On October 3, Governor George Pataki signed into law an anti–predatory lending act, making New York only the third state in the nation to put legislation battling high-cost loans on the books.

“It’s just incredible,” says Sarah Ludwig, coordinator of New Yorkers for Responsible Lending, which has lobbied for the bill for more than two years. “This will change the way the industry operates.”

Slated to take effect in April, the law is expected to have far-reaching effects in the five boroughs. According to the Neighborhood Economic Development Advocacy Project, in 2000 high cost (or “sub-prime”) lenders made 36 percent of the refinancing loans citywide. In Jamaica, Queens, they comprised 56 percent of refinancing loans made, and in Bedford-Stuyvesant, Brooklyn, they made up 65 percent.

While high-cost loans themselves are not illegal, Ludwig believes the new law will deter lenders from taking advantage of people who take out those loans.

The law applies to loans which have an interest rate at least 8 percent higher than the Treasury rate, or have fees that total more than 5 percent of the loan amount. Under the legislation, the state will penalize any high cost lender–whether a bank or a mortgage lender–that accelerates the payback schedule on the loan, or that increases the interest rate after a homeowner has defaulted on a payment.

A borrower who took out such a loan can now file a complaint in court, and if the judge finds in his favor, then the lender might be required to forfeit all earned and unearned interest, fees and closing costs charged on the loan. Depending on the offense, the borrower might get a full refund on any payments made, and the lender might also have to pay at least $5,000 per violation, as well as attorney’s fees.

“What is significant about this law is [it creates] defenses to foreclosure,” says Ludwig. Up to now, she explains, homeowners facing foreclosure had great difficulty citing predatory lending practices as a reason they should be able to hold onto their homes. “The law gives them the legal hooks they need,” she said.

The fight to protect low-income homeowners from high-cost loans is not over, however. An even more ambitious bill passed by the City Council in late September would prohibit the city from doing business with any bank or lender that makes predatory loans. Mayor Bloomberg vetoed that bill on October 23, but at press time, sources said the Council had enough votes to override him.

And its proponents are hopeful the legislation would make a difference even without the mayor’s support. “It would provide a stronger incentive for lenders to play by the rules,” says Don Baylor of ACORN. Because the bill would require that the comptroller investigate the practices of the banks with which the city does business, “There will be a public process,” says Baylor. “The shame will be out in the open.”