Court Rejects L.A., Oakland Predatory Lending Laws

In a closely watched decision by the mortgage industry, the state Supreme Court narrowly ruled that state law supercedes local government in regulating the sale of high-cost home loans.

The 4-3 decision prevents the cities of Oakland and Los Angeles from enforcing their anti-predatory lending rules, and blocks other cities from adopting similar ordinances.

The ruling was hailed as a victory for lenders who specialize in subprime mortgages, which target high-risk borrowers.

In her majority opinion, Associate Justice Janice Rogers Brown reflected the industry’s oft-stated argument that to allow municipalities to expand upon state mortgage laws would create a “patchwork” of rules that would be hard to comply with.

The mortgage market, Brown wrote, could not function “based on potentially hundreds of competing and inconsistent measures at the local level.”

Oakland City Atty. John Russo expressed disappointment with the decision and urged state lawmakers to strengthen existing laws.

In the fall of 2001, the California Legislature enacted an anti-predatory lending law that was endorsed by the industry. A few weeks later, Oakland city officials approved a tougher measure that required borrowers to receive credit counseling and made secondary-market purchasers of high-cost loans liable, among other things.

The American Financial Services Assn., an industry lobby, sued Oakland, saying that state law preempted the city’s. Los Angeles adopted its rule in 2003 but held off enacting it.

Now, L.A. officials “will have to go back to the drawing board” to rethink how to address predatory lending, said Frank Mateljan of the city attorney’s office.