Who Killed Oakland's Predatory Lending Law?

By Robert Gammon
East Bay Express
September 29, 2009

Back in the late 1990s, ACORN was acutely aware of the grave dangers posed by subprime mortgage lending because of the group's close work with low-income property owners. ACORN officials were witnessing first-hand how unscrupulous lenders were enticing people to buy homes they couldn't afford and advising long-time homeowners to strip out all of the equity in their homes. The group then saw those very same people lose everything when their subprime mortgages kicked in and low-income neighborhoods were devastated.

So in 2001, ACORN helped sponsor anti-predatory lending laws in Oakland and a few other cities around the nation that would have greatly curtailed the subprime market. Oakland's ordinance, which was written by officials in the office of City Attorney John Russo and unanimously approved by the City Council in October 2001, was way ahead of its time. The law would have prohibited subprime mortgage lenders from making a loan unless the borrower could afford it and had obtained a written certification from an independent credit counselor stating that the borrower had received financial advice. In other words, subprime lenders would have had to make sure that people could pay back a mortgage before getting one. "Given the number of foreclosed properties that we eventually had, it would have made a huge difference," Oakland Councilman Larry Reid told Full Disclosure.

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Who Killed Oakland's Law?

So what happened to Oakland's forward-looking ordinance? Moderate Democrats in the state Legislature unwittingly killed it after being lobbied heavily by the mortgage industry. In addition, one state senator, our very own Don Perata, attempted to snuff out Oakland's law on purpose, while taking huge campaign contributions from its biggest opponent.

In 2001, just days after Oakland passed its law, California Governor Gray Davis signed a watered-down predatory lending bill sponsored by Migden. Unlike Oakland's ordinance, Migden's bill only "recommended" that borrowers get financial counseling. In addition, the weakened bill had no provision for holding banks liable for the pieces of bad loans they bought. In other words, subprime lenders were free to bundle bad loans with good ones and sell them over and over again. Predictably, the state law eventually had no effect on the foreclosure crisis and, in fact, probably helped spur it.

Not long after Oakland passed its law, the mortgage industry sued to block it. Subprime lenders argued that Migden's bill "preempted" Oakland's ordinance and thus invalidated it under the doctrine that cities can't adopt ordinances that conflict with state law. However lawyers representing the City of Oakland defeated the mortgage industry at trial and at the appellate court level, successfully arguing that the Legislature had specifically discussed the issue of preemption and did not include it in Migden's bill. A preemption provision would have automatically prohibited cities from adopting a tougher law than Migden's.

Then, in the late summer of 2002, when it looked as if the subprime industry was going to lose its court battle and Oakland's tough law was going to go into effect, Perata sponsored a bill that would have killed it and a similar ACORN-backed ordinance pending before the Los Angeles City Council. Perata's legislation would have specifically "preempted" cities from enacting predatory lending ordinances.

At the time, the senator was taking large donations from Ameriquest, an Orange County subprime lender that strongly opposed Oakland's law. According to campaign finance reports, Perata and political committees closely associated with him accepted at least $200,000 in contributions from Ameriquest before he sponsored the bill that would have shot down Oakland's law. In all, Ameriquest donated at least $591,000 to Perata or committees closely associated with him from 2001 until late 2006, when the company went out of business because of its history of giving out lots of bad loans and preying on low-income borrowers who couldn't afford to pay them back.

In fact, Perata and the committees continued to take hundreds of thousands of dollars from Ameriquest even after the attorneys general of 49 states, including then California Attorney General Bill Lockyer, had charged the company with widespread fraud. Moreover, the Perata committees accepted more than $237,000 from Ameriquest after the company settled its legal troubles with California and 48 other states in January 2006, and agreed to pay $325 million. Ameriquest ceased operations later that year.

After Perata's support for the legislation became public, ACORN and other consumer advocacy groups eventually convinced him to abandon the bill. Perata, who is now running for mayor of Oakland, claimed at the time that he was worried about lenders pulling out of Oakland, thereby harming the local real estate market.

As for Oakland's law, the state Supreme Court struck it down in 2005, along with Los Angeles' ordinance, in a split 4-3 decision. Writing for the majority, Janice Rogers Brown sided with the subprime mortgage industry and ruled that Migden's bill preempted Oakland's ordinance after all, even though it contained no specific preemption provision and even though Oakland had then — and now — a much higher rate of foreclosures than the state average. A few months after the ruling, the US Senate confirmed Bush's appointment of Brown to the federal court of appeals in Washington, DC.

[To The Full East Bay Express Article]

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