The 3rd meeting of the Interim Joint Committee on Banking and Insurance was held on Tuesday, November 23, 2004, at 10:00 AM, in Room 149 of the Capitol Annex. Senator Tom Buford, Chair, called the meeting to order at 10:20 AM, and the secretary called the roll.
Present were:
Members: Senator Tom Buford, Co-Chair; Representative James Bruce, Co-Chair; Senators Lindy Casebier, Julie Denton, Tim Shaughnessy, Representatives John Adams, Sheldon Baugh, James Comer, Ron Crimm, Robert Damron, Ted "Teddy" Edmonds, Danny Ford, James Gooch, J. R. Gray, Dennis Horlander, Steve Riggs, Arnold Simpson, Brandon Smith, Roger Thomas, Tommy Thompson, Ken Upchurch, Susan Westrom, and Rob Wilkey.
Guests: Bill Harned and John Rosenberg, AARP; Ann Marie Regan, Office of Kentucky Legal Services Programs; Harold Turner and Todd Leatherman, Office of Attorney General; James Jitter Allen, Consultant; Bill Doll, KMA; Sean Cutter, MMLK, Rich Seckel, Office of Kentucky Legal Services; and D. Walton, KMHI.
LRC Staff: Greg Freedman, Rhonda Franklin and Marlene Rutherford.
The committee recognized those members who have served on the Committee on Banking and Insurance and who would not be returning to the General Assembly.
Representative Bruce read a resolution recognizing and honoring Representative John Adams of the 8th House District for his service to the Kentucky General Assembly and the Interim Joint Committee on Banking and Insurance and acknowledging his outstanding record as a dedicated public servant in serving his constituents.
Representative Rob Wilkey read a resolution honoring Representative Roger Thomas of the 21st House District for his service to the Kentucky General Assembly and the Interim Joint Committee on Banking and Insurance. Representative Wilkey stated that Representative Thomas served with honesty, character and integrity and hoped he continues to be active in areas of his interest.
Representative Bruce mentioned Representative Paul Bather and Senators Albert Robinson, Lindy Casebier, and Larry Saunders, not in attendance, and that they be provided copies of resolutions.
A motion was made and seconded to approve the minutes of the House Members of the Interim Joint Committee on Banking and Insurance meeting of August 24, 2004, and the Interim Joint Committee on Banking and Insurance meeting of September 13, 2004. Motion carried without objection.
John Rosenberg, representing the AARP, Bill Harned, AARP, Ann Marie Regan, Office of Kentucky Legal Services Programs and Harold Turner of the Attorney General's Office of Consumer Protection, discussed predatory lending in Kentucky.
Mr. Rosenberg noted that he was sorry Representative Webb was unable to be in attendance to discuss the topic because she has been supportive of this issue and had introduced HB 707 in the 2004 Regular Session.
Representative Wilkey indicated that he had spoken with Representative Webb who had expressed regret for not being able to attend however she had asked that he relay to the committee that she is dedicated to this legislation.
Mr. Harned pointed out that predatory lending continues in Kentucky. In 2003, HB 287 was passed addressing limitations on high-cost loans, however the points and fees "trigger" of 8% is too high. Mr. Harned stated that Kentucky should follow the lead of North Carolina, which has a 5% trigger. He commended Representative Webb for introducing HB 707, which the AARP supports. That lowering the trigger from 8% to 5% of the total loan amount, spelling out what points and fees are to be included, the inclusion of an "anti-flipping" provision which would prohibit the refinancing of a high-cost loan for a lower interest rate unless the points, fees, and closing costs can be recouped within four years, and including mandatory attorneys' fees for a violation of the law would go far in addressing predatory lending. He also noted that the Senior Citizens Advisory Committee, Subcommittee on Consumer Affairs, endorses this proposal.
Ms. Regan indicated that according to a study by Metropolitan Housing of the foreclosure rates in Indiana and Kentucky, that foreclosures are up in Kentucky. Kentucky's percentage of sub-prime loans in the market are 19% greater than the national market and that one-half of the individuals with sub-prime loans could have qualified for another type loan; that the points and fees threshold or trigger is no different from those under the Home Ownership and Equity Protection Act of 1994 (HOEPA); that abuse of these type loans is not in the interest rate, but in the points and fees charged by the lender who tries to defraud the borrower by charging just below the trigger point. Another point she raised was that HB 707 defined points and fees more explicitly. HB 287, passed in 2003, did not define points and fees which should include all costs of the loan except general interest.
In response to a question by Representative Ford relating to pre-payment penalties, Ms. Regan indicated that this was addressed in HB 707, that a high-cost home loan may not contain a provision which permits the lender to charge or collect pre-payment fees or penalties more than thirty-six (36) months after the loan closing. HB 287 also has a three year pre-payment penalty. Representative Ford also commented on the suggested improvement of HB 707 that the Kentucky Housing Corporation was being excluded from the definition of points and fees of its loans. Ms. Regan indicated that she had had several meetings with KHC and it was their suggestion that they be excluded since they make a lot of loans.
Another concern of Representative Ford was the refinancing of the loan unless the fees , etc. could be recouped in four years. Mr. Rosenberg indicated that if the consumer is given a lower rate by a lender that there has to be a "reasonable" tangible benefit to the consumer.
Ms. Regan stated that the damage award provision for violation of the law should include reasonable attorney fees. This was contained in HB 707 introduced in 2004. The remedies section of HB 287 indicated action could be pursued under the consumer protection act or the usury statute which has better damage provisions. It is proposed that the bill be amended to include attorneys' fees so that individuals can seek private counsel in pursing violations.
Senator Buford asked why, under HOEPA, changes have not been made to change the trigger. Mr. Rosenberg indicated there have been discussions about making general changes and there are a number of bills under consideration in Congress.
Harold Turner, Office of the Attorney General, indicated that his office has had complaints on predatory lending, that fair competition is good for the consumer as well as business and that the proposed enhancements to the 2004 HB 707 will bring more balance to transactions so that abuse does not occur. He stated that sub-prime lending does not provide a benefit to consumers, there has to be an appropriate balance.
In response to a question by Representative Damron about mortgages that are sold, Ms. Regan stated that language in HB 287 addressing mortgages that are sold was not language proposed by Legal Services. She noted that problems have arisen in other states with the secondary market. HB 287 limits the liability. HOEPA indicates assignees are liabilities. The trigger for federal standards is different than assigning liability.
Mr. Turner provided the committee an example of a consumer, by permission, which had been referred to his office by a local banker. The individual had responded to a solicitation and an application for the loan was taken by phone and the loan closed by a notary. The equity in the home was transferred to California where the loan originated.
Mr. Turner also stated that the Attorney General supports the provisions of HB 707 but the question is where is the appropriate balance, when does it become exploitation. The five percent threshold is more reasonable and allows flexibility for the lender. Many loans are being made from outside Kentucky. They are not small loans but are investments in a home. It is a problem for senior citizens because they normally have a lot of equity in their homes. If there is a five percent threshold, the lender could not take as much of the equity in the home.
Senator Buford asked how many complaints since the passage of HB 287 have been received and how many were in violation of the law. Mr. Turner indicated that most provisions do not apply, but the proposal would essentially be providing protection for those being taken advantage of.
Mr. Rosenberg would like for sub-prime loans to compete much like prime loans, referring to states such as North Carolina, South Carolina, Arkansas, New Mexico and other states which have predatory lending laws. Lowering the threshold has not impaired access to fair credit in those states.
Three of the nation's sub-prime industry home lenders, Household International, Citifinancial and Washington Mutual have triggers of five percent.
It was also noted that 71% of the loans in Kentucky are made in North Carolina and that predatory loans have decreased in that state.
Senator Buford asked what percentage of loans the top three sub-prime lenders have in Kentucky. Mr. Turner indicated that because of a lawsuit with Household Finance there were over 3,000 loans which were part of the settlement, other information would have to be obtained from the sub-prime companies. Household approved the 5% trigger as a result of the lawsuit and it was pointed out that Household is still competing at the 5% trigger level and has had no decrease in business in Kentucky.
Senator Buford inquired whether this proposal had been discussed with the Department of Financial Institutions, bankers association, mortgage brokers and other financial institutions which would be affected.. It was indicated that this proposal had not been discussed with those agencies, but Mr. Rosenburg indicated that he would be happy to get with those representatives and agencies to discuss the proposal. It was pointed out that the affected associations and the banking industry was very supportive of the legislation passed in North Carolina.
There being no further business, the meeting adjourned at 11:55 AM.