in community and economic development
Federal Reserve Bank of Atlanta
Volume 10, Number 2
In This Issue
What is Predatory Lending?
The definition remains elusive.
Consumer Advocate Perspective
William J. Brennan, Jr., of Atlanta Legal Aid Society’s Home Defense Program.
Trade Association Perspective
MBAA’s “Seven Point Plan”
Home Ownership Equity Protection Act
Education is a key to avoiding the predatory lending trap.
Predatory lending practices are real. There is no mistake that it occurs, and based on anecdotal information and most surveys or reports so far, it appears that the victims are typically older, lower-income, and minority. It is offensive, and it is wrong. But as you might expect, there is more to stopping it than “just say no.”
Many of our constituents have worked long and hard to ensure equal and fair access to credit, and the results are impressive. We now boast the highest home ownership rate in our nation’s history. Nontraditional underwriting, including higher debt ratios or lower down payments, for example, has revolutionized the home mortgage lending industry. Technology changes that allow more efficient underwriting and the advent of credit scoring have also allowed market penetration like never before. And risk-based pricing has certainly fueled lender willingness to assume higher risks.
Predatory lending practices themselves may not be new, but the stories of abuse have become too common. And public outcry is appropriate. Everybody is speaking out against it and looking for ways to fight back.
Partners is compelled to dedicate this issue to the fight against predatory lending. We begin with a discussion of predatory lending practices. Flipping. Packing. Targeting. Stacking. While individual actions may not be illegal, many of these practices are unjustified and inappropriate at best.
We present a regulatory analysis of the subject of predatory lending, and feature perspectives from the Federal Reserve, Office of the Comptroller of the Currency (OCC), Office of Thrift Institutions (OTS) and the Federal Deposit Insurance Corporation (FDIC). We include a nationally recognized consumer advocate’s testimony to Congress (Bill Brennan, Atlanta Legal Aid Society), and the Mortgage Banker’s Association of America’s “Seven Point Plan” for mortgage reform.
Everybody agrees: these practices must stop. But definitions are hard because nobody wants to cut the flow of credit to under-served markets. One theme is common throughout the industry — the line between predatory and subprime lending is difficult to define, and stopping predatory lending must not reduce access to credit through appropriate risk-based pricing, or “responsible subprime lending.”
While this issue of Partners can’t resolve the issues surrounding predatory lending, we hope to add additional light on the subject and join forces toward seeking solutions. Along those lines, we feature a summary of the Home Ownership Equity Protection Act and a Consumer Corner on education. We welcome the opportunity to join your organization in speaking out against predatory lending practices. Together we have made great strides in providing fair and equal access to credit, almost to the point that we take it for granted. We have penetrated markets like never before, reaching goals that seemed unimaginable just 10 or 20 years ago, and developing new and improved loan and investment products that knock down old barriers. We must not let unscrupulous lenders damage the progress we have made. In the end, we all have an interest in stopping abusive practices and putting predatory lenders out of business.