Chris Kukla

Warning bells have been ringing about bad lending practices for almost a decade, but few paid attention until the ongoing economic crisis led Congress to consider a $700 billion bailout, consumer advocates and politicians say.

“I wasn’t smart enough to see predatory lending devastating the entire economy, but anybody who listened to the victims knew the injustices were multiplying and great harm was being done,” said Tennessee Sen. Roy Herron, D-Dresden.

Sen. Herron sponsored legislation in 2004 to combat predatory lending. The legislation, which passed in 2006, set restrictions on high interest rates and closing fees, but predators still can set their rates just below the trigger levels, he said.

Lobbyists were a major obstacle in reforming lending laws, the senator said. He recalled that in one hearing, two citizens spoke out for victims but about 60 lobbyists were on hand to protect the loan industry.

Some financial experts have been issuing warnings about bad loans since the late 1990s. The New York Times in 1999 quoted Peter Wallison, a resident fellow with the conservative research institution American Enterprise Institute, as saying that mortgage giant Fannie Mae could founder. Fannie Mae had relaxed credit requirements to allow it to buy loans from companies that gave money to people with subprime credit.

Mr. Wallison warned that the government might have to bail out Fannie Mae and other companies during an economic downturn.

In September, the federal government took over Fannie Mae and its financial relation, Freddie Mac, both of which were collapsing under the weight of bad mortgages and foreclosures.

The Center for Responsible Lending also has spoken out for years against abusive lending practices. Subprime lending has existed for a long time, but it became widely available in about 2005 or 2006, when it accounted for 25 percent of mortgages, said Chris Kukla, senior counsel for government affairs at the consumer advocate group.

There was a “complete deterioration” in lending standards, said Bento Lobo, UC Foundation associate professor of finance at the University of Tennessee at Chattanooga. The economic crisis today was created by lenders who had little stake in the products they sold, since the loans mostly were bundled into securities and sold to investors, he said.

Several years ago, lenders often pushed people to take larger loans than they needed, said Teresa Boyer, broker-owner of Best Realty GMAC. She said she counseled her clients against borrowing more than they could afford.

“They should have had a $100,000 loan, but they got a $150,000 loan,” she said. “Of course, they wanted the $150,000 home because it looks more appealing.”

The Center for Responsible Lending and other agencies have said bankruptcy judges should be allowed to modify the mortgage of a person in financial straits, Mr. Kukla said. Mortgages on primary residences are the only type of loans that may not be modified in bankruptcy hearings, he said, and without the bankruptcy provision, foreclosure often is the only option for the homeowner.

The provision to change bankruptcy judges’ abilities was in the bailout plan that Congress failed to pass Monday, but is not in the current version, he said, because of investment banks’ complaints.

“We’re saying they’re blocking options for homeowners while demanding a bailout of their own,” he said. “We think the threat of a judge being able to modify a mortgage would cause more servicers to modify the loan earlier in the process.”