Academic journal article Fordham Urban Law Journal

In Pursuit of Safety and Soundness: An Analysis of the OCC's Anti-Predatory Lending Standard

Academic journal article Fordham Urban Law Journal

In Pursuit of Safety and Soundness: An Analysis of the OCC's Anti-Predatory Lending Standard

Article excerpt

   To borrow a concept from the animal kingdom ... a classic
   predator traps the unwary and preys on the weak. Put in the
   lending context, a predatory lender ensnares ... vulnerable
   customers, offering loan products designed to prey on their
   weakness, bleed them financially and ... strip them of their most
   precious possessions. (1)

PROLOGUE

George Campbell lived his entire life in the same home in Queens, New York. (2) Disabled, living solely on monthly Supplemental Security Income checks, Mr. Campbell had one significant financial asset: the value of his home appreciated substantially over the years and he amassed considerable equity in the property. (3) A few years ago, an aggressive mortgage broker persuaded Mr. Campbell to take out a second mortgage to finance much-needed repairs. (4) The broker claimed Mr. Campbell, with neither a checking account nor an established credit history, was ineligible for a bank loan. (5) Unable to read well, Mr. Campbell did not understand his obligations under the agreement; like countless other unsuspecting borrowers in the United States, Mr. Campbell became the victim of a predatory lender. (6) The terms of the mortgage required monthly payments almost equal to Mr. Campbell's social security income. (7) Predictably, he defaulted. (8)

INTRODUCTION

Predatory lenders are unscrupulous, aggressively marketing their loans to borrowers who cannot afford their credit on the onerous terms offered. Their prey are some of the most vulnerable members of society: the elderly, persons living in low-income areas, the socially and economically disadvantaged, the financially unsophisticated. The consequences are devastating, and include enormous personal losses, foreclosures on homes, and the devastation that foreclosure brings to entire neighborhoods. Many common abusive lending practices are already illegal under federal law, (9) yet predatory lending continues to destroy communities. (10)

In response to this escalating problem, the Office of the Comptroller of the Currency ("OCC"), a federal regulator of the national banking industry, issued a Final Rule on January 7, 2004 ("Final Rule"). (11) The OCC has always prohibited banks from engaging in predatory lending, but difficulties defining "predatory" and the problematic application of conflicting state-lending laws has caused significant supervisory and enforcement problems. (12) The Final Rule addresses these problems and sets forth a uniform federal standard to guide banking policies on predatory practices and to aid regulators' identification of predatory loans. (13) The Final Rule forbids national banks from making consumer loans, including mortgage loans, car loans, and student loans, (14) based predominantly on the foreclosure value of the borrower's collateral. (15) The rationale lies in the OCC's belief that the value of a borrower's collateral does not indicate their ability to repay the loan. As a result, such loans are now per se predatory, and for that reason, prohibited. (16)

The Final Rule also preempts several categories of state banking laws (17) that are no longer enforceable against national banks. (18) States now have little authority to regulate the lending practices of those national banks situated within their jurisdictions. (19) Specifically, the Final Rule preempts state regulation of lending licenses, loan terms, interest rates, terms of credit, disclosure requirements, and other conditions of lending. (20) The Final Rule also codifies the judge-made determination that the OCC has authority to enforce Section 5 of the Federal Trade Commission Act ("FTC Act") (21) and regulations thereunder against unfair and deceptive trade practices in banking. (22)

Effectively, as a result of the Final Rule national banks are no longer subject to state anti-predatory lending laws. (23) The OCC standard has replaced a multitude of state laws, and national banks are now only accountable to the OCC and its single standard. …

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