lewisma9 at pilot.msu.edu
04-30-2000, 11:29 AM
<x-flowed>
>From: "NeighborWorks Predatory Lending Discussion"
><predatorylending@listbot.com>
>Subject: Gramlich Speach
>
>Remarks by Governor Edward M. Gramlich
>At the Fair Housing Council of New York, Syracuse, New York
>April 14, 2000
>
>Predatory Lending
>This should be a time of great satisfaction for the advocates of
>low-income and minority borrowers. As a result of the good economy,
>various technological changes, and innovative financial products, credit
>to low-income and minority borrowers has exploded in recent years. Between
>1993 and 1998, conventional home-purchase mortgage lending to low-income
>borrowers increased nearly 75 percent, compared with a 52 percent rise for
>upper-income borrowers. Conventional mortgages to African-Americans
>increased 95 percent over this period and to Hispanics 78 percent,
>compared with a 40 percent increase in all conventional mortgage
>borrowing. A significant portion of this expansion of low-income lending
>appears to be in the so-called subprime lending market. This market has
>expanded considerably, permitting many low-income and minority borrowers
>to realize their dream of owning a home and to have a chance for acquiring
>the capital gains that have so increased the wealth of upper-income
>households.
>
>But with the good news there is also bad news, or at least sobering news.
>Just as the expansion of subprime lending has increased access to credit,
>the expansion of its unfortunate counterpart, predatory lending, has made
>many low-income borrowers worse off.
>
>The distinction is important. Subprime lending refers to lending to
>borrowers who do not qualify for "prime" rates, those rates reserved for
>borrowers with virtually blemish-free credit histories. Prime loans are
>often described as "A" credits, and the mortgage industry has adopted a
>grading scheme for subprime that extends from A-minus through D. Premiums
>range from about 1 point over prime for A-minus loans to about 6 points
>over prime for D loans. These premiums have been questioned, and some have
>argued that many low-income borrowers are still charged too much; but
>long-run forces may eliminate inappropriate spreads. We would normally
>expect that premiums in a market as competitive as mortgage lending would
>at least move toward appropriate levels over time.
>
>This optimistic story goes out the window for what is known as predatory
>lending. Because the practices are shady, information is incomplete and
>anecdotal. No one knows how significant a problem, national or local, that
>predatory lending really is. But we hear distressing reports of abusive
>practices that include outright fraud, excessive fees and interest rates,
>hidden costs, unnecessary insurance, and deceptive uses of balloon
>payments. Self-explanatory labels from the predatory markets are "loan
>flipping" and "equity stripping." Horrifying anecdotes of predatory
>lending have been standard fare for television exposés and include a
>notable congressional testimony of a witness with a bag over his head.
>Recently a number of housing and banking agencies, including the Federal
>Reserve, have announced their intention to study possible restrictions on
>predatory lending. The Department of Housing and Urban Development (HUD)
>has set up a national task force on the topic. Members of Congress on both
>sides of the aisle have bills that limit predatory practices.
>
>The ultimate difference between subprime and predatory lending comes back
>to the competitive assumptions. If one is a market optimist and believes
>that both lenders and borrowers are rational and well-informed, then
>subprime credit markets with proper rate differentials will open up. If
>one is a market pessimist and believes that borrowers are not
>well-informed and may not be fully rational, then some lenders will have
>opportunities to exploit these borrowers with predatory practices.
>Distinguishing positive subprime lending from negative predatory lending
>is obviously important, particularly for regulators trying to encourage
>one type of lending and discourage the other.
>
>Who Does Subprime or Predatory Lending?
>Subprime lending tends to be done primarily by nondepository institutions,
>either finance companies or mortgage companies that are not subject to
>routine regulatory compliance audits and connected with regulated
>financial institutions. These subprime lenders generally raise money
>directly from bond or equity markets and make subprime loans. In the
>mortgage market relatively few of these loans are for first-time
>mortgages--mostly they are for mortgage refinancings, second mortgages, or
>consolidating debt. Often these loans are securitized and sold to
>investors such as insurance companies and pension funds.
>
>HUD compiles an annual list of the subprime lenders that report data under
>the Home Mortgage Disclosure Act (HMDA). For 1998, this list showed 239
>subprime lenders, of which 168 were regulated only by the Federal Trade
>Commission (FTC). Thirty-six of these institutions were banks or
>subsidiaries of banks and savings and loans that were regulated, and the
>remaining thirty-five were banks or subsidiaries of bank holding
>companies, where the holding company was regulated but the subsidiary
>operated with some freedom from the holding company and its regulator.
>
>As mentioned earlier, one distinguishes predatory lending from subprime
>lending by the features of the loan and, importantly, by whether the
>borrower understands the terms of the loan. Thus, there is no ready way to
>distinguish predatory from subprime lending, to identify predatory
>lenders, or to measure amounts. Yet most anecdotal reports or legal cases
>against predatory lenders have involved subprime lenders, and it is
>certainly logical to expect these practices to flourish where the
>regulators are more remote. And the numbers given above suggest that most
>subprime lenders are reasonably sheltered from the normal bank regulatory
>apparatus.
>
>What Do Predatory Lenders Do?
>Predatory lending is made possible by inadequate information or, in
>technical jargon, asymmetric information held by lenders and borrowers.
>The fundamental weakness is the desire of low-income, uneducated borrowers
>for cash up front. In part, this desire reflects the ever-present needs of
>these low-income borrowers for cash, often for badly needed home repairs.
>In part, it reflects what might be called myopia, the illogical balancing
>of relatively small up-front amounts compared with huge downstream
>borrowing costs. In part, it reflects the lack of understanding of complex
>credit terms or conditions in which insurance is and is not needed. In
>part, it reflects bargaining imbalances where borrowers are subjected to
>outright fraud, falsifications, and even forgery.
>
>A significant component of predatory lending involves outright fraud and
>deception, practices that are clearly illegal. The policy response should
>simply be better enforcement. But the harder analytical issue involves
>abuses of practices that do improve credit market efficiency most of the
>time. Mostly the freedom for loan rates to rise above former usury law
>ceilings is desirable, in matching relatively risky borrowers with
>appropriate lenders. But sometimes very high interest rates can spell
>financial ruin for borrowers. Most of the time, balloon payments make it
>possible for young homeowners to buy their first house and match payments
>with their rising income stream. But sometimes balloon payments can ruin
>borrowers who do not have a rising income stream and are unduly influenced
>by the up-front money. Most of the time the ability to refinance mortgages
>permits borrowers to take advantage of lower mortgage rates, but sometimes
>easy refinancing means high loan fees and unnecessary credit costs. Often
>mortgage credit insurance is desirable, but sometimes the insurance is
>unnecessary, and sometimes borrowers pay premiums up front without the
>ability to cancel the insurance and get a rebate when the mortgage is paid
>off. Generally advertising enhances information, but sometimes it is
>deceptive. Most of the time disclosure of mortgage terms is desirable, but
>sometimes key points are hidden in the fine print.
>
>Apart from outright fraud, these are the fundamental characteristics of
>predatory lending. Mortgage provisions that are generally desirable, but
>complicated, are abused. For these generally desirable provisions to work
>properly, both lenders and borrowers must fully understand them.
>Presumably lenders do, but often borrowers do not. As a consequence,
>provisions that work well most of the time end up being abused and hurting
>vulnerable people enormously some of the time. Similarly, lenders outside
>the bank regulatory system may help improve the economic efficiency of
>low-income credit markets most of the time, but act as unregulated rogue
>elephants some of the time.
>
>Both factors make the regulatory issues very difficult. Again, apart from
>outright fraud, regulators and legislators feel understandably reluctant
>to outlaw practices, if these practices are desirable most of the time.
>Lenders can sometimes be brought into the bank regulatory system, but
>others always could spring up outside this system. The FTC is there to
>regulate trade practices in general, but that agency has a huge job in
>policing all loan contracts.
>
>What Can be Done?
>In response to earlier reports of fraudulent lending, the Congress in 1994
>passed the Home Ownership Equity Protection Act (HOEPA). HOEPA defined a
>class of "high cost" home purchase loans, loans that charge closing fees
>of 8 points or more, or have an annual percentage interest rate (APR) 10
>percentage points above prevailing Treasury rates for loans with
>comparable maturities. For these HOEPA-protected loans there are thorough
>disclosure requirements and prohibitions of many practices. There can be
>no balloon payments in the first five years of a loan. Certain prepayment
>penalties are prevented, as are negative amortization loans and some
>advance payments. While most analysts consider HOEPA to have been
>effective, we hear reports of lenders skating just below the HOEPA
>requirements and still engaging in egregious practices.
>
>The logic of HOEPA is that in this high-cost corner of the mortgage
>market, practices that are generally allowable are not permitted, because
>the possibilities of abuse are too high. Most present attempts to deal
>with predatory lending try to broaden the HOEPA net, by lowering the
>threshold cost levels and by preventing more practices. On the Democratic
>side of the political aisle, Senator Sarbanes and Representative LaFalce,
>from neighboring Buffalo, broaden the HOEPA definition of high-cost loans
>to those with an APR 6 points above Treasury rates for comparable
>maturities, and prevents life insurance that is paid for with a single
>up-front premium. On the Republican side, Representative Ney from Ohio
>broadens the HOEPA definition to loans with an APR 8 or 9 points above
>Treasury rates; and tightens the rules on prepayment penalties. There are
>several other bills, generally taking similar approaches to the problem.
>
>Many states have also attempted legislative remedies. Last July, North
>Carolina enacted amendments to its usury laws that also broaden the HOEPA
>net. North Carolina's law prohibits prepayment penalties, loan-flipping,
>and single-premium credit life insurance on most home loans. For high-cost
>loans, defined as loans with up-front fees greater than 5 percent of the
>loan or an APR of 10 percentage points above the comparable Treasury rate,
>the law requires borrower counseling before closing and prevents a number
>of practices: balloon payments, negative amortization, lending without
>consideration of the ability to pay, and financing of up-front fees or
>insurance premiums.
>
>Many other states are now using this North Carolina legislation as a model
>for statutes of their own. The list includes Illinois, Kansas, Maryland,
>Minnesota, Missouri, South Carolina, Utah, and West Virginia. One such
>bill has been introduced in New York State, but here the primary focus has
>been regulatory. Last year the State Banking Board approved a regulation
>patterned after HOEPA. It would apply to home-improvement loans and have
>lower APR and point thresholds than the federal statute has.
>
>Other federal statutes address predatory lending less directly. The Truth
>in Lending Act (TILA) requires all creditors to calculate and disclose
>costs in a uniform matter. Under this statute, lenders must disclose
>information on payment schedules, prepayment penalties, and the total cost
>of credit, expressed as a dollar amount and as an APR. The Real Estate
>Settlement Procedures Act (RESPA) prohibits lenders from paying fees to
>brokers that are not reasonably related to the value of services performed
>by the broker. The Equal Credit Opportunity Act (ECOA) prohibits
>discrimination in lending on the basis of a number of "prohibited basis
>characteristics" such as age and race. The Federal Trade Commission Act
>prohibits unfair and deceptive practices.
>
>And yet, with all this legislation, predatory lending seems to go on.
>Struck by these potential weaknesses in the regulatory nets, the Federal
>Reserve last fall convened an nine-agency working group to come up with
>other approaches or common approaches. The relevant agencies are the five
>that regulate depository institutions (the Federal Reserve, the Office of
>the Comptroller of the Currency, the Federal Deposit Insurance
>Corporation, the Office of Thrift Supervision, and the National Credit
>Union Administration), two that regulate housing (HUD and the Office of
>Federal Housing Enterprise Oversight) and two that regulate or prosecute
>deceptive trade practices in general (the Department of Justice and the
>FTC). The complete regulatory net of these agencies would cover all
>predatory lending, though the FTC, for example, might be hard pressed to
>go after all lending operations outside the primary depository institution
>net. The aims of the group are to tighten enforcement of existing
>statutes, to identify those predatory practices that might be limited by
>tightened regulations or legislative changes, and in general to establish
>a coordinated attack on predatory practices.
>
>HUD has also recently announced a task force to combat predatory lending.
>HUD administers RESPA and may be envisioning tightening its procedures.
>HUD's Federal Housing Administration (FHA) has also recently started
>requiring mandatory testing of real estate appraisers and an assessment of
>the physical condition of properties in its own lending programs.
>
>Secondary mortgage institutions such as Fannie Mae and Freddie Mac also
>plan to enter the subprime business. If Fannie and Freddie were merely to
>buy subprime loans without added inspection, these secondary market
>institutions could actually subsidize predatory lending. But if Fannie and
>Freddie were to inspect the practices of subprime lenders from whom they
>purchase loans, or to limit purchases of certain types of loans, they
>might effectively extend the domain of subprime regulations.
>
>A final factor is consumer education. Predatory lending would not exist,
>or would be relatively rare, if prospective borrowers understood the true
>nature of their loan contracts. The Neighborhood Reinvestment Corporation
>(NRC) has an active borrower education program to promote just that type
>of understanding, and many other public and quasi-public agencies are
>thinking of following suit. To this point, efforts to extend consumer
>financial education into high schools have proven very disappointing, but
>there have been some successes with stock market simulation exercises.
>Perhaps some of these efforts could be extended to predatory lending
>issues.
>
>Conclusion
>Predatory lending is a difficult issue. It causes obvious difficulties for
>borrowers, it is difficult for enforcers to track down, and it is
>difficult to regulate. So far as we can tell, predatory lenders generally
>operate outside the main financial regulation network. These lenders are
>sometimes fraudulent, but probably more often they take advantage of loan
>terms that are useful for many borrowers but can become destructive if
>misunderstood by some borrowers. They also take advantage of low-income
>and less-educated borrowers who need cash up front and are unlikely to
>understand the provisions. When and if borrowers default, they can either
>lose their house or be induced to sign up for still more exploitative
>terms.
>
>Because predatory lenders are less regulated and predatory loans are often
>difficult to identify and define legally, it becomes both a regulatory and
>an enforcement challenge to stop predatory practices. Currently, nine
>agencies are meeting to design a coordinated attack on the problem, and a
>number of legislative options are under consideration in both the federal
>and state legislatures. The goal is to eliminate or limit some sorry
>practices that are the unfortunate byproduct of recent efforts to
>democratize credit markets.
>
>
>__________________________________________________ ____________________
>To unsubscribe, write to predatorylending-unsubscribe@listbot.com
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*****************************
Maryellen J. Lewis
Program Leader/Community Capital
MSU Community & Economic Development
1801 W. Main Street
Lansing, Michigan 48915-1097 USA
ph: 517-353-9555
fax: 517-484-0068
e-mail: lewisma9@msu.edu
~~~~~~~~~~~~~~~~~~~~~~~~~~
"Work is of two kinds: first, altering the position
of matter at or near the earth's surface; second,
telling other people to do so....
The second kind is pleasant and highly paid."
-- Bertrand Russell
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
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.·´¯`·..·´¯`·.¸ ><((((º> .·´¯`·.¸¸.·´¯`·.¸ ·.¸.·´¯`·.¸ ><((((º>
.·´¯`·.¸ <º))))>< ¸.·´¯`·.¸.·´¯`·.¸.·´¯`·.¸ ><((((º> ¸.·´¯`·..·´¯`·.
</x-flowed>
This post transferred from the cdb-l mailing list
>From: "NeighborWorks Predatory Lending Discussion"
><predatorylending@listbot.com>
>Subject: Gramlich Speach
>
>Remarks by Governor Edward M. Gramlich
>At the Fair Housing Council of New York, Syracuse, New York
>April 14, 2000
>
>Predatory Lending
>This should be a time of great satisfaction for the advocates of
>low-income and minority borrowers. As a result of the good economy,
>various technological changes, and innovative financial products, credit
>to low-income and minority borrowers has exploded in recent years. Between
>1993 and 1998, conventional home-purchase mortgage lending to low-income
>borrowers increased nearly 75 percent, compared with a 52 percent rise for
>upper-income borrowers. Conventional mortgages to African-Americans
>increased 95 percent over this period and to Hispanics 78 percent,
>compared with a 40 percent increase in all conventional mortgage
>borrowing. A significant portion of this expansion of low-income lending
>appears to be in the so-called subprime lending market. This market has
>expanded considerably, permitting many low-income and minority borrowers
>to realize their dream of owning a home and to have a chance for acquiring
>the capital gains that have so increased the wealth of upper-income
>households.
>
>But with the good news there is also bad news, or at least sobering news.
>Just as the expansion of subprime lending has increased access to credit,
>the expansion of its unfortunate counterpart, predatory lending, has made
>many low-income borrowers worse off.
>
>The distinction is important. Subprime lending refers to lending to
>borrowers who do not qualify for "prime" rates, those rates reserved for
>borrowers with virtually blemish-free credit histories. Prime loans are
>often described as "A" credits, and the mortgage industry has adopted a
>grading scheme for subprime that extends from A-minus through D. Premiums
>range from about 1 point over prime for A-minus loans to about 6 points
>over prime for D loans. These premiums have been questioned, and some have
>argued that many low-income borrowers are still charged too much; but
>long-run forces may eliminate inappropriate spreads. We would normally
>expect that premiums in a market as competitive as mortgage lending would
>at least move toward appropriate levels over time.
>
>This optimistic story goes out the window for what is known as predatory
>lending. Because the practices are shady, information is incomplete and
>anecdotal. No one knows how significant a problem, national or local, that
>predatory lending really is. But we hear distressing reports of abusive
>practices that include outright fraud, excessive fees and interest rates,
>hidden costs, unnecessary insurance, and deceptive uses of balloon
>payments. Self-explanatory labels from the predatory markets are "loan
>flipping" and "equity stripping." Horrifying anecdotes of predatory
>lending have been standard fare for television exposés and include a
>notable congressional testimony of a witness with a bag over his head.
>Recently a number of housing and banking agencies, including the Federal
>Reserve, have announced their intention to study possible restrictions on
>predatory lending. The Department of Housing and Urban Development (HUD)
>has set up a national task force on the topic. Members of Congress on both
>sides of the aisle have bills that limit predatory practices.
>
>The ultimate difference between subprime and predatory lending comes back
>to the competitive assumptions. If one is a market optimist and believes
>that both lenders and borrowers are rational and well-informed, then
>subprime credit markets with proper rate differentials will open up. If
>one is a market pessimist and believes that borrowers are not
>well-informed and may not be fully rational, then some lenders will have
>opportunities to exploit these borrowers with predatory practices.
>Distinguishing positive subprime lending from negative predatory lending
>is obviously important, particularly for regulators trying to encourage
>one type of lending and discourage the other.
>
>Who Does Subprime or Predatory Lending?
>Subprime lending tends to be done primarily by nondepository institutions,
>either finance companies or mortgage companies that are not subject to
>routine regulatory compliance audits and connected with regulated
>financial institutions. These subprime lenders generally raise money
>directly from bond or equity markets and make subprime loans. In the
>mortgage market relatively few of these loans are for first-time
>mortgages--mostly they are for mortgage refinancings, second mortgages, or
>consolidating debt. Often these loans are securitized and sold to
>investors such as insurance companies and pension funds.
>
>HUD compiles an annual list of the subprime lenders that report data under
>the Home Mortgage Disclosure Act (HMDA). For 1998, this list showed 239
>subprime lenders, of which 168 were regulated only by the Federal Trade
>Commission (FTC). Thirty-six of these institutions were banks or
>subsidiaries of banks and savings and loans that were regulated, and the
>remaining thirty-five were banks or subsidiaries of bank holding
>companies, where the holding company was regulated but the subsidiary
>operated with some freedom from the holding company and its regulator.
>
>As mentioned earlier, one distinguishes predatory lending from subprime
>lending by the features of the loan and, importantly, by whether the
>borrower understands the terms of the loan. Thus, there is no ready way to
>distinguish predatory from subprime lending, to identify predatory
>lenders, or to measure amounts. Yet most anecdotal reports or legal cases
>against predatory lenders have involved subprime lenders, and it is
>certainly logical to expect these practices to flourish where the
>regulators are more remote. And the numbers given above suggest that most
>subprime lenders are reasonably sheltered from the normal bank regulatory
>apparatus.
>
>What Do Predatory Lenders Do?
>Predatory lending is made possible by inadequate information or, in
>technical jargon, asymmetric information held by lenders and borrowers.
>The fundamental weakness is the desire of low-income, uneducated borrowers
>for cash up front. In part, this desire reflects the ever-present needs of
>these low-income borrowers for cash, often for badly needed home repairs.
>In part, it reflects what might be called myopia, the illogical balancing
>of relatively small up-front amounts compared with huge downstream
>borrowing costs. In part, it reflects the lack of understanding of complex
>credit terms or conditions in which insurance is and is not needed. In
>part, it reflects bargaining imbalances where borrowers are subjected to
>outright fraud, falsifications, and even forgery.
>
>A significant component of predatory lending involves outright fraud and
>deception, practices that are clearly illegal. The policy response should
>simply be better enforcement. But the harder analytical issue involves
>abuses of practices that do improve credit market efficiency most of the
>time. Mostly the freedom for loan rates to rise above former usury law
>ceilings is desirable, in matching relatively risky borrowers with
>appropriate lenders. But sometimes very high interest rates can spell
>financial ruin for borrowers. Most of the time, balloon payments make it
>possible for young homeowners to buy their first house and match payments
>with their rising income stream. But sometimes balloon payments can ruin
>borrowers who do not have a rising income stream and are unduly influenced
>by the up-front money. Most of the time the ability to refinance mortgages
>permits borrowers to take advantage of lower mortgage rates, but sometimes
>easy refinancing means high loan fees and unnecessary credit costs. Often
>mortgage credit insurance is desirable, but sometimes the insurance is
>unnecessary, and sometimes borrowers pay premiums up front without the
>ability to cancel the insurance and get a rebate when the mortgage is paid
>off. Generally advertising enhances information, but sometimes it is
>deceptive. Most of the time disclosure of mortgage terms is desirable, but
>sometimes key points are hidden in the fine print.
>
>Apart from outright fraud, these are the fundamental characteristics of
>predatory lending. Mortgage provisions that are generally desirable, but
>complicated, are abused. For these generally desirable provisions to work
>properly, both lenders and borrowers must fully understand them.
>Presumably lenders do, but often borrowers do not. As a consequence,
>provisions that work well most of the time end up being abused and hurting
>vulnerable people enormously some of the time. Similarly, lenders outside
>the bank regulatory system may help improve the economic efficiency of
>low-income credit markets most of the time, but act as unregulated rogue
>elephants some of the time.
>
>Both factors make the regulatory issues very difficult. Again, apart from
>outright fraud, regulators and legislators feel understandably reluctant
>to outlaw practices, if these practices are desirable most of the time.
>Lenders can sometimes be brought into the bank regulatory system, but
>others always could spring up outside this system. The FTC is there to
>regulate trade practices in general, but that agency has a huge job in
>policing all loan contracts.
>
>What Can be Done?
>In response to earlier reports of fraudulent lending, the Congress in 1994
>passed the Home Ownership Equity Protection Act (HOEPA). HOEPA defined a
>class of "high cost" home purchase loans, loans that charge closing fees
>of 8 points or more, or have an annual percentage interest rate (APR) 10
>percentage points above prevailing Treasury rates for loans with
>comparable maturities. For these HOEPA-protected loans there are thorough
>disclosure requirements and prohibitions of many practices. There can be
>no balloon payments in the first five years of a loan. Certain prepayment
>penalties are prevented, as are negative amortization loans and some
>advance payments. While most analysts consider HOEPA to have been
>effective, we hear reports of lenders skating just below the HOEPA
>requirements and still engaging in egregious practices.
>
>The logic of HOEPA is that in this high-cost corner of the mortgage
>market, practices that are generally allowable are not permitted, because
>the possibilities of abuse are too high. Most present attempts to deal
>with predatory lending try to broaden the HOEPA net, by lowering the
>threshold cost levels and by preventing more practices. On the Democratic
>side of the political aisle, Senator Sarbanes and Representative LaFalce,
>from neighboring Buffalo, broaden the HOEPA definition of high-cost loans
>to those with an APR 6 points above Treasury rates for comparable
>maturities, and prevents life insurance that is paid for with a single
>up-front premium. On the Republican side, Representative Ney from Ohio
>broadens the HOEPA definition to loans with an APR 8 or 9 points above
>Treasury rates; and tightens the rules on prepayment penalties. There are
>several other bills, generally taking similar approaches to the problem.
>
>Many states have also attempted legislative remedies. Last July, North
>Carolina enacted amendments to its usury laws that also broaden the HOEPA
>net. North Carolina's law prohibits prepayment penalties, loan-flipping,
>and single-premium credit life insurance on most home loans. For high-cost
>loans, defined as loans with up-front fees greater than 5 percent of the
>loan or an APR of 10 percentage points above the comparable Treasury rate,
>the law requires borrower counseling before closing and prevents a number
>of practices: balloon payments, negative amortization, lending without
>consideration of the ability to pay, and financing of up-front fees or
>insurance premiums.
>
>Many other states are now using this North Carolina legislation as a model
>for statutes of their own. The list includes Illinois, Kansas, Maryland,
>Minnesota, Missouri, South Carolina, Utah, and West Virginia. One such
>bill has been introduced in New York State, but here the primary focus has
>been regulatory. Last year the State Banking Board approved a regulation
>patterned after HOEPA. It would apply to home-improvement loans and have
>lower APR and point thresholds than the federal statute has.
>
>Other federal statutes address predatory lending less directly. The Truth
>in Lending Act (TILA) requires all creditors to calculate and disclose
>costs in a uniform matter. Under this statute, lenders must disclose
>information on payment schedules, prepayment penalties, and the total cost
>of credit, expressed as a dollar amount and as an APR. The Real Estate
>Settlement Procedures Act (RESPA) prohibits lenders from paying fees to
>brokers that are not reasonably related to the value of services performed
>by the broker. The Equal Credit Opportunity Act (ECOA) prohibits
>discrimination in lending on the basis of a number of "prohibited basis
>characteristics" such as age and race. The Federal Trade Commission Act
>prohibits unfair and deceptive practices.
>
>And yet, with all this legislation, predatory lending seems to go on.
>Struck by these potential weaknesses in the regulatory nets, the Federal
>Reserve last fall convened an nine-agency working group to come up with
>other approaches or common approaches. The relevant agencies are the five
>that regulate depository institutions (the Federal Reserve, the Office of
>the Comptroller of the Currency, the Federal Deposit Insurance
>Corporation, the Office of Thrift Supervision, and the National Credit
>Union Administration), two that regulate housing (HUD and the Office of
>Federal Housing Enterprise Oversight) and two that regulate or prosecute
>deceptive trade practices in general (the Department of Justice and the
>FTC). The complete regulatory net of these agencies would cover all
>predatory lending, though the FTC, for example, might be hard pressed to
>go after all lending operations outside the primary depository institution
>net. The aims of the group are to tighten enforcement of existing
>statutes, to identify those predatory practices that might be limited by
>tightened regulations or legislative changes, and in general to establish
>a coordinated attack on predatory practices.
>
>HUD has also recently announced a task force to combat predatory lending.
>HUD administers RESPA and may be envisioning tightening its procedures.
>HUD's Federal Housing Administration (FHA) has also recently started
>requiring mandatory testing of real estate appraisers and an assessment of
>the physical condition of properties in its own lending programs.
>
>Secondary mortgage institutions such as Fannie Mae and Freddie Mac also
>plan to enter the subprime business. If Fannie and Freddie were merely to
>buy subprime loans without added inspection, these secondary market
>institutions could actually subsidize predatory lending. But if Fannie and
>Freddie were to inspect the practices of subprime lenders from whom they
>purchase loans, or to limit purchases of certain types of loans, they
>might effectively extend the domain of subprime regulations.
>
>A final factor is consumer education. Predatory lending would not exist,
>or would be relatively rare, if prospective borrowers understood the true
>nature of their loan contracts. The Neighborhood Reinvestment Corporation
>(NRC) has an active borrower education program to promote just that type
>of understanding, and many other public and quasi-public agencies are
>thinking of following suit. To this point, efforts to extend consumer
>financial education into high schools have proven very disappointing, but
>there have been some successes with stock market simulation exercises.
>Perhaps some of these efforts could be extended to predatory lending
>issues.
>
>Conclusion
>Predatory lending is a difficult issue. It causes obvious difficulties for
>borrowers, it is difficult for enforcers to track down, and it is
>difficult to regulate. So far as we can tell, predatory lenders generally
>operate outside the main financial regulation network. These lenders are
>sometimes fraudulent, but probably more often they take advantage of loan
>terms that are useful for many borrowers but can become destructive if
>misunderstood by some borrowers. They also take advantage of low-income
>and less-educated borrowers who need cash up front and are unlikely to
>understand the provisions. When and if borrowers default, they can either
>lose their house or be induced to sign up for still more exploitative
>terms.
>
>Because predatory lenders are less regulated and predatory loans are often
>difficult to identify and define legally, it becomes both a regulatory and
>an enforcement challenge to stop predatory practices. Currently, nine
>agencies are meeting to design a coordinated attack on the problem, and a
>number of legislative options are under consideration in both the federal
>and state legislatures. The goal is to eliminate or limit some sorry
>practices that are the unfortunate byproduct of recent efforts to
>democratize credit markets.
>
>
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*****************************
Maryellen J. Lewis
Program Leader/Community Capital
MSU Community & Economic Development
1801 W. Main Street
Lansing, Michigan 48915-1097 USA
ph: 517-353-9555
fax: 517-484-0068
e-mail: lewisma9@msu.edu
~~~~~~~~~~~~~~~~~~~~~~~~~~
"Work is of two kinds: first, altering the position
of matter at or near the earth's surface; second,
telling other people to do so....
The second kind is pleasant and highly paid."
-- Bertrand Russell
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