Honorable Robert Bunda

President of the Senate

Twenty-First State Legislature

Regular Session of 2002

State of Hawaii

Sir:

Your Committees on Commerce, Consumer Protection and Housing and Judiciary, to which was referred H.B. No. 2642, H.D. 2, entitled:

beg leave to report as follows:

The purpose of this measure is to establish the Hawaii Home Loan Protection Act to prohibit predatory lending practices.

Your Committees received testimony in support of this measure from the Department of Commerce and Consumer Affairs, Hawaii Coalition for Responsible Lending, Kokua Council, Legal Aid Society of Hawaii, AARP Hawaii, Hawaii State AFL-CIO, ILWU Local 142, HGEA-AFSCME, IBEW Local 1360, Self-Help, and ten individuals. The measure was opposed by First Hawaiian Bank, National Association of Industrial and Office Properties, Hawaii Bankers Association, Hawaii Financial Services Association, Hawaii Association of Mortgage Brokers, Title Guaranty Escrow Service, Inc., Mortgage Bankers Association of Hawaii, and the Chamber of Commerce of Hawaii. The Hawaii Credit Union League and Hawaii Association of Realtors offered comments on the measure.

According to testimony received by your Committees, "predatory lending" refers to a variety of deceptive or unfair mortgage practices that include asset-based lending (making loans to borrowers unable to make the required payments), loan "flipping" (refinancing a loan with no real benefit to the borrower only to collect more fees for the broker or lender), and "packing" (adding unnecessary fees or insurance). Prepayment penalties are used to inhibit a borrower from seeking a more affordable loan elsewhere. All predatory lending practices strip away home equity and cause people to lose their homes.

Abusive lenders and mortgage brokers target the vulnerable. Elderly homeowners are especially targeted because they often have substantial equity in their homes but have fixed or declining incomes. Unscrupulous lenders and brokers also target women, minorities, low-income households, people with limited education and English proficiency, the disabled, and people in crisis. In July 2001, it was reported that borrowers in the United States lose $9.1 billion each year to predatory lenders.

Your Committees find that predatory lending is a serious problem in Hawaii. Attorneys who represent victims of predatory lending testified that they have met with dozens of victims of predatory lending practices throughout the State. Your Committees also heard from several Hawaii residents who have lost their homes as a result of predatory lending practices, including a senior citizen and several youngsters from a Big Island plantation community. Yet, currently, Hawaii has no law that specifically addresses predatory lending practices.

This measure prohibits credit provisions and practices commonly associated with predatory lending, including flipping, oppressive balloon payments, pyramiding late charges, and lending without due regard to repayment ability. It prohibits certain practices with respect to home loans, generally, and establishes additional prohibitions relating to high-cost home loans. The Act provides borrowers with the right to cure a default and to reinstate their loans before their homes are lost. To deter predatory lending practices, this measure also provides strong remedies, including a private right of action for substantial damages.

Opponents of this measure argue that its enactment will restrict the availability of subprime credit in this State, hurting consumers who are unable to qualify for prime interest rates. However, your Committees note that subprime credit continues to thrive in North Carolina which adopted the strongest predatory lending law in the country in 1999, while predatory lending in that state has diminished.

Your Committees have amended this measure by replacing its contents with language that represents a compromise between the proponents of this measure and the financial institutions industry. Your Committees recognize that this measure is a work-in-progress and that the parties continue to meet to discuss and develop a law that protects consumers against predatory lending, while balancing the needs of the industry and the subprime lending market.

Among other things, this amended measure:

As your Committees noted earlier, the measure's stakeholders continue to engage in discussion and compromise, including in regards to the enforcement provisions of this measure. Therefore, to facilitate further consideration of this matter, your Committees have inserted into this measure a delayed effective date of July 1, 2050.

As affirmed by the records of votes of the members of your Committees on Commerce, Consumer Protection and Housing and Judiciary that are attached to this report, your Committees are in accord with the intent and purpose of H.B. No. 2642, H.D. 2, as amended herein, and recommends that it pass Second Reading in the form attached hereto as H.B. No. 2642, H.D. 2, S.D. 1, and be placed on the calendar for Third Reading.