D.C. Speaks: Seidman's OTS Hails Cavalry in Predator Fight

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Ellen Seidman's crusade to curb predatory lending is gaining traction. The director of the Office of Thrift Supervision, the smallest of the four bank supervisory agencies, has led the regulators' campaign to quash lending practices they deem systemically risky, legally questionable, and ethically unsound. "I'm pleased to have been out there early. But I'm even happier that other people have really picked it up and folks like the Federal Reserve Board, which has a critically important role, are now moving," Ms. Seidman said in an interview this week. On Monday the central bank announced plans for three public hearings to discuss how the Home Ownership Equity and Protection Act of 1994, known as HOEPA, can be used to stop abuses -- the first step toward fulfilling a promise made in May to review its rule-writing authority to curb predatory lending practices. The 1994 law subjects lenders making high-cost home-secured loans to price limits and disclosure requirements that go beyond those required under the Truth in Lending Act. Under the law, the Fed has the power to set the "trigger" levels that categorize a loan as high-cost. It also has the authority to declare certain lending practices "unfair and deceptive." While many propose new laws to stop predatory lending, Ms. Seidman favors tougher enforcement by regulators. "We've got to do a better job" policing lending practices "that are clearly illegal under current law," she said. Ms. Seidman's oratory and action against predatory lending can only do so much, she concedes. She supervises roughly 10% of the banking industry, has no jurisdiction over the key laws governing lending and consumer protection, and lacks the status of Federal Reserve Board Chairman Alan Greenspan. The Fed's review of the act's regulations will provide answers to one of the big questions: how to define predatory lending. The Home Ownership Equity Protection Act uses rates and fees in defining a high-cost loan: annual percentage rate 10 points higher than Treasury securities with comparable maturities, or customer-paid points and fees exceeding 8% of the loan amount. If Fed officials changed these triggers -- and Ms. Seidman said "the evidence suggests something needs to be done" -- a new definition of predatory lending would emerge. Ms. Seidman, 52, has not ceded all policing of predators to the Fed, however, and said she will continue to flex her muscles. Starting with a pilot program this fall, the OTS will check thrifts during compliance exams to see if they might be engaging in predatory lending. Examiners are developing the new procedures now and trying to decide whether it is better to first look at loan portfolios or at institutions with suspect marketing practices. "Do we think about the marketing side first or do we deal with the loans first?" she asked. "And if we see loans that have exceptionally large fees or interest rate -- or ones that consistently have pre-payment penalties combined with very high interest rates -- do we then look at how they are marketed and to whom?" Ms. Seidman also wants to close a federal loophole that allows state-regulated nonbank mortgage lenders to avoid tough state subprime lending laws. "We need to find the best way to get at the part of the predatory lending problem that we have some ability to deal with on a regulatory basis, while making sure we do not stop innovation," she said. …