When Washington implemented an anti-predatory lending law in September, it did more than stop fraudulent mortgage lending in the city. It stopped just about all lending outside the prime market.

Mortgage lenders say the law - which was suspended in November and is expected to return in some form this month - put too many burdens on legitimate lenders and further complicated the byzantine mortgage transaction.


Lenders also said they were afraid to lend when they weren't sure what practices and loan products could get them into trouble.

The Washington law "didn't really define what predatory loans were," said Gene Lugat, president of the Maryland Mortgage Bankers Association and vice president for the Baltimore area at AccuBanc Mortgages.


Although well-intended, the rush to enact the law backfired after lenders balked at the expensive paperwork and documentation it called for and the way it narrowed the means for lenders to foreclose.

"Lenders just pulled out of the market," Lugat said.

Predatory lending is as murky as it sounds. It is the underbelly of the sub-prime credit market, related to "flipping" schemes but not as high-profile. Mary Louise Preis, Maryland's commissioner of financial regulation, calls predatory lending "sort of undefinable."

The mortgage industry and consumer advocates agree on this broad definition: Predatory lending is the practice of selling high-interest, high-fee loans to people unlikely to be able to pay them back - the credit-challenged and gullible, who are often minorities, the poor and the elderly. The legacy of this lending is blight, with foreclosure upon foreclosure and entire city blocks boarded up.

Baltimore, the site of federal hearings on predatory lending in 2000, is considering whether to enact legislation of its own. It is not alone.

Dozens of states and cities have debated laws on anti-predatory lending in recent years. Philadelphia passed such a law last year, but it was "pre-empted" (i.e., killed) by the Pennsylvania legislature.

Baltimore City Council President Sheila Dixon said the city has been working with the state to determine whether new lending laws are necessary.

Last month, however, Del. Maggie L. McIntosh introduced a bill in the General Assembly stipulating that banking regulation is conducted by the state, not by localities. Though the bill does not mention predatory lending in Baltimore, its aim is to prevent the city from enacting its own banking and lending laws.


"That's what we're trying to do, so we don't get into the mess that some other cities and states have gotten into," said McIntosh, a Baltimore Democrat.

Her move has infuriated the community activist group ACORN. Last month, about three dozen members blocked the office of Del. John F. Wood Jr., a St. Mary's County Democrat who is a co-sponsor of the bill, to protest the legislation.

Mitchell Klein, head organizer for the local office of ACORN - the Association of Community Organizations for Reform Now - said that in Baltimore, sub-prime lending and predatory lending are the same thing.

"Baltimore is a disaster," Klein said. "There's collusion between city government and slumlords. Nothing is enforced. This [lending] is a scourge. It has a grip on this city that is awful."

Members of the mortgage industry urge Baltimore to look hard at Washington's experience before acting.

A law like Washington's "would take away options for consumers," Lugat said, adding that during the two months that law was in effect - from September to November - it hurt those it was supposed to help. "It's good intentions that are misdirected," he said.


Consumer advocates say there is a place for sub-prime loans. These "B," "C" and "D" mortgages carry higher interest rates and substantial fees, but they allow people who would not qualify for a market-rate conventional mortgage - "A" loans - to become homeowners or to remain homeowners by refinancing or taking out a second mortgage.

In today's market, the most creditworthy borrowers can get a 7 percent loan with no points. A point represents 1 percent of the borrowed amount and is charged to the consumer in exchange for a lower interest rate.

Legitimate lenders typically charge 9 percent to 9.5 percent for sub-prime loans, said Alan R. Ingraham, regional vice president of First Horizon Home Loans MNC Division.

But ACORN's Klein said his group regularly sees interest rates of 25 percent on refinanced loans for borrowers with poor credit.

"On first mortgages we are seeing between 12 and 20 percent. We regularly see stuff like that," Klein said.

Most of the fraud occurs in the sub-prime market, consumer advocates say. Because sub-prime lenders generally sell their loans directly to the secondary-mortgage market instead of to the government-chartered mortgage investors Freddie Mac and Fannie Mae, sub-prime loans are not as closely scrutinized as conventional loans are.


Sub-prime lending boomed in the easy-money 1990s, with national sub-prime loan volume increasing from $20 billion in 1993 to more than $150 billion in 1998, according to the U.S. Department of Housing and Urban Development.

Foreclosures boomed, too.

In Baltimore, foreclosures rose from roughly 500 annually in the mid-1990s to 8,000 today, said Vincent Quayle, executive director of the St. Ambrose Housing Aid Center in Baltimore, which counsels people in foreclosure.

Quayle, who has run the St. Ambrose program for 30 years, blames a too-liberal lending climate for the increase. People used to default because of illness, divorce or job loss, he said. Things changed in 1996, when the Clinton administration began a national homeownership push.

"Many people coming to us behind on their mortgages, in our opinion, should never have bought their homes in the first place," Quayle said. "They weren't prepared for homeownership."

Predatory lending is a cousin of flipping, the practice of buying a property, making cosmetic repairs, then reselling almost immediately to an unwary buyer for far more than the property is worth.


Predatory lending doesn't necessarily involve inflated appraisals or faked documents, as flipping schemes do. Customers are gulled by pitches such as: "When others say no, we say yes!" and "No income verification!" They don't read the fine print that spells out the fees they will have to pay.

Many customers also don't understand that mortgage brokers generally are not risking their own money and are not out to get their customers the best deal. On the contrary, the higher the interest rate charged, the more the broker makes.

(The term "mortgage lender" contributes to the confusion: It means brokers as well as lenders, such as banks.)

Unscrupulous brokers don't care whether the borrower has a chance of repaying the loan. They just collect their fees at settlement, unload the loan onto the secondary market and move on to the next foreclosure-in-the-making.

"Predatory lending [involves] loans that put the borrower in a position to fail," Lugat said. "They put the homeowner at risk for the sole purpose of gain to the individual broker."

Predatory lending is more prevalent in cities than in suburbs, and its main victims are minorities. HUD calculations find that blacks are five times as likely to receive sub-prime rather than prime loans, says the National Community Reinvestment Coalition, a Washington-based lobbying group that represents organizations seeking community reinvestment and equal access to credit.


"In essence, it's a dual-lending marketplace," said David Berenbaum, a senior vice president with the coalition, which lobbied on behalf of Washington's anti-predatory-lending law.

The coalition also reports that Fannie Mae and Freddie Mac have stated that 30 percent to 50 percent of borrowers with sub-prime loans nationwide could have qualified for lower-interest loans.

In Baltimore, sub-prime loans accounted for 8 percent of the conventional lending in predominantly white areas, 24 percent of the conventional lending in racially changing areas and 46 percent of the conventional lending in predominantly black areas, according to a May 2000 report by the Public Justice Center in Baltimore.

"There is a growing public policy concern that some share of these loans actually take advantage of borrowers who could qualify for various standard loan products, on one hand, and borrowers that are simply not qualified for a home loan on the other," the Public Justice Center report said.

In recent years, banks have just gotten out of the sub-prime market.

Bank of America pulled out in August, saying only that its sub-prime division did not meet the company's profitability goals.


Not everyone bought that explanation. The month after Bank of America began selling off its $26.3 billion in sub-prime loans, a Mortgage Bankers Association of America spokesman said the increase in regulations at the state and local level was "vulcanizing" the national mortgage market.

The mortgage industry deplores what it considers simplistic solutions to the problem of predatory lending.

"There's not one silver-bullet solution, which everybody wants," said Anne Canfield, executive director of the Consumer Mortgage Coalition, a Washington-based trade association of mortgage lenders and servicers.

Canfield, who was a member of the Washington task force on predatory lending, said plenty of laws were on the books to deal with fraud. The key to ending predatory lending, she said, was enforcing them.

"More laws here are not going to change [fraudulent lenders'] behavior," she said.

Canfield said it is unfair to expect the mortgage industry to assume losses incurred by naive consumers. She, like many others in the industry, said simplifying mortgage procedures and educating consumers are crucial to preventing fraud.


She pointed to the hypothetical case of a grandmother who takes out a home equity loan to help her granddaughter buy a car. The granddaughter is supposed to make monthly payments so that the grandmother can repay the loan, but the granddaughter skips town, leaving the grandmother with a loan she can't pay back and a house she's likely to lose.

Other task force members "basically wanted the lenders to eat the losses," Canfield said. "You can't do that; it doesn't work like that."

Some consumer advocates think it is time to reassess how penalties are enforced and risk is assessed. Should the grandmother be penalized?

Should a worker without health insurance who has always been on time with his bills be denied "A" credit because he needed heart surgery and is unable to pay his hospital bills?

Should customers have to pay fees such as the "yield-spread premium"? Do they know what it is?

Ken Strong, staff coordinator of the Baltimore City Flipping and Predatory Lending Task Force and director of research and policy at the Community Law Center in Baltimore, said the task force aims "to make the real estate market in Baltimore City more ethical and fair to consumers."


"I don't think all sub-prime lending is predatory," Strong said. "But there are business practices that have been adopted and accepted within the industry that I think are predatory in nature and are commonly abusive to a consumer."

Strong has particularly harsh words for the yield-spread premium, which rewards brokers for charging customers higher interest rates.

"The mortgage broker gets an incentive to stick a consumer with a higher interest rate. They get a bonus for that [which] the consumer pays for in their mortgage. I think that is outrageous," he said.

The going is likely to be rough for consumer advocates.

"There's a philosophical argument that people with the lowest income should be getting the lowest rates," said Vincent Quayle of Baltimore's St. Ambrose Housing Aid Center.

"But that's not the American capitalist way."