The Predatory Lending Challenge
Williams, Julie L., Bylsma, Michael S., Mortgage Banking
Top-ranking bank regulators offer their thoughts on the unique concerns presented by abusive lending. They advise lenders on the wisdom of self-regulation to head off potential government responses that could overreach.
CONCERNS ABOUT PREDATORY LENDING are attracting a great deal of attention in Washington and at the state and local level. In May, the House Banking Committee held a daylong hearing on predatory lending, with testimony from nine federal and state regulatory agencies, scores of representatives from community and consumer organizations and the financial industry. There are at least five bills pending in Congress to deal with predatory lending. In addition to expanding the coverage and provisions of the Home Ownership and Equity Protection Act (HOEPA), some of these bills would also impose restrictions on home mortgages generally, regardless of the rate.
Federal regulators have also been active. In April, the Office of Thrift Supervision (OTS) issued an advance notice of proposed rule-making seeking public input on lending practices and on any unintended effects of the Alternative Mortgage Transaction Parity Act, which allows both OTS-regulated thrifts and non-OTS-regulated lenders to make mortgages with variable rates and other features, without regard to state law. In July, the Office of the Comptroller of the Currency (0CC) issued an advisory letter alerting bankers and examiners to red flags for potential abusive lending practices. The Federal Reserve Board (FRB) has also conducted a series of nationwide hearings on potential FRB regulations that would enhance HOEPA protections.
Predatory lending is also the focus of attention at the state and local level. For example, North Carolina has enacted an antipredatory lending law that is based on the high-cost loan concept in HOEPA. In fact, it appears that the North Carolina law served as a model for some of the bills pending in Congress. Utah and West Virginia have recently enacted laws designed to address abusive practices in mortgage lending. Other jurisdictions, such as Massachusetts, New York and the District of Columbia, are also considering antipredatory mortgage lending legislation.
A few state legislative bodies, such as the Indiana House of Representatives and the South Carolina Senate, have adopted resolutions regarding predatory lending-the former urging the formation of a task force to study the issue and the latter requiring the establishment of a subcommittee to study the issue and make recommendations to protect consumers. In addition, the New York Banking Department has adopted rules regarding the issue, and other states, such as Illinois and Massachusetts, are considering regulatory proposals. Finally, there is activity at the local level, such as in Chicago, where an ordinance was passed that would bar what it terms "predatory lenders" and affiliates of such companies from doing business with the city, including being a depository of city funds.
Although there are difficulties defining and measuring predatory lending with precision, all indications are that federal, state and local government efforts in this area will continue. The level of governmental activity only serves to underscore the role that mortgage lending institutions need to play-not only to help stop unacceptable practices by a few bad actors, but also to promote responsible lending to all segments of customers. To paraphrase a recent observation by Congressman John LaFalce (D-New York), the industry should ensure that it is mainstreaming new homeowners-not questionable practices-into our financial system.
Devising a general definition of predatory lending is a challenge
"Predatory lending" is often used to refer to practices that share one or more of the following characteristics:
* Loans made in reliance on the value of the borrower's home, without a proper evaluation of the borrower's ability to repay without resort to foreclosure on the collateral, with the possible or even intended result of foreclosure or the need to refinance under duress;
* Pricing terms that far exceed the true risk and cost of making the loan;
* Targeting people who are less financially sophisticated or otherwise vulnerable to abusive practices, or who have less access to mainstream lenders, such as the elderly and persons living in low-income areas;
* Inadequate disclosure of the true costs and risks of loan transactions;
* Practices that are fraudulent, coercive, unfair, deceptive or otherwise illegal;
* Loan terms and structures that make it difficult for borrowers to reduce their indebtedness;
* Aggressive marketing tactics that amount to deceptive or coercive conduct;
* "Packing" into the loan unearned, or otherwise unwarranted, fees or services, which may include prepaid single premium credit life, disability or unemployment insurance;
* Balloon payment loans that may conceal the true burden of the loan financing and may force borrowers into costly refinancing or foreclosure situations; and
* Loan "flipping"-that is, frequent refinancing with fees that strip equity from a borrower. …