When victims of predatory lending tell their tale in the media, the entire banking industry gets a black eye, according to industry observers.
So, preventing predatory lenders from becoming a big problem in the commonwealth is to the advantage of the banking industry – seeking to serve the ever-increasing subprime market – and consumer watchdog groups out to protect unsophisticated customers from being bamboozled.
To further both of those goals, a working group has been formed – a union of two parties that don’t always see eye to eye. Spearheaded by Massachusetts Consumer Affairs and Business Regulation Director Jennifer Davis Carey, the group’s formation comes after a number of recent initiatives on the state and federal level to combat predatory lending. In September, the Massachusetts Division of Banks held public hearings on Bank Commissioner Thomas J. Curry’s proposed regulations aimed at eliminating predatory lending. The final version of the regulations is expected next month.
“Over the course of the late spring and early summer, the Federal Reserve, Federal Deposit Insurance Corp. and the Division of Banks at the state level began to be concerned about anecdotal reports that we’d been hearing on predatory lending. One of the things that we want to prevent from happening is predatory lending taking a foothold in Massachusetts,” Carey said. “The pervasiveness of predatory lending in other states became clear at the hearings the Federal Reserve and the FDIC held.”
There haven’t been any major incidents locally like that of United Companies Lending Corp. and First Alliance Mortgage Co., against both of which the attorney general filed lawsuits, but the state is taking action to prevent it from happening, she said.
“The purpose of this working group is to keep the line open and keep a link between the legitimate lenders and the watchdog groups and advocacy groups and keep an eye on what the affect of these regulations have been,” Carey said.
It’s important that the working group establish a distinction between subprime lending, a legitimate option for those with less-than-perfect credit histories, and predatory lending which results in no benefit to the consumer and often places a substantial debt on their shoulders, Carey said. Education will be key.
“One of the things we are seeing is that people are not as cautious and not as careful and do not have a full understanding of some of the subtleties of the money market. As a result of that, [they] don’t have a full understanding of the terms they sign up for,” she said.
The working group, which includes the Division of Banks, the Department of Consumer Affairs, credit union representation, the Association for Community Organizations for Reform Now and the Greater Boston Fair Housing Center, is unusual, she said. “The makeup of the working group are people who have generally not been in the same room together.”
“Our main goal is twofold. One is to keep an eye on the effect of the regulations. One of the things we don’t want to do is choke off the legitimate forms of lending and choke off access to credit,” Carey said.
“The other is to come up with some effective ways of reaching individuals who are often targeted [by predatory lenders] so they have the tools they need to ask the right questions,” she said.
The tone of the meetings has generally been good, according to participant Tanya Duncan, director of federal regulatory and legislative policy for the Massachusetts Bankers Association, a member of the working group.
“It was a really good meeting. The banking industry’s role today was to present an overview of the lending market in Massachusetts … The market has changed dramatically,” said Duncan of last Thursday’s meeting. There’s much more competition coming from out of state. “Some of the data showed that out of state lending increased while in-state lending decreased,” which could contribute to increased predatory lending occurrences. The problem stems from lenders who have no presence in the state. They are outside the jurisdiction of the Division of Banks, she said.
Duncan reiterated Carey’s concern that a distinction be drawn in the public’s eye between subprime lending and predatory lending.
“If you look at the whole lending market, you have a circle who do prime lending. Within that circle you have another circle of some subprime lenders who extend credit to a market who may have credit blemishes. Within that group is a smaller group of predatory lenders,” she said. Most predatory lenders strike within the subprime market but most subprime lenders are not predatory, said Duncan.
“What makes the difference between the two is subprime lenders usually have transactions that benefit the customer. The pricing you receive will reflect the risk. But predatory lending will take advantage of that … ultimately increasing your debt,” she said.
Although the groups involved in this working group have traditionally been at opposite sides of the issues, Duncan said the mood has been good.
“I’m really happy to say that in the meetings, of course there’s been some differences, but we’ve tried to put that aside. We’re moving in the spirit of cooperation,” she said.
