The Oakland City Council recently banned predatory lending by financial institutions seeking to do business with the city and is considering extending the ban to all financial institutions doing business in Oakland. Though well-intentioned, these regulations will harm, not enhance, the ability of low-income consumers to own homes in Oakland.

In July, the council unanimously passed a resolution that will require all “financial institutions seeking to participate in development projects financed by the (city’s Redevelopment) Agency to certify that neither they nor their affiliates engage in ‘predatory lending’ practices.”

In addition to this resolution, a separate ordinance survived a first reading and is up for a second reading and vote on Sept. 11. Among other things, the ordinance outlaws subprime borrowing, where it is of “no tangible benefit” to the borrower. Subprime loans are available to consumers at interest rates higher than prevailing prime market rates. But the one most fit to judge the benefits is not the City Council but borrowers.

Home mortgage lending is regulated by state and federal authorities, but none of the statues or regulations provides a definition of “predatory lending.” The Clinton Department of Housing and Urban Development launched a National Predatory Lending Task Force, headed up by then-Secretary Mario Cuomo. They defined predatory lending as “deception or fraud, manipulating the borrower through aggressive sales tactics, or taking unfair advantage of a borrower’s lack of understanding about loan terms.”

The Oakland Council relies largely on a report issued by this task force. For many reasons, subprime mortgage lending has grown rapidly over the past several years, swelling from $35 billion in 1994 to a $160-billion industry in 1999. According to HUD, by the first quarter of 2000 home ownership rate reached a record 67.1 percent (or 70.7 million) of American families—more than at any time in our nation’s history.

By providing higher risk loans to borrowers who do not meet prime market credit standards—due to insufficient or blemished credit history—subprime lending serves a critical role in the economy. In effect it extends the dream of home ownership to lower income buyers.

Subprime lenders, while subject to the same consumer protection laws, are subject to less federal oversight than prime lenders such as federally supervised banks, thrifts and credit unions. However, subprime borrowers are a much higher risk than more credit-worthy prime borrowers.

Not surprisingly, default rates are higher for subprime loans. And, a recent HUD report also found high concentrations of defaults on FHA-insured loans among “less-affluent borrowers,” but concluded that putting further restrictions on borrowers would reduce defaults but work against extending home ownership.

The proposed Oakland ordinance would do just that.

Subprime borrowers also finance auto and appliance loans, but the council does not protect borrowers from the repo man when they default. Others rely on check-cashing firms, pawnshops and short-term lenders instead of banks.

Far from predatory, these fringe financial institutions meet needs that banks do not—as do subprime lenders. The council also identified redlining—a practice by which mainstream lenders avoid doing business in poor or minority communities—as a cause of the growth of subprime lending in Oakland.

Unlike subprime lending, redlining is discriminatory. But the proposed ordinance does not address Oakland’s alleged redlining, as revealed by the council. Instead, it would destroy an important means for low-income consumers to own or improve their homes.

The council asserts that unscrupulous actors in the subprime markets prey on the elderly, minorities, and low-income and uneducated borrowers with deceptive or high-pressure sales tactics. But the task force report revealed that a disproportionate percentage of subprime loans are held by homeowners in high-income black neighborhoods. Surely not a defenseless group, they do not suffer from a lack of understanding as the report suggests.

Fraud is already illegal, making the council’s regulation unnecessary. The Truth in Lending Act, the Home Ownership and Equity Protection Act, and the Real Estate Settlement Procedures Act are among the laws protecting consumers from fraud in mortgage lending.

Borrowers, not the government, are the parties best equipped to decide whether a loan is a tangible benefit. Home ownership is a benefit to both individuals and the community. Whatever the intention of the Oakland City Council, low-income voters should be aware that both the resolution and pending ordinance will harm, not help, their ability to own a home.

Diallo Dphrepaulezz is a policy fellow at the Center for School Reform at the Pacific Research Institute for Public Policy. He can be reached via email at diallod@pacificresearch.org.