Legislation that would create a federal standard to curtail predatory mortgage lending may not result in system that is more friendly to consumers, says Federal Reserve Governor Edward Gramlich.
The House is considering two bills that would create federal rules to clamp down on predatory lending practices on mortgages and home equity lines of credit. The federal standard would pre-empt state mortgage laws.
“Substituting federal standards for state standards does not necessarily guarantee a better outcome," said Gramlich, in talking points prepared for a speech at the University of Pennsylvania, according to Reuters. "Preemption of state law raises a fundamental political question about states' rights and the proper distribution of authority between the state and federal governments," he also said.
Consumer advocates have long argued that certain mortgage lenders take advantage of the poor and minorities by offering exhorbitant interest rates, which are far higher than those on comparable government securities.
One bill under consideration would change the definition of a “high-cost” loan, meaning those with points and fees totaling 5 percent (down from 8 percent) of the loan's value.
"There is no consensus on the costs and benefits of state laws, but it seems fair to say that as the laws cover more transactions and add more restrictions, the risk increases that some legitimate transactions might be impaired," Gramlich said.
Gramlich has been a member of the Board of Governors of the Federal Reserve System since late 1997.