Public education and self-policing by the mortgage industry may foil the efforts of predatory lenders, but uniform industry guidelines are needed as well, industry leaders said last week in a forum on predatory lending hosted by the FDIC.
FDIC Chairman Donna Tanoue led mortgage lenders and consumer advocates in examining predatory lending and ways to combat abuses. Massachusetts has made strides in combating abusive practices by prosecuting companies under the state’s consumer protection act. The Attorney General’s office brought charges against United Companies of Baton Rouge, La., and First Alliance of Irvine, Calif., which charged as much as 23 points on mortgage loans.
“We see epidemic proportions of the growth of predatory lending out there,” said Doug Dylla of the Neighborhood Reinvestment Corp. “For an individual that’s worked on affordable housing, I really feel like the pendulum has swung way too far on easy credit.”
The problem of predatory lending has shifted in the last 10 years, said Commissioner of Banks Thomas J. Curry.
“We’ve seen an evolution from smaller entities to larger nationwide firms,” Curry said.
In the early 1990s a number of small companies operated in Massachusetts without licenses. After the state began licensing mortgage brokers and lenders in 1992, the business changed to consist of large national lenders that charge high fees, engage in loan flipping, fail to disclose terms and add on credit insurance and other products to the loan.
“We’re light years ahead of some of the other states,” said Tanya Duncan, director of federal regulatory and legislative policy for the Massachusetts Bankers Association.
Mortgage lenders are not regulated on the federal level, so in states that do not license lenders, companies have little regulatory oversight, she said.
State associations have launched a number of educational programs aimed at consumers to thwart the efforts of predatory lenders, including the Don’t Borrow Trouble campaign and a program warning buyers of easy credit.
“A lot of the market for subprime lending are people that are financially unsophisticated and not used to comparison shopping for financial products,” said Jennifer Davis Carey, director of Consumer Affairs and Business Regulation. “They see it as an opportunity, not something to shop for.”
Follow the Money
While industry leaders stressed the role of education at last week’s forum, leaders from nonprofit groups said they need financial help to carry out the job.
Tanoue emphasized that banks conduct due diligence before buying subprime loans on the secondary market to make sure the originators did not engage in predatory practices. The FDIC chairman asked leaders to follow the money chain to see where predatory lenders obtain their funding.
“Some have credit lines to them from large banks or a consortium of banks, but the primary funding is from Wall Street,” Curry said.
Predatory lending will continue as long as investors buy mortgage-backed securities of the loans on the secondary market. Tanoue suggested that banks establish guidelines for due diligence before buying loans and securities.
“There wouldn’t be a market for predatory loans if they weren’t bought,” said Timothy J. Shea, chief of the public protection bureau for the attorney general’s office.
Carey said leaders should examine how to use regulation to cut down on abusive practices. Bank examiners look for high debt-to-income ratios, use of unscrupulous or unlicensed mortgage brokers, loan flipping, and a high consumer acceptance of credit insurance, she said.
H&R Block Mortgage official Dana Clarke warned against creating new regulations for the industry. Predatory lending is conducted by pockets of brokers, lenders and financiers that enter and leave the industry to avoid detection, she said. But regulations would harm reputable companies, causing some to close their doors or pass additional costs on to consumers.
“The cost of complying with regulation is borne by responsible lenders,” Clarke said.
Instead, she suggested tougher enforcement of predatory lenders, and suggested that subprime lenders should be examined on a case-by-case basis. That becomes difficult for regulators, Curry said, because there is no agreement in the industry about what constitutes predatory lending. The Home Owners Equity and Protection Act requires notification when lenders charge high rates, but does not outlaw the practice.
“It doesn’t make it illegal, it’s just a scarlet letter with possible liability for the purchaser,” Curry said.
State Guidelines
Two Bay State associations, the Massachusetts Bankers Association and the Massachusetts Mortgage Bankers Association, crafted subprime lending guidelines for their members. Subprime lending allows consumers with less than perfect credit to be able to buy a home at a higher cost. This type of lending makes it possible for more customers to become home owners, but a number of companies have engaged in predatory practices by charging excessive points and fees.
Some MBA members make subprime loans to customers with A-minus credit, but the banks do not have formal subprime lending programs, Duncan said.
“There are some issues in getting into this type of lending because it’s riskier,” Duncan said. “With C and D loans there is a greater risk in getting the loans paid back. We encourage them to participate in subprime lending but to just be careful of safety and soundness issues as well as other concerns regarding predatory lending.”
MMBA President Susan Zuber called on mortgage lenders to engage in self-policing. Her association is investigating setting up a consumer hotline to report predatory practices, she said.
With state and federal legislation on predatory lending on the table, the issue will not go away any time soon. Commissioner Curry and Tanoue spoke on the issue Wednesday before the U.S. House of Representatives Banking Committee, which is considering five bills on the matter this session.
