more contracts in a year be subject to the regulations. Hean, on the other hand, favors clarifying the definition of "rental" and "lease" in the state housing code so that certain types of contract sales would be covered by existing inspection requirements for rental property.
Supporters of both options use the same argument against the other. As Hoover said of changing the definition, "That becomes problematic because people will find ways to structure their contracts to get around that." In the same vein, contract sellers might find new ways to structure their holdings or businesses to avoid inspections under the city-staff suggestion.
If preventing loopholes is the primary interest, one solution might be to require a base level of inspection for all home sales. Most homes are already inspected when they're sold, and the cost of an inspection (typically several hundred dollars) could easily be folded into the loan amount. This would also eliminate complaints that the city is burdening contract buyers and sellers as well as racial minorities.
The biggest thing missing from the city's recommendation and its deal with First Financial and Oak Helm, though, is an ordinance to regulate predatory lending. The city staff has instead chosen to push that off on the state, which might or might not enact significant reform.
Hoover said that the agreement does not include any requirements that Oak Helm or First Financial change the terms of their contracts. "We are not in the business of telling businesses how to conduct their business," he said.
But there was some discussion about altering contract language to reflect recommendations from the city. But until the terms of the agreement are presented in writing, the scope of the deal remains unclear.
(It's worth noting, though, that the city's legal department already inspects First Financial contracts.)
Hoover also said the city does not think its role is to safeguard consumers. "Generally," he said, "consumer-protection issues are in purview of the state. There is some concern about states and municipalities enacting ordinances that regulate" predatory lending. First off, there are legal issues - whether the city has the right to regulate predatory lending. There's also a concern that with added red tape, lenders might do fewer and fewer transactions in cities or states with stricter regulations.
Davenport Corporation Counsel John Martin reiterated that the city doesn't think it should be regulating predatory lending. "We believe that's an area more appropriate left to the state or higher," he said.
But the attorney general's office has not discouraged cities from trying to control predatory lending.
Brauch said the attorney general's office has not analyzed state law to determine what ordinances local governments could enact to deter predatory lending. The question of local authority to conduct inspections is "something that's just been raised with us," he said, and something that the office is researching.
He added that the attorney general hopes that federal and state law don't prevent the creation of local housing-inspection requirements or regulations on predatory lending. "We would not want to deter that," he said. "We do not like to be given a ceiling [on what can be done]. We like to be given a floor."
"There's nothing precluding local action," said Shelley Sheehy, a housing activist who has studied the issue of predatory lending.
Other cites, including Philadelphia, have enacted legislation that attacks the problem of predatory lending. The City of Dayton, Ohio, in July passed an ordinance to regulate home loans, specifically targeting predatory lending. The city prohibits home-loan terms such as prepayment fees (in which the borrower is penalized financially for paying off any portion of the loan early) and flipping (in which a home is refinanced with no tangible benefit to the borrower).
"High-cost" home loans (defined in the ordinance) are further restricted. This section targets the most abusive components of predatory loans. Most strikingly, the ordinance basically prohibits large balloon payments, therefore preventing a refinancing of the home unless the terms are better for the consumer.
Nearly all such ordinances have been challenged in court. (Philadelphia's is currently tied up in the judiciary, while a lawsuit is planned against Dayton's ordinance.) "That's the nature of the industry," Sheehy said. "They're going to sue everybody."
But, she added, nearly all local and state ordinances regulating subprime and predatory lending have been upheld.
If Davenport were to attempt to do something similar, it would almost certainly be courting a lawsuit. But it would also be able to say that it was making a concerted effort to solve the problem of predatory lending.
State Action
Davenport action on predatory lending could have been important because the state in many ways is hamstrung. While the Iowa attorney general has put predatory lending near the top of his agenda, his office can only do so much.
Miller is leading the charge of state attorneys general on the issue of contract sales. Testifying before the Senate Committee on Banking, Housing, & Urban Affairs in July, he said, "We are seeing abusive practices in the sale of homes on contracts. In fact, it appears that such contracts may be taking their place along with brokers and home-improvement contractors as another 'feeder' system into the high-cost mortgage market."
Miller's primary concern has been loans that actually eat away at equity instead of building it. He told the River Cities' Reader that loans in which the "buyer" doesn't build equity or builds it very slowly (in such a way that ownership in the standard mortgage term of 30 years is impossible) are an "analogous concern." The city report claimed that some First Financial contracts would result in loans that would take 180 years to pay off.
On Friday, Miller met with city officials to discuss the issue of contract sales. Brauch said the city's report "really moves us ahead very quickly in understanding what's happening in the Quad Cities."
The state has a variety of laws through which it can address some problems typically associated with contract sales, but the major one is the Consumer Fraud Act, a broad statute under which the attorney general can file civil lawsuits for a wide range of deceptive practices.
"It's not as if people are without protection," Brauch said. But the Consumer Fraud Act has its limits. "The question is whether contract sellers tell the truth," Brauch said. The law only applies if a seller has misrepresented a property or a contract to a consumer or otherwise deceived that person. In other words, if the terms are predatory but the lender was up-front about them, the consumer has no recourse through the Consumer Fraud Act.
But if and when the attorney general's office goes after contract sales and predatory lending, it will choose its target carefully. Miller said that his office is in the middle of one major investigation of a contract seller. "We've been involved with one investigation for several months," Brauch said. He would not identify the target and would not divulge details because the investigation is still pending.
The state will be selective because it doesn't have the people or time to do more. "One of the most significant impediments to public enforcement of existing applicable laws is insufficient resources," Miller told Congress. "In the past 15 or so years, we have seen an ever-growing shortfall in the personnel when compared to workload. The number of credit providers, the volume of lending, and the amount of problem lending have all exploded at the same time that the resources available to examine, monitor, [and] investigate them, and enforce the laws have declined in absolute numbers."
"We are selective in the cases we take to court," Brauch said. Nonetheless, he added, "I think we have the resources to make a significant impact on this area statewide."
"We'd like to bring some major cases," Miller told the River Cities' Reader, "I think it would have a deterrent effect."
But the state will largely be fighting the issue alone. One of the challenges in combating predatory lending is that Iowa is the only state that does not have a "private cause of action." That means that only the state can bring a lawsuit under the Consumer Fraud Act. If a consumer feels that a contract seller committed fraud, that consumer cannot sue under that law. While a successful state lawsuit against a large contract seller might deter other contract sellers, Brauch said, "an individual cause of action would go a long way." (Miller supports allowing private causes of action in Iowa, but the legislature hasn't enacted such a measure.)
Another option open to the state is enacting further legislation or regulations on the issue.
Without legislative approval, the attorney general's office could create new regulations, for instance defining what constitutes deceptive practices in the context of contract sales and the Consumer Fraud Act. (Such a regulation might require that a contract use the phrase "lease" or "rent to own" if it meets certain predatory-lending criteria.)
While the attorney general does have the power to enact new regulations defining certain terms in existing laws, it does not have the authority to impose new requirements on contract sales. Reform would require legislative approval "once we start regulating what may be part of a land-sale contract," Brauch said. For instance, the state could forbid balloon payments in the first five years of a contract or limit the interest rate or fees charged in a land-sale contract, but those would need to be approved by the legislature.
And given the lobbying muscle of the financial industry and the Republican control of both houses of the Iowa legislature, it seems a safe bet that combating predatory lending is not a high priority at the statehouse.
Still, the attorney general's office plans to propose legislation.
"We don't have a set of recommendations yet," Miller said. But "we plan to have some proposed legislation in the land-contract area."
Brauch said the attorney general would like to file legislation "within the next two months" so it can be considered during the next legislative session.
A Larger Problem
Regulations or new laws on contract sales ignore larger issues, some activists claim. And the problem will not be solved until lending institutions provide reasonable access to capital, and reasonable loan terms, for people with spotty credit. That also means lending money to people in poorer parts of town - which isn't happening now.
Contract sellers are "doing these loans because they make a lot of money on them," Sheehy said. "Why is there a market?"
The larger problems, Sheehy said, are access to credit and a dearth of housing. "The reason this is such a problem is the lack of safe, clean, affordable housing in this town," she said.
While major lending institutions are investing in central-city neighborhoods in other communities, Sheehy said, "they're not making the same investment in Davenport. There is not the capital flow into those neighborhoods."
That echoes the statements of Coon, who said that her company is one of the only institutions putting money into older parts of the city.
Sheehy said the city could attack the larger problem on multiple fronts. First, "I think the city has a role to look at the mainstream financial institutions in this market," she said. Second, the city should encourage those institutions to create a loan pool for people with bad credit and those who go to the subprime market because they fear rejection by a bank. Last, the city could craft a policy in which it does not deposit its funds at any institution that does not have substantial financial and marketing resources directed toward central-city neighborhoods and people with spotty credit. "They need to have a vision that way," Sheehy said.
And, ideally, a solution to the predatory-lending problem would not come from the city or the state but from Congress, so that the issue is addressed across the country. There are some basic deficiencies in federal laws regulating lending, say those familiar with them.
The Home Ownership Preservation Project of the Legal Assistance Foundation of Metropolitan Chicago tries to prevent foreclosure on victims of predatory lending. Dan Lindsey, supervisory attorney with the project, said his group uses both state and federal law to help people keep their homes, including the federal Truth-in-Lending Act and Home Ownership Equity Protection Act (HOEPA) and the state consumer-fraud statute. The project has a caseload of about 125. (Of course, the project would be significantly different if it were located in Iowa because of the prohibition against private causes of action at the state level.)
Lindsey said that state and federal laws provide some protections for consumers, but not enough. "States and municipalities are doing what they can," he said, "but it really needs to be stronger at the federal level."
Part of the problem, Lindsey said, is that it's unclear what latitude states have. Illinois enacted a law similar to the Home Ownership Equity Protect Act (HOEPA) with better protections than the federal statute, but it's being challenged in court.
Another issue is how the government defines predatory lending. The Home Ownership Equity Protection Act sets specific standards, and "there are a lot [of mortgages] that are just coming in under the bar," Lindsey said. "We think the bar needs to be lowered."
To read part one of this story, outlining the problems associated with contract sales, visit our Web site: (http://www.rcreader.com).
In Davenport, a recent report on contract home sales has put the issue at the forefront of the city agenda. Alderman Bob McGivern called it "one of the most difficult issues we're going to deal with as a council."
Yet although the problems associated with contract sales have risen to prominence, it does not appear the city or state is close to a solution.
Measures passed by the Davenport City Council last week represent a start, but further steps and debate will probably be derailed by an agreement forged last week between the mayor and one of the major contract sellers, First Financial Group. The deal - which the city's largest contract seller, Oak Helm Partners, has also signed on to - involves voluntary inspections for one year. That agreement falls short of even a modest proposal by city staff and does not include local measures to stop the predatory lending that often takes place with contract sales.
Contract sales in Davenport create two different problems: housing stock in poor condition and loan arrangements that take advantage of people with poor credit. The former problem has prompted complaints from neighborhood groups, while the latter results in high interests rates, high fees, high default rates, and terms that make it difficult or impossible for borrowers to ever own their homes.
City staff, in a report released last month after two years of work, identified problems associated with two major contract sellers: Oak Helm Partners and First Financial Group. The report also suggested some possible solutions. (See "The Money Pit," River Cities' Reader, Issue 339, September 5-11, 2001.)
The report's recommendations, while sound, did not go very far. They suggest that the city implement a point-of-sale inspection program for companies that sell more than five homes a year on contract, a recommendation that was scheduled to begin its path through the city council this week at the committee level. But that only addresses the housing-quality component of the contract-sales problem.
The other four recommendations, passed in a single resolution last week, encourage the state to take various measures:
· defeat legislation that would exempt contract sales from mandatory rental inspections;
· extend consumer-protection laws to land-sale contracts;
· require all residential-real-estate contracts to be recorded within 10 days (instead of the current 180); and
· investigate contract sellers who might have violated existing laws.
Unfortunately, these are only suggestions. The city itself might be able to do more to reduce predatory home lending. As things stand now, it won't.
At the state level, there are a variety of approaches to combating the problems associated with contract sales, said Bill Brauch, director of the consumer-protection division of the Iowa Attorney General's office: enforcing existing state laws, enacting new state regulations or laws, and educating consumers.
"We're basically using all the tools available to us," Brauch said.
Yet what might be the most effective tool against predatory lending - legislation - would need to be steered through the Republican-controlled legislature during an election year, with some powerful lobbies working against it.
The result is that although both the state and city have clearly identified predatory lending as a problem in contract sales, neither is likely to take action to fight it.
Local Options
Four of the city's recommendations involve lobbying the Iowa legislature for changes in state law to enhance consumer protections. They were passed unanimously by the city council last week.
The most controversial proposal was one requiring inspections when properties are sold on contract, and it was expected to be considered at the Community & Economic Development Committee meeting this week.
But at a meeting last week, Mayor Phil Yerington, First Financial's Dan Lubell, and city staff hammered out a deal that will likely kill that proposal. Under the deal, First Financial and Oak Helm would agree to voluntary pre-sale inspections of their properties for a year. Greg Hoover, the city's director of housing and neighborhood development, said Oak Helm has also agreed to the deal, and Nancy Coon, a partner in the company, confirmed it. "We feel like we don't have anything to hide," she said. "We might as well do it voluntarily. ... I don't think they need an ordinance."
A resolution affirming the deal will likely be considered by the city council at its September 19 or October 3 meeting, and Hoover said he expects it to get the support of the majority of the city council.
Hoover called the program a "trial period to see the efficacy of inspections." If all parties are happy with the results, the program will likely continue, Hoover said. If one of the parties defaults on the agreement or decides after a year to discontinue the inspections, the city council would have to act if it wants to make them mandatory.
The agreement might effectively cut off discussion about problems associated with contract sales, especially predatory lending.
Ward 5 Alderman Wayne Hean said he still wants all concerned parties - including neighborhood groups, housing activists, and Oak Helm - at the table for any negotiations. He added that the deal between First Financial and the city ignores smaller contract sellers.
The proposal outlined in the report would have required point-of-sale inspections for companies that sell five or more properties per year on contract. Hoover said he thought the inspection requirement would affect between two and six contract sellers. The deal between Lubell and the city would limit the affected parties to two.
One key component of the deal is the voluntary inspections. The city has asked the Iowa Attorney General if Davenport has the authority to require point-of-sale inspections for contract sales. Attorney General Miller told the River Cities' Reader that a written opinion on the issue should be done by early next week. The opinion will likely address whether the city has under its home-rule authority the right to require the inspections, and whether targeting contract sales is a violation of the Constitution's Equal Protection clause. Voluntary inspections, obviously, would prevent any lawsuits seeking to block city-imposed ones.
But the deal will do little to address the problems of contract sales. Most importantly, the inspections would only be done for a year. Even if they accomplished a goal of more accurately assessing the conditions of property owned by Oak Helm and First Financial, there would be no guarantee that property conditions would improve over the long run. Any meaningful, long-term inspection requirement would need to be enacted by a future council.
But other proposals might not have had the desired effects, either.
City staff recommended that all contract sellers that execute five or more contracts in a year be subject to the regulations. Hean, on the other hand, favors clarifying the definition of "rental" and "lease" in the state housing code so that certain types of contract sales would be covered by existing inspection requirements for rental property.
Supporters of both options use the same argument against the other. As Hoover said of changing the definition, "That becomes problematic because people will find ways to structure their contracts to get around that." In the same vein, contract sellers might find new ways to structure their holdings or businesses to avoid inspections under the city-staff suggestion.
If preventing loopholes is the primary interest, one solution might be to require a base level of inspection for all home sales. Most homes are already inspected when they're sold, and the cost of an inspection (typically several hundred dollars) could easily be folded into the loan amount. This would also eliminate complaints that the city is burdening contract buyers and sellers as well as racial minorities.
The biggest thing missing from the city's recommendation and its deal with First Financial and Oak Helm, though, is an ordinance to regulate predatory lending. The city staff has instead chosen to push that off on the state, which might or might not enact significant reform.
Hoover said that the agreement does not include any requirements that Oak Helm or First Financial change the terms of their contracts. "We are not in the business of telling businesses how to conduct their business," he said.
But there was some discussion about altering contract language to reflect recommendations from the city. But until the terms of the agreement are presented in writing, the scope of the deal remains unclear.
(It's worth noting, though, that the city's legal department already inspects First Financial contracts.)
Hoover also said the city does not think its role is to safeguard consumers. "Generally," he said, "consumer-protection issues are in purview of the state. There is some concern about states and municipalities enacting ordinances that regulate" predatory lending. First off, there are legal issues - whether the city has the right to regulate predatory lending. There's also a concern that with added red tape, lenders might do fewer and fewer transactions in cities or states with stricter regulations.
Davenport Corporation Counsel John Martin reiterated that the city doesn't think it should be regulating predatory lending. "We believe that's an area more appropriate left to the state or higher," he said.
But the attorney general's office has not discouraged cities from trying to control predatory lending.
Brauch said the attorney general's office has not analyzed state law to determine what ordinances local governments could enact to deter predatory lending. The question of local authority to conduct inspections is "something that's just been raised with us," he said, and something that the office is researching.
He added that the attorney general hopes that federal and state law don't prevent the creation of local housing-inspection requirements or regulations on predatory lending. "We would not want to deter that," he said. "We do not like to be given a ceiling [on what can be done]. We like to be given a floor."
"There's nothing precluding local action," said Shelley Sheehy, a housing activist who has studied the issue of predatory lending.
Other cites, including Philadelphia, have enacted legislation that attacks the problem of predatory lending. The City of Dayton, Ohio, in July passed an ordinance to regulate home loans, specifically targeting predatory lending. The city prohibits home-loan terms such as prepayment fees (in which the borrower is penalized financially for paying off any portion of the loan early) and flipping (in which a home is refinanced with no tangible benefit to the borrower).
"High-cost" home loans (defined in the ordinance) are further restricted. This section targets the most abusive components of predatory loans. Most strikingly, the ordinance basically prohibits large balloon payments, therefore preventing a refinancing of the home unless the terms are better for the consumer.
Nearly all such ordinances have been challenged in court. (Philadelphia's is currently tied up in the judiciary, while a lawsuit is planned against Dayton's ordinance.) "That's the nature of the industry," Sheehy said. "They're going to sue everybody."
But, she added, nearly all local and state ordinances regulating subprime and predatory lending have been upheld.
If Davenport were to attempt to do something similar, it would almost certainly be courting a lawsuit. But it would also be able to say that it was making a concerted effort to solve the problem of predatory lending.
State Action
Davenport action on predatory lending could have been important because the state in many ways is hamstrung. While the Iowa attorney general has put predatory lending near the top of his agenda, his office can only do so much.
Miller is leading the charge of state attorneys general on the issue of contract sales. Testifying before the Senate Committee on Banking, Housing, & Urban Affairs in July, he said, "We are seeing abusive practices in the sale of homes on contracts. In fact, it appears that such contracts may be taking their place along with brokers and home-improvement contractors as another 'feeder' system into the high-cost mortgage market."
Miller's primary concern has been loans that actually eat away at equity instead of building it. He told the River Cities' Reader that loans in which the "buyer" doesn't build equity or builds it very slowly (in such a way that ownership in the standard mortgage term of 30 years is impossible) are an "analogous concern." The city report claimed that some First Financial contracts would result in loans that would take 180 years to pay off.
On Friday, Miller met with city officials to discuss the issue of contract sales. Brauch said the city's report "really moves us ahead very quickly in understanding what's happening in the Quad Cities."
The state has a variety of laws through which it can address some problems typically associated with contract sales, but the major one is the Consumer Fraud Act, a broad statute under which the attorney general can file civil lawsuits for a wide range of deceptive practices.
"It's not as if people are without protection," Brauch said. But the Consumer Fraud Act has its limits. "The question is whether contract sellers tell the truth," Brauch said. The law only applies if a seller has misrepresented a property or a contract to a consumer or otherwise deceived that person. In other words, if the terms are predatory but the lender was up-front about them, the consumer has no recourse through the Consumer Fraud Act.
But if and when the attorney general's office goes after contract sales and predatory lending, it will choose its target carefully. Miller said that his office is in the middle of one major investigation of a contract seller. "We've been involved with one investigation for several months," Brauch said. He would not identify the target and would not divulge details because the investigation is still pending.
The state will be selective because it doesn't have the people or time to do more. "One of the most significant impediments to public enforcement of existing applicable laws is insufficient resources," Miller told Congress. "In the past 15 or so years, we have seen an ever-growing shortfall in the personnel when compared to workload. The number of credit providers, the volume of lending, and the amount of problem lending have all exploded at the same time that the resources available to examine, monitor, [and] investigate them, and enforce the laws have declined in absolute numbers."
"We are selective in the cases we take to court," Brauch said. Nonetheless, he added, "I think we have the resources to make a significant impact on this area statewide."
"We'd like to bring some major cases," Miller told the River Cities' Reader, "I think it would have a deterrent effect."
But the state will largely be fighting the issue alone. One of the challenges in combating predatory lending is that Iowa is the only state that does not have a "private cause of action." That means that only the state can bring a lawsuit under the Consumer Fraud Act. If a consumer feels that a contract seller committed fraud, that consumer cannot sue under that law. While a successful state lawsuit against a large contract seller might deter other contract sellers, Brauch said, "an individual cause of action would go a long way." (Miller supports allowing private causes of action in Iowa, but the legislature hasn't enacted such a measure.)
Another option open to the state is enacting further legislation or regulations on the issue.
Without legislative approval, the attorney general's office could create new regulations, for instance defining what constitutes deceptive practices in the context of contract sales and the Consumer Fraud Act. (Such a regulation might require that a contract use the phrase "lease" or "rent to own" if it meets certain predatory-lending criteria.)
While the attorney general does have the power to enact new regulations defining certain terms in existing laws, it does not have the authority to impose new requirements on contract sales. Reform would require legislative approval "once we start regulating what may be part of a land-sale contract," Brauch said. For instance, the state could forbid balloon payments in the first five years of a contract or limit the interest rate or fees charged in a land-sale contract, but those would need to be approved by the legislature.
And given the lobbying muscle of the financial industry and the Republican control of both houses of the Iowa legislature, it seems a safe bet that combating predatory lending is not a high priority at the statehouse.
Still, the attorney general's office plans to propose legislation.
"We don't have a set of recommendations yet," Miller said. But "we plan to have some proposed legislation in the land-contract area."
Brauch said the attorney general would like to file legislation "within the next two months" so it can be considered during the next legislative session.
A Larger Problem
Regulations or new laws on contract sales ignore larger issues, some activists claim. And the problem will not be solved until lending institutions provide reasonable access to capital, and reasonable loan terms, for people with spotty credit. That also means lending money to people in poorer parts of town - which isn't happening now.
Contract sellers are "doing these loans because they make a lot of money on them," Sheehy said. "Why is there a market?"
The larger problems, Sheehy said, are access to credit and a dearth of housing. "The reason this is such a problem is the lack of safe, clean, affordable housing in this town," she said.
While major lending institutions are investing in central-city neighborhoods in other communities, Sheehy said, "they're not making the same investment in Davenport. There is not the capital flow into those neighborhoods."
That echoes the statements of Coon, who said that her company is one of the only institutions putting money into older parts of the city.
Sheehy said the city could attack the larger problem on multiple fronts. First, "I think the city has a role to look at the mainstream financial institutions in this market," she said. Second, the city should encourage those institutions to create a loan pool for people with bad credit and those who go to the subprime market because they fear rejection by a bank. Last, the city could craft a policy in which it does not deposit its funds at any institution that does not have substantial financial and marketing resources directed toward central-city neighborhoods and people with spotty credit. "They need to have a vision that way," Sheehy said.
And, ideally, a solution to the predatory-lending problem would not come from the city or the state but from Congress, so that the issue is addressed across the country. There are some basic deficiencies in federal laws regulating lending, say those familiar with them.
The Home Ownership Preservation Project of the Legal Assistance Foundation of Metropolitan Chicago tries to prevent foreclosure on victims of predatory lending. Dan Lindsey, supervisory attorney with the project, said his group uses both state and federal law to help people keep their homes, including the federal Truth-in-Lending Act and Home Ownership Equity Protection Act (HOEPA) and the state consumer-fraud statute. The project has a caseload of about 125. (Of course, the project would be significantly different if it were located in Iowa because of the prohibition against private causes of action at the state level.)
Lindsey said that state and federal laws provide some protections for consumers, but not enough. "States and municipalities are doing what they can," he said, "but it really needs to be stronger at the federal level."
Part of the problem, Lindsey said, is that it's unclear what latitude states have. Illinois enacted a law similar to the Home Ownership Equity Protect Act (HOEPA) with better protections than the federal statute, but it's being challenged in court.
Another issue is how the government defines predatory lending. The Home Ownership Equity Protection Act sets specific standards, and "there are a lot [of mortgages] that are just coming in under the bar," Lindsey said. "We think the bar needs to be lowered."
To read part one of this story, outlining the problems associated with contract sales, visit our Web site: (http://www.rcreader.com).
