Mortgage Companies are awaiting a ruling from the Alabama Supreme Court that they fear could impact many home loans across the state.
A consumer attorney said lenders are overstating the impact to try to influence the court and to avoid state regulation that would benefit consumers.
On Monday, the state's highest court heard a lending company's appeal of a lower court ruling involving a home loan in Mobile. Michael McGehee, disabled Mobile epileptic with four children, was charged 8 discount points, or $2,972, when United Companies Lending Corp. gave him a $34,800 home mortgage at 14 percent interest.
His suit claimed United Companies of Baton Rouge, La., was in violation of Alabama's consumer credit laws, known as the "Mini-Code."
Circuit Judge Chris Galanos, ruling in McGehee's favor, held that:
- Home mortgage companies licensed by the federal Department of Housing and Urban Development to make HUD-backed loans must also be licensed by the state if they make traditional mortgages that aren't back by HUD. United Companies, while licensed by HUD, wasn't licensed in Alabama and McGehee's loan wasn't backed by HUD.
- The 5-point cap on discount points, contained in Alabama's "Mini-Code," applies to home mortgage loans.
The ruling in Mobile "has sent shock waves through the national mortgage market," said Chris King, attorney for United Companies.
Although the lawsuit involved a Louisiana company, all Alabama bankers are watching it carefully because the licensing issue could affect them, said Hamp Boles, attorney for the Alabama Bankers Association.
McGehee's attorney, Skip Finkbohner, said business groups were overstating the impact. "They are trying to politicize this case because that's the only way they can win it," he said.
He said he had never seen another mortgage company charging more than 5 discount points.
The Supreme Court did not indicate when it would rule, but rulings normally take several months.
The lawsuit is part of the litigation that prompted efforts to rewrite Alabama's consumer credit laws in last month's failed special session of the Legislature and in the regular session that began last week.
One of the other big lawsuits ended with a business victory Friday, when the Alabama Supreme Court reversed itself and said:
- Out-of-state lending companies with no offices in Alabama don't have to be licensed by the state in order to have mortgages in Alabama.
- Businesses making sales on credit don't have to be licensed under the state's consumer finance laws.
Jerry Spencer, executive director of the Alabama Bankers Association, said that ruling won't end efforts to rewrite consumer finance laws and apply them retroactively, wiping out hundreds of lawsuits that have been filed against Alabama lenders and retail stores.
King, urging the Supreme Court to overturn the Mobile ruling in the United Companies case, said mortgage companies had been told by the state Banking Department and the state attorney general that they didn't have to be licensed by the state if they were licensed by HUD.
He also argued that the Legislature never intended to apply the Mini-Code to HUD-approved lenders and they don't come under the 5-point cap.
Finkbohner, McGehee's attorney, said the National Housing Act allowed states to adopt regulations on discount points, and that's what the Legislature did in 1988 with the 5-point cap.
But Justice Hugh Maddox disagreed about the Legislature's intention. "It seems to be they were saying we exempt those regulated by HUD."
Finkbohner argued that without state licensing, United Companies would have no regulation because the firm makes no HUD-backed loans even though it is approved by HUD.
"They never intended to make a HUD-backed loan. What we've got here is an ingenious attempt - a slick attempt - to circumvent consumer protection laws," he said.
King said United Companies complies with HUD regulations, even though it doesn't make HUD-backed loans. "What HUD regulates is not loans. It regulates lenders," he told the court.
In addition to McGehee's suit, United Companies faces a similar class-action lawsuit by about 900 Alabama customers.