Partners (Summer 2000)

OTS Viewpoint
By Director Ellen Seidman

Director Seidman, from the Office of Thrift Supervision, gave testimony on May 24, 2000, before the House Committee on Banking and Financial Services concerning predatory lending. Below are exceprts from Director Siedman’s remarks.

OTS Viewpoint

A discussion of predatory lending must start with the frank admission that defining it is not easy. In Deborah Goldstein’s predatory lending study, “Understanding Predatory Lending: Moving Towards a Common Definition and Workable Solutions,”1 the author states that “predatory lending describes a set of loan terms and practices that fall between appropriate risk-based pricing by subprime lenders and blatant fraud.”

Ms. Goldstein suggests that loans become predatory when they target a particular population (most frequently low-income minorities and the elderly), taking advantage of the borrower’s inexperience and lack of information to manipulate a borrower into a loan the borrower cannot afford to pay.

In addition to risks to consumers and communities, predatory lending can present safety and soundness risks such as “legal” and “reputation.” A second major risk involves market liquidity with high loan-to-value loans. Finally, there are operational and credit problems when borrowers are strained in servicing their debt.

OTS’s Advance Notice of Proposed Rulemaking (ANPR)
As concerns intensified about predatory lending practices, the OTS decided to review its own regulations to determine their effect in today’s market on thrifts and their customers and, under the Alternative Mortgage Transaction Parity Act of 1982, on state housing creditors. The ANPR sets forth the following six goals:

  1. Encourage safe and sound lending.
  2. Encourage innovation in identifying potential customers and meeting their needs.
  3. Discourage lending that preys upon customers’ lack of knowledge or limited options.
  4. Enable thrifts to compete with other types of lenders.
  5. Maintain the uniform system of regulation that applies to federal thrifts.
  6. Minimize regulatory burden on thrifts.
The Three “E’s” of Combating Predatory Lending
In fighting against abusive predatory lending practices, the OTS is taking a three-prong approach. The emphasis is on three “E’s.”
  • Examination for enforcement of applicable laws and regulations;
  • Encouragement of responsible subprime lending; and
  • Education of consumers and investors.
Responsible Subprime Lending
Subprime lending refers to lending to borrowers who do not qualify for the most favorable interest rates and other loan terms because they are not among those with the best credit histories and most stable employment. Responsible subprime lending means making those loans at a price and with terms that appropriately compensate the lender for any enhanced risk, including a reasonable return, and marketing the loan in a manner that is fair to, and understandable by, the borrower.

Freddie Mac has estimated that from 10 to 35 percent of borrowers with subprime loans could have qualified for a prime loan, but were steered to a higher-cost loan anyway — a practice that clearly conflicts with responsible subprime lending.

Ellen Seidman
In working to curtail predatory lending, the flow of credit to low- and moderate-income families, elderly individuals, and their communities must not be impeded. Lending to underserved communities and individuals, whether prime or responsibly done subprime lending, provides necessary credit safely and soundly.

For a full text of Director Siedman’s testimony, refer to

1This study was written under the support of the Neighborhood Reinvestment Corporation’s Emerging Leaders in Community Economic Development Fellowship and was issued in October 1999.

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