Partners (Summer 2000)
Partners (Summer 2000)
By Chairman Donna Tanoue
Chairman Tanoue gave testimony on May 24, 2000, before the House Committee on Banking and Financial Services concerning predatory lending. Below are excerpts from Ms. Tanoue’s remarks.
Although a precise definition of “subprime” lending remains subject to debate, the “Interagency Guidance on Subprime Lending” issued by the federal banking agencies on March 1, 1999, defines subprime lending as “extending credit to borrowers who exhibit characteristics indicating a significantly higher risk of default than traditional bank lending customers.”
Subprime lending serves the market of borrowers whose credit history would not permit them to qualify for the conventional “prime” loan market. Therefore, a well-managed subprime lending program provides an important source of credit in a manner consistent with safe-and-sound banking, and the FDIC does not want to inhibit subprime lending that meets these criteria. While most predatory loans are made to subprime borrowers, predatory lending is product-driven — exhibiting certain marketing tactics, collection practices, and loan terms that, when combined, deceive and exploit borrowers.
While the FDIC has not uncovered evidence that insured depository institutions are actively originating loans with predatory features, concern exists that banks and thrifts, like other institutional investors, may be involved in the predatory loan market in an indirect way. One indirect form of funding predatory loans is through the relationships that banks may have with mortgage brokers. Another involves banks and thrifts purchasing loans or securities backed by predatory loans, or by offering credit lines to nonbank predatory lenders. These indirect means may subject an institution to increased credit, reputation, and legal risk because the institution does business with predatory lenders or mortgage brokers.
The FDIC is addressing the issue of predatory lending in a number of ways, including:
A number of laws and regulations prohibit fraud and certain misleading or deceptive sales and marketing practices by providing disclosure requirements and limitations. However, current law does not fully address a number of predatory practices found in some loans, especially in the markets for refinancing and for home equity loans. But while banning certain practices (e.g. balloon payments and prepayment penalties,) may be well-intended, outright prohibitions of such practices could unduly limit credit availability.
- Writing guidance for insured depository institutions describing effective practices to keep them from inadvertently acquiring loans (or securities backed by loans) that have predatory features;
- Working on an interagency basis to revise CRA examination practices so that a bank’s purchase of loans (or securities backed by loans) that have predatory terms or features cannot be used to improve the bank’s CRA rating;
- Giving positive CRA consideration to bank-sponsored programs that combat predatory lending by fostering financial literacy;
- Working on an interagency basis to review other consumer laws and regulations to determine whether regulatory changes may be warranted;
- Holding several public forums across the country in which community organizations, government officials, and members of the financial community can meet and explore effective means to protect consumers; and
- Working on a financial literacy campaign to educate consumers about the risks of predatory lenders.
In evaluating alternatives that might curb predatory lending, the FDIC is applying a framework of allowing continued access to credit for the widest range of qualified customers; protecting against the abuse of vulnerable individuals; and allowing sufficient return for lenders to provide credit on a risk-justified basis.
For a full text of Chairman Tanoue’s testimony, refer to www.fdic.gov/news/news/index.html
Return to Index