Predatory lending -- defining what it is and how to stop it --
could be one of the toughest issues in the financial industry that
lawmakers tackle this year.
Financial officials in several branches of the industry all agree
that predatory lending -- loans to people with bad credit that
involve excessive and unreasonable terms -- is a problem. But
defining that problem in statutory language has been a challenge.
"The problem with the whole concept of predatory lending is
you're grasping at a smoke cloud," said A'Kos Kovach, president of
the Oklahoma Association of Mortgage Brokers. "What may appear to
you and me as a really bad loan, once you dig into the particulars,
that can change your perspective."
"Nobody really knows what it means," agreed Roger M. Beverage,
president of the Oklahoma Bankers Association. "And that's what
makes it difficult."
Beverage noted that most banks are involved in the "subprime"
lending market, providing loans to individuals with a less-than-
stellar credit history. Those borrowers, obviously, face higher
fees, rates and penalties than individuals with significant income
and a flawless credit history -- but those extra fees shouldn't
necessarily been seen as gouging, Beverage said.
"Just because it's subprime doesn't mean that it's predatory," he
said. "We think that any legislation that is directed at trying to
police this concept, the subprime market if you will, shouldn't be
overly broad and it should conform with what federal law requires of
Kovach also noted that respectable lenders approve loans to
people with bad credit that -- from the outside looking in -- may
A loan that "from the face of it" looks like a predatory loan
"can in fact be something that is a miracle loan for that particular
customer because of their specific credit situation," Kovach said.
Often, he said a very high interest rate would be tacked onto a
loan if someone has declared bankruptcy and lacks equity.
"In and of itself, the interest rate cannot be looked at to point
a finger of blame, so to speak, and call something predatory
lending," Kovach said. "You have to look at all the particulars."
Records indicate in 1994 subprime loans made up $35 billion, or 5
percent of all mortgage lending. It was supported by $11 billion in
About two years ago, subprime loans grew to $160 billion -- 13
percent of the mortgage market -- and were backed by $83 billion in
As a result of the intricacies of the subprime lending market,
writing legislation to tackle the lenders who prey on the elderly
and the poor has proven difficult.
But those challenges haven't stopped one lawmaker.
Rep. Opio Toure, D-Oklahoma City, has filed House Bill 2144 to
drive predatory lenders from Oklahoma. Toure's bill defines a high-
cost loan as one with an interest rate of 6 to 8 percent above the
Treasury rate, or total points or fees above certain levels.
The bill also strictly defines the limitations of a high-cost
loan, including the following constraints:
* No increased interest rate. No high-cost home loan may contain
a provision that increases the interest rate after default.
* No balloon payment. No home loan may contain a scheduled
payment that is more than twice as large as the average or earlier
* No negative amortization. No home loan may contain a payment
schedule that causes the principal balance to increase.
* No lending without regard to repayment ability. A lender may
not make a high-cost loan unless the lender reasonably believes the
borrower can repay the loan.
* No mandatory arbitration clause. No high-cost loan should be
subject to limit in any way the right of the borrower to seek relief
through the judicial process.
* No lending without home ownership counseling. …