Subprime housing market lenders have benefited from weak or nonexistent federal regulation that provides little oversight or redress to homebuyers swindled into expensive loans. Now, many states have stepped into the breach, passing restrictive laws designed to provide consumers the opportunity to fight back against predatory lenders.

But Congress is taking up the issue of federal guidelines that would supersede the tough state laws, opening the possibility that consumers will take a backseat to the profit-hungry financial services sector which showers Congress with money and favors.

The House of Representatives currently has two bills on its docket dealing with predatory loan protections.

The "Responsible Lending Act," introduced by Rep. Bob Ney (R-OH), would create uniform federal guidelines for predatory lending laws, superceding laws already on the books in many states. Ney has become infamous for his ties to corrupt lobbyist Jack Abramoff.

The law would also allow prepayment penalties for the first three years of a loan, and would only restrict refinancing on the most expensive loans unless they had a "net, tangible benefit" to the borrower.

The mortgage industry favors the Ney bill, in order to put an end to what the Mortgage Bankers' Association calls "a bewildering regulatory landscape that is both difficult and costly to decipher. Consumers, unfortunately, are being forced to pay the price, with fewer credit options and more expensive mortgages."

Kurt Ptofenhauer, MBA's senior vice-president for governmental affairs, told the Los Angeles Times that "the predatory lending problem is frankly dwarfed" by the ability of lower-income borrowers to get credit and home loans. "The market works because it regulates itself, " he said.

Legalizing Fraud

Consumer advocates such as the Center for Responsible Lending (CRL) disagree strongly.

Pointing to statistics showing that predatory loans can cost Americans $9.1 billion each year, the Center believes that the Ney bill will put subprime borrowers at even greater risk of expensive prepayment penalties, excessive additional fees, and outright mortgage fraud.

"It would be a travesty if all [the states'] hard work was undone by a federal law that puts more homeowners at risk by eliminating state protections," CRL's executive vice-president Debbie Goldstein said.

CRL and other consumer advocacy groups are backing another House bill, sponsored by Reps. Mel Watt and Brad Miller (D-NC), and Barney Frank (D-MA), that prevents subprime lenders from advising borrowers to quickly refinance ("flip") their property without explaining the costs and benefits upfront. Unlike the Ney bill, the measure would apply to all subprime loans.

The "Prohibit Predatory Lending Act" would also prohibit the use of mandatory arbitration to resolve disputes and would mandate that borrowers get credit counseling before agreeing to higher-cost loans. It would also allow states to craft stricter requirements.

Watt and Miller modeled the bill on North Carolina's laws against predatory lending, considered to be the strictest in the nation. Twenty-four other states have laws against predatory lending on the books, many with very different requirements.

California's laws are generally considered the weakest, as they can allow prepayment penalties on "traditional" loans for up to five years. Not coincidentally, California's real estate market is one of the most expensive in the nation.

The states are often tougher than the federal government when it comes to enforcing laws against subprime lenders. The Attorneys General of 33 states and the District of Columbia recently negotiated a $325 million dollar settlement with subprime lender Ameriquest for charges of predatory lending and excessive fees.

Money Talks

The mortgage industry is lobbying hard to ensure the Ney bill gets passed. Ney received tens of thousands of dollars' worth of campaign contributions from political action committees representing the mortgage industry, including $10,000 from MBA, and another $10,000 from the National Association of Realtors.

Ney is also under investigation for his ties to infamous Washington lobbyist Jack Abramoff. Ney receieved $32,000 in campaign contributions from Abramoff in exchange for supporting legislation that favored a Texas Indian tribe that Abramoff represented. Ney also enjoyed favors from the lobbyist, including a golfing trip to Scotland in 2002.

Ney was subpoenaed by the Justice Department to testify in the Abramoff investigation in Nov. 2005. Abramoff recently pled guilty to multiple federal charges, including conspiracy and tax evasion.