MARCH 2004

New York State Court Strikes Down
City Predatory Lending Law

The tension continues between legal jurisdictions competing to stop abusive mortgage lending. In late January the New York State court struck down a New York City ordinance that prohibited any institution engaged in "predatory lending" from doing business with the city. The New York City Council had passed Local Law 36 in November 2002. In response, New York City mayor Michael Bloomberg sued the council, arguing that the law curtailed the mayor’s ability to direct the city’s purchasing decisions. The American Financial Services Association (AFSA) joined the suit as a co-plaintiff, arguing that Local Law 36 was preempted by both state law and the National Bank Act.

In an editorial in the American Banker, AFSA’s outside legal counsel, Eric Mogilnicki (Wilmer, Cutler and Pickering, LLP), provided an excellent summary of the issue of preemptive laws related to abusive mortgage lending. Mogilnicki points out that Local Law 36 defined predatory lending to include practices that were completely legal under both a New York State law passed earlier the same year, as well as federal law. He continues: "By setting standards that went well beyond federal and state law, Local Law 36 would have forced financial institutions to either forfeit their ability to make some perfectly legal subprime mortgages (directly or through affiliates) or forfeit any opportunity to provide financial services to New York City."

Who wins through this brand of protectionism? He writes, "If financial institutions chose to continue offering all legal subprime mortgages, the city would have fewer such institutions with which it could do business. If financial institutions chose to continue to do business with the city, consumers with poor credit would have fewer institutions from which they could obtain a mortgage. In other words, the law guaranteed that either the city or its citizens would have to obtain financial services in a smaller—and likely less competitive and more expensive—marketplace."