A hard-fought court battle over the Parity Act has left state-licensed subprime lenders on the losing end.

A U.S. Appeals Court here has upheld the authority of the Office of Thrift Supervision to decide which state restrictions on lending should be pre-empted by the Alternative Mortgage Transaction Parity Act.

In a ruling against the National Home Equity Mortgage Association, the three-judge panel also upheld an OTS regulation that has subjected state state-licensed lenders to state restrictions on prepayment penalties and late fees since July 2003.

NHEMA argued that the Parity Act gives state-licensed lenders the same immunity from state laws and regulations as federally chartered thrifts enjoy when they make adjustable-rate mortgages and other alternative mortgages.

However, the Court found the Parity Act "clearly vested the OTS with authority to 'identify those portions' of its regulations that are 'inappropriate for' application to non-federally chartered creditors."

The Appeal Court judges also noted OTS is free to change its mind. In 1996, OTS expanded the Parity Act pre-emptions to cover state prepayment penalties and late fees. But OTS rescinded that decision in 2002 because of concerns it might be contributing to predatory lending in the subprime market.

"OTS reverted to this view in response to what it reasonably perceived as the unanticipated and undesirable fallout from the change it made in 1996," the Court says in NHEMA v. OTS.

NHEMA general counsel Maury Shevin said he is disappointed by the ruling, but he doubts the association has the appetite for pursing the litigation any further. He noted, however, that a final decision has not been made.

The lender group is now expected to shift its attention to Congress and press for passage of a national lending standard that pre-empts state predatory lending laws. Such legislation may be the only way to restore a "level playing field" between state-licensed and federally chartered lenders, Mr. Shevin said.

Besides federally chartered thrifts, national banks and their mortgage subsidiaries are shielded from state predatory lending laws and state regulation thanks to two regulations issued by the Office of the Comptroller of the Currency in January.

Despite criticism from state attorneys general, bank supervisors, consumer groups and some members of Congress, comptroller John Hawke Jr. has not withdrawn the regulations or conceded any regulatory or enforcement role for the states when it comes national banks.

A legislative resolution to overturn the OCC rules has died quietly. Several lawsuits against OCC's pre-emptive rules are pending in the courts. But the first ruling by a U.S. District Court went in OCC's favor.

Meanwhile, lenders groups have been anxiously waiting for Rep. Paul Kanjorski, D-Pa., to release a draft of his anti-predatory lending bill that attempts to bridge the differences between Democrats and Republicans on the House Financial Services Committee.

Rep. Kanjorski was expected to unveil his bill earlier this summer, but he could not be reached for comment as ON went to press.

"They are getting close," said Wright Andrews, executive director of the Coalition for Fair and Affordable Lending. But Mr. Andrews does not expect to see the Kanjorski bill until September -- after Congress returns from its August recess.

Rep. Kanjorski is expected to work with Rep. Bob Ney, R-Ohio, to see if a consensus can be reached on a joint bill. Rep. Ney is the sponsor of bill that creates a national lending standard and pre-empts state predatory lending laws.

"I believe they can" reach a consensus, Mr. Andrews said. "They are experienced legislators who know how to work out reasonable compromises and solve legislative problems."

As a temporary fix, Rep. Richard Baker, R-La., has introduced a bill that would shield investors in subprime mortgage securities from major liability caused by lender violations of federal or state predatory lending laws.

The bill (H.R. 4719) would amend the assignee liability language in the Home Ownership and Equity Protection Act and prohibit class-action lawsuits. Awards in individual cases would be limited to the amount the borrower paid for the loan, plus reasonable attorney's fees.

Rep. Baker indicated during a recent House Financial Services Committee hearing that the bill is a stopgap measure, while Congress continues to work on a national lending standard.

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