A Senate bill that would fundamentally change the nature of loans and lending would unreasonably burden lenders and encourage lawsuits by individuals seeking to avoid repaying loans, The Business Council said in a legislative memo opposing the proposal (S.5005/Larkin, Maziarz).
The Business Council strongly opposes "predatory lending" practices, but also opposes this bill because it would go far beyond what is needed to curb predatory lending, said Elliott Shaw, director of government affairs for The Business Council.
How loans are classified: Loans are generally classified in three categories: prime (offered to borrowers with the best credit rating), sub-prime, and high-cost. New York State banking regulations specify the interest rate at which a loan is considered high-cost; the other two designations are based on lending practices. High-cost loans come with higher risk for the lender and higher costs for the borrower.
The impact of this bill: This bill would dramatically lower the interest-rate threshold at which loans would be classified as high-cost. As a result, thousands of loans a year that would be classified as sub-prime would be pushed down into the high-cost category, Shaw said.
"Some mortgage companies that specialize in sub-prime loans would see their entire book of business pushed into the high-cost category," Shaw said.
The Council's memo specified several other objections to the bill, saying it would:
- Eliminate the option of arbitration for resolving disputes between lenders and borrowers. Arbitration is recognized as an effective way to resolve disputes in labor relations, business transactions, and many other arenas. Moreover, state regulations already require that arbitration requirements in loan agreements meet the strict standards of the National Consumer Dispute Advisory Committee.
- Create new liability exposure and increased statutory damages for lenders of high-cost loans. The bill would also create a new affirmative defense for borrowers. This would effectively encourage new lawsuits by borrowers seeking to avoid repayment. "Let's go after unscrupulous lenders. Let's not do it by letting predatory lawyers rewrite the rules," the memo said.
- Require all borrowers to be subjected to mandatory counseling about credit and borrowing. Current law already requires lenders to inform borrowers that they can have access to counseling and to provide, if asked, information on credit-counseling resources maintained by the state Banking Department.
Current banking regulations offer a better balance of free-market principles and consumer protection, the memo said. The Senate has long championed deregulation, leading efforts to deregulate electricity, hospitals, and many insurance products. "All those markets are the better for this action," the memo said.
The Business Council is also opposing a similar Assembly bill (A.7828A/Greene).