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Attorney General calls on Congress to fors partnership with states against predatory lending, restore state authority to fight subprime abuses
By Attorney General's office
Apr 29, 2008 - 7:14:31 PM

Attorney General Richard Blumenthal today called on Congress to restore states’ authority to fight predatory lending and form a new federal-state partnership against subprime mortgage abuses.

Blumenthal testified in Washington D. C. before the U.S. Senate Committee on Commerce, Science and Transportation.

The attorney general spoke in support of a bill to empower the Federal Trade Commission to regulate subprime loans marketing and delegate enforcement authority to the states. Blumenthal called the measure “a good first step” in restoring authority the Bush administration stripped from the states and cracking down on subprime abuses.

“This ongoing, deepening crisis creates an opportunity -- indeed an obligation -- for a new aggressive, innovative effort to fight fraud and protect consumers,” Blumenthal said. “There must be a new federal/state consumer protection partnership -- really a renewed and reinvigorated alliance and enforcement paradigm. States have been shackled and subverted by federal preemption -- an arrogant assumption of exclusive power that all too commonly replaces state enforcement with federal inaction.

“The federal role should be reconstituted and reconfigured. States should be enabled and encouraged to do what they do best: efficiently and effectively protect consumers from constantly evolving financial schemes.

The federal government should review these laws, enacting into federal regulation the best state consumer protections, applying them across the country as federal law.

“At present, rather than encouraging or enabling effective state
enforcement, federal agencies have been an impediment and obstacle. The Office of Comptroller of the Currency (OCC) has continually -- and successfully -- scuttled state consumer protection laws as applied to national banks. Yet, the OCC has been AWOL during the recent mortgage crisis. The federal pattern has been to claim sole authority and then fail or refuse to use it.

“Lax and lackadaisical federal enforcement must end. States should be empowered as full partners to enforce consumer protection laws.

“The combination of federal power grab and Bush administration hostility toward consumer rights created a perfect storm allowing predatory lending to flourish.

“As law enforcement officials, state attorneys general have acted where we could. In 2002, Connecticut and 18 other states compelled subprime lender Household Finance to pay consumers $500 million for predatory lending practices. In 2006, Connecticut and 48 other states forced Ameriquest to pay $325 million for predatory lending practices.

“But these victories are built on sand as long as we face the huge loophole provided by inadequate federal regulation and preemption of state law. We were only able to reach these settlements because Household Finance and Ameriquest were state licensed, giving states jurisdiction. Had they been federally chartered, the states could not have won a penny for consumers, no matter how gargantuan or glaring their violations of the law.

“Indeed, our settlement with Household Finance would be impossible today because the company has since obtained a federal charter.

“Federal regulations regarding deceptive practices should constitute a floor not a ceiling. States should have the authority to provide stricter and stronger consumer protections. Such an approach has been successfully implemented in other similar federal laws -- from do-not-call regulations to the Truth in Lending Act.”

Investigations Blumenthal has been able to do have revealed numerous deceptive and predatory lending practices, including:

• “One stop shopping” schemes in which mortgage brokers, real
estate agents and other co-conspirators combine to sell
distressed houses with structural flaws, cosmetically repaired.
Such schemes typically target first time homebuyers with
impaired credit, often with limited English ability;

• Inflated appraisals resulting from mortgage brokers pressuring
appraisers to exaggerate property values by threatening explicitly to deny them business;

• Misrepresentation and non-disclosure of loan terms and interest
rates and bait-and-switch tactics at closings;

• Abusive foreclosure practices, including deceptive and illegal
fees -- a practice that often impairs the ability of distressed
borrowers to reach an arrangement with the lender or mortgage
servicer to avoid losing their homes.

The OCC early in the Bush administration issued a rule barring states from enforcing their consumer protection and predatory lending laws against national lenders, which provide most mortgages. As a result, states could no longer protect consumers from subprime abuses, forcing consumers to seek assistance from faraway federal regulators.

The National Bank Act further eroded state authority regulate subprime lending.

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