The Georgia Fair Lending Act, authored by Comrade Senator Vincent Fort (D) and passed by a naïve Legislature, is a prime example of the government stereotyping all businessmen as evil and trying to micromanage the economy. When government manages anything you can be assured of one thing: TROUBLE.
As usual, the motivation of this law is admirable; it seeks to protect the elderly and the unsophisticated from those who by ignorance or evil would steer them into bad loans for profit. Unfortunately, the law does not protect any of us from Comrade Senator Fort. Beware of Senators who come to help you; even if their motivation appears to be good, though somewhat condescending, they tend to fix delicate issues with a meat cleaver.
There are three major problems with this bill: First, Comrade Senator Fort refers to all lenders as having “predatory practices.” This is akin to saying that because some Senators are unethical and take bribes that they are all subject to taking bribes. By far, most lenders and mortgage brokers are not “predatory” by nature.
Secondly, despite Comrade Senator Fort’s assertion that this bill is the most, “well written and researched bill to come out of Georgia in decades” he is flatly wrong. There are, among others, three gaping errors in this bill: there is no definition for “Net Tangible Benefit,” the points and fees test includes Mortgage Insurance which does not go to the lender, and the points and fees test includes prepayment penalties which may never be collected.
“Net Tangible Benefit” is one of the keystones of this bill, yet it is left wholly undefined. Whether that is an error in research or writing I do not know, but law by definition must be clear to be followed. At first one would say, “The definition of that seems rather obvious.” But fixing penalties on undefined words like these is like having a speed limit sign that says, “Don’t go Fast.” In this case, no lender wants to go before the judge to find out what “net tangible benefit” means after they have already made the loans. So, lenders are limiting fees to 3% so that no refinance loan is considered to be a “covered loan.”
Now what could be wrong with that? The definition of fees and limiting the market is what is wrong with that. In this law, “fees” include such ridiculous items as Mortgage Insurance premiums. Now we may not like it, but insurers like FHA require funding fees of 1.25% of the loan amount. This money goes to FHA to insure against default and never goes to the broker or lender either directly or indirectly. But, Comrade Senator Fort counts it as a fee. With that taken out of the equation the lender/broker can only charge 1.75%.
That may sound like plenty to you, but it is not enough to make the lenders want to do those loans. So, Comrade Senator Fort is introduced to another principle of law: You can’t make businessmen work. When government legislation makes business too expensive, too risky, or not profitable in some way, businessmen stop doing business and we all suffer. This is exactly what has happened. Lenders are leaving our state like deer running from a hunter: Comrade Senator “Elmer Fudd” Fort.
The last of the “fees” to be counted in this test for predatory lending is one that may never be charged. In fact, the borrower has total control over it: the prepayment penalty. In Comrade Senator Fort’s infinite wisdom, he, and others like him, decided that prepayment penalties should be included in the upfront fee calculation even though they may never happen if the borrower keeps the contract.
You may ask, why would anyone take a prepayment penalty at all? There are two reasons: first, the loan is so good that the lender can not afford to give you the deal if you are going to refinance out of it every year (like rolling low-interest credit cards from one introductory offer to the other). Secondly, if you are in a high-risk credit category in order for the loan to have value to the lender they must know that it will be around for at least two years.
Here is the secret that Comrade Senator Fort either does not know or does not want to tell you about prepayment penalties: without them the interest rate would be higher or the loan will not be offered.
Comrade Senator Fort, in order to protect you from making silly decisions has crafted a law to treat all Georgians as if they are gullible and dim-witted. Why would a person of ordinary intelligence refinance their home if they did not see a “tangible net benefit?” Are we so silly that we need Comrade Senator Fort to protect us from our own decision making?
At the end of the day, this bill is one of the most poorly worded, badly researched bills to ever be conceived by a Senator who thinks he is everyone’s daddy. Now he has learned the hard way that you cannot force business into unprofitable rules because of a few criminals in the system. The problem is, Comrade Senator Fort will not suffer if lenders refuse to do business in this state: You will.