Illinois Stands up to Bank, Why Couldn't NYC?
On Friday, the Illinois based Republic Windows and Doors abruptly closed. Outraged and in shock, the company's 250 workers held a sit-in, supported by their union and elected officials. President- elect Barack Obama spoke in support of the suddenly laid off plant workers.
Gov. Rod R Blagojevich said the State of Illinois was suspending its business with the Bank of America.
Illinois Threatens Bank Over Sit-In due to Bank of America cutting off Republic Windows and Doors' line of credit, which the company could have used to retain the jobs, or distribute severance and vacation pay to the workers.
The insult comes after Bank of America received $15 billion of the $700 billion bailout of Wall Street, and is scheduled to get $10 billion more. Bank of America applied for the TARP funds after September's $50 billion Purchase of Merrill Fulfills Quest for a Bank.
In 2002, the NYC Council attempted to do what Illinois governor Blagojevich did – by passing a local law that would prevent the City of NY from doing business with any institution that engaged in predatory lending. Mayor Bloomberg sued the City Council to prevent enactment of the law, and won. The story is below.
Mayor Bloomberg, the City Council, and Predatory Loans
Published Nov. 20, 2008 in Our Time Press
Mayor Michael Bloomberg recently announced a city initiative that would turn foreclosed homes into affordable housing for low income New Yorkers. But, these homes might not have been foreclosed at all if Bloomberg did not challenge the City Council's efforts to protect New Yorkers from predatory subprime loans and the sometimes unethical business practices of some home improvement contractors.
From April through July of 2002, in response to constituent complaints, the City Council committee on Consumer Affairs conducted a series of hearings on Intro. No. 67, a proposal to amend chapter 1 of Title 6 of the Administrative Code, which covers city contracts and purchases. The proposal would have prohibited the city from doing business with those institutions that engage, directly or indirectly, in predatory lending practices.
On September 4, 2002, the Committee on Consumer Affairs unanimously approved the current version of 67-A, and the full Council passed it on September 25, 2002 with a vote of 44-5. On October 23, 2002, the Mayor sent a message (M331) to the City Council vetoing Int. 67-A. M331 was presented to the City Council at the Stated Meeting on November 20, 2002. The Mayor's veto was overridden by another vote of 44-5, and Int. 67 became Local Law 36 of 2002.
Mayor Bloomberg's response was the take the Council to court. In Mayor of New York vs. City Council of New York (Index No. #400583-2003), Judge Michael D. Stallman of Manhattan Supreme Court invalidated and permanently enjoined the Council's law, arguing that the State Attorney General, the Superintendent of Banking and any party to a high-cost home loan can enforce the State's anti-predatory lending law. (Apparently NYS Banking law was not sufficient, because while crafting Intro, No. 67, the Council crafted Resolution 93-A, which called on the NYS Legislature to pass legislation regulating high-cost home loans in order to eliminate predatory lending practices.)
Judge Stallman held that Local Law 36 could not be applied to nationally chartered banks and federal savings and loans, because federal law preempted regulation of those banks by the City Council, in addition to other conflicts with federal law.
Council Committee Reports related to Intro. No. 67 described a sub prime loan industry that grew locally and nationally between 1993 and 1999, impacting minorities, immigrants, and seniors. The Council found “Predatory subprime lenders often assisted by unscrupulous mortgage brokers and home improvement contractors, engage in high-pressure sales tactics that result in burdensome loan agreement terms without adequate disclosure. Such loans result in owners being stripped of their equity and in the increased risk of foreclosure.” Specifically, in the New York metropolitan area, the subprime lending market grew to 9.8 percent in 1999 from only 0.9 percent in 1993. From 1993 to 1999, the percent of refinance loans in the New York metropolitan area went from 1 percent to 20.3 percent and in the home-purchase market the percentage grew from .5 percent to 3 percent.
The City Council defined the factors leading to subprime loans become predatory. Burdensome terms and practices that may be predatory include: pre-payment penalties; balloon payments; financing of excessive points and fees; single-premium loan credit insurance; “oppressive” mandatory arbitration of disputes; interest increases on default; negative amortization; loan and property “flipping”; failure to comply with federal requirements with respect to the disclosure of loan terms and loan settlements; requiring advance payments; charging fees to modify a loan or defer payments; permitting acceleration of a loan at the lender’s discretion; repeated refinancing of a loan without any tangible benefit to the borrower, as well as the practice of making loans to individuals who do not have the income or financial resources to maintain scheduled payments.
Refinanced loans were most problematic for the Council. Generally, brokers or contractors solicit homeowners by going door to door in low-income neighborhoods. The homes usually need repairs and the homeowner does not have the finances to afford them. A contract is written which includes many more repairs than the homeowner is aware of and a high-cost loan is created. The broker typically refers this loan to a lender where additional fees are added to the loan, locking a homeowner into a now predatory loan. Also, homes can be appraised for a greater value than they are actually worth, again locking the homeowner into a higher loan than necessary.
African American neighborhoods were especially targeted. The City Council found that in 1998, predominantly African-American neighborhoods in the New York metropolitan area were over four times as likely to rely on subprime lenders as white neighborhoods to refinance mortgages. That same year, nationally, upper-income African-American homeowners were twice as likely to be holders of sub-prime loans than low-income white homeowners and in the New York metropolitan area the ratio jumps to four times as likely. In addition, 46% of refinanced mortgages for African-Americans were subprime, while only 11% were subprime for white borrowers. Perhaps most telling is that 31% of upper-income African-Americans relied on subprime refinances as opposed to 26% of low-income whites. That year, Freddie Mac and Standard and Poor’s studies indicate that between one-third and one-half of subprime borrowers would actually qualify for prime loans.
The City Council voted Local Law 36 of 2002 into existence because some of the problems that have been associated with the predatory lending issue were not covered under the existing regulations. At the time, the State Senate Banking Committee was considering legislation regarding predatory lending and the State Assembly passed a predatory lending bill in 2001 further protections for borrowers without infringing on the benefits of subprime lending. Federal legislation under the Home Ownership and Equity Protection Act (HOEPA) applied only to refinanced high-cost home loans and equity loans, and not to 'purchase-money' home loans.
Worse, the federal turn-of-the-millienium Gramm-Leach-Bliley Act removed barriers between commercial and investment banks that had been instituted after the Great Depression to reduce the risk of economic catastrophes. The law let commercial banks, securities firms and insurers become financial supermarkets. Sen. Phil Gramm, prime sponsor of Gramm-Leach-Bliley, was not content with financial industry consolidation. He made sure no regulation would cover mortgage backed securities, including derivatives and credit default swaps. In addition, while commercial and investment banks consolidated, regulation and oversight was split among government agencies. States had no chance. While serving as NYS Attorney General from 1999 -- 2006, former Governor Eliot Spitzer, working with attorneys general from all 50 states, was blocked from investigating subprime lending by the Bush administration and a group of major banking institutions.
Mayor Bloomberg should have known the implications of challenging Local Law 36. The Mayor's stint at Salomon Brothers prior to starting Bloomberg LLP gave him intimate knowledge of how Wall Street works. With a reported worth of $20 billion, Mayor Bloomberg is the 8th richest American on the Forbes 400. As part of the City's wealthy class, Bloomberg keeps abreast of developments in the financial services industry, especially since NYC's Wall Street is Ground Zero for the worldwide financial crisis, necessitating a $700 billion bailout. On Nov. 8, Bloomberg sued the Federal Reserve for failing to disclose where its $2 trillion of loans were going.
The City Council only sought to use the $60 billion city budget to protect New Yorkers by prohibiting the City from conducting business with those financial institutions that engage, directly or indirectly, in predatory lending practices. From Local Law 36: “The Council of the City of New York finds that the City should not encourage or support predatory lending, which damages the economic health of our City and its residents, by doing business with institutions that engage, directly or indirectly, in predatory lending practices. The Council finds that the City should not do business with institutions that adversely impact City revenues by siphoning resources from communities, thereby decreasing City sales and property tax revenues, and that increase City expenditures necessary to assist residents that are impoverished by predatory lending.”
By challenging Local Law 36 of 2002, whose side was Mayor Bloomberg on?
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