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Report to the Chairman and Ranking Minority Member, Special Committee 
on Aging, U.S. Senate:

January 2004:

CONSUMER PROTECTION:

Federal and State Agencies Face Challenges in Combating Predatory 
Lending:

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-280]: 

GAO Highlights:

Highlights of GAO-04-280, a report to the Chairman and Ranking 
Minority Member, Special Committee on Aging, U.S. Senate 

Why GAO Did This Study:

While there is no universally accepted definition, the term “predatory 
lending” is used to characterize a range of practices, including 
deception, fraud, or manipulation, that a mortgage broker or lender 
may use to make a loan with terms that are disadvantageous to the 
borrower. No comprehensive data are available on the extent of these 
practices, but they appear most likely to occur among subprime 
mortgages—those made to borrowers with impaired credit or limited 
incomes. GAO was asked to examine actions taken by federal agencies 
and states to combat predatory lending; the roles played by the 
secondary market and by consumer education, mortgage counseling, and 
loan disclosure requirements; and the impact of predatory lending on 
the elderly.

What GAO Found:

While only one federal law—the Home Ownership and Equity Protection 
Act—is specifically designed to combat predatory lending, federal 
agencies have taken actions, sometimes jointly, under various federal 
consumer protection laws. The Federal Trade Commission (FTC) has 
played the most prominent enforcement role, filing 19 complaints and 
reaching multimillion dollar settlements. The Departments of Justice 
and Housing and Urban Development have also entered into predatory 
lending-related settlements, using laws such as the Fair Housing Act 
and the Real Estate Settlement Procedures Act. Federal banking 
regulators, including the Federal Reserve Board, report little 
evidence of predatory lending by the institutions they supervise. 
However, the nonbank subsidiaries of financial and bank holding 
companies—financial institutions which account for a significant 
portion of subprime mortgages—are subject to less federal supervision. 
While FTC is the primary federal enforcer of consumer protection laws 
for these entities, it is a law enforcement agency that conducts 
targeted investigations. In contrast, the Board is well equipped to 
routinely monitor and examine these entities and, thus, potentially 
deter predatory lending activities, but has not done so because its 
authority in this regard is less clear.

As of January 2004, 25 states, as well as several localities, had 
passed laws to address predatory lending, often by restricting the 
terms or provisions of certain high-cost loans; however, federal 
banking regulators have preempted some state laws for the institutions 
they supervise. Also, some states have strengthened their regulation 
and licensing of mortgage lenders and brokers.

The secondary market—where mortgage loans and mortgage-backed 
securities are bought and sold—benefits borrowers by expanding credit, 
but may facilitate predatory lending by allowing unscrupulous lenders 
to quickly sell off loans with predatory terms. In part to avoid 
certain risks, secondary market participants perform varying degrees 
of “due diligence” to screen out loans with predatory terms, but may 
be unable to identify all such loans.

GAO’s review of literature and interviews with consumer and federal 
officials suggest that consumer education, mortgage counseling, and 
loan disclosure requirements are useful, but may be of limited 
effectiveness in reducing predatory lending. A variety of factors 
limit their effectiveness, including the complexity of mortgage 
transactions, difficulties in reaching target audiences, and 
counselors’ inability to review loan documents.

While there are no comprehensive data, federal, state, and consumer 
advocacy officials report that the elderly have disproportionately 
been victims of predatory lending. According to these officials and 
relevant studies, older consumers may be targeted by predatory lenders 
because, among other things, they are more likely to have substantial 
home equity and may have physical or cognitive impairments that make 
them more vulnerable to an unscrupulous mortgage lender or broker.

What GAO Recommends:

GAO suggests that Congress consider providing the Federal Reserve 
Board with the authority to routinely monitor and, as necessary, 
examine nonbank mortgage lending subsidiaries of financial and bank 
holding companies to ensure compliance with federal consumer 
protection laws applicable to predatory lending. Congress should also 
consider giving the Board specific authority to initiate enforcement 
actions under those laws against these nonbank mortgage lending 
subsidiaries.

www.gao.gov/cgi-bin/getrpt?GAO-04-280.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact David G. Wood at 
202-512-8678 or woodd@gao.gov.

[End of section]

Contents:

Transmittal Letter: 

Executive Summary:

Purpose: 

Background: 

Results in Brief: 

Principal Findings: 

Matters for Congressional Consideration: 

Agency Comments and Our Evaluation: 

Chapter 1: Introduction: 

The Nature and Attributes of Predatory Lending: 

Emergence of Subprime Mortgage Market: 

The Extent of Predatory Lending Is Unknown: 

Emergence of Predatory Lending As Policy Issue: 

Objectives, Scope, and Methodology: 

Chapter 2: Federal Agencies Have Taken Steps to Address Predatory 
Lending, but Face Challenges: 

Federal Agencies Use a Variety of Laws to Address Predatory Lending 
Practices: 

Federal Agencies Have Taken Some Enforcement Actions, but Banking 
Regulators Have Focused on Guidance and Regulatory Changes: 

Jurisdictional Issues Related to Nonbank Subsidiaries Challenge Efforts 
to Combat Predatory Lending: 

Conclusions: 

Matters for Congressional Consideration: 

Agency Comments and Our Evaluation: 

Chapter 3: States Have Enacted and Enforced Laws to Address Predatory 
Lending, but Some Laws Have Been Preempted: 

States and Localities Have Addressed Predatory Lending through 
Legislation, Regulation, and Enforcement Actions: 

Activities in North Carolina and Ohio Illustrate State Approaches to 
Predatory Lending: 

Regulators Have Determined That Federal Law Preempts Some State 
Predatory Lending Laws, but Views on Preemption Differ: 

Chapter 4: The Secondary Market May Play a Role in Both Facilitating 
and Combating Predatory Lending: 

The Development of a Secondary Market for Subprime Loans Can Benefit 
Consumers: 

The Secondary Market for Subprime Loans Can Facilitate Predatory 
Lending: 

Due Diligence Can Help Purchasers Avoid Predatory Loans, but Efforts 
Vary among Secondary Market Participants: 

Assignee Liability May Help Deter Predatory Lending but Can Also Have 
Negative Unintended Consequences: 

Chapter 5: The Usefulness of Consumer Education, Counseling, and 
Disclosures in Deterring Predatory Lending May Be Limited: 

Many Consumer Education and Mortgage Counseling Efforts Exist, but 
Several Factors Limit Their Potential to Deter Predatory Lending: 

Disclosures, Even If Improved, May Be of Limited Use in Deterring 
Predatory Lending: 

Chapter 6: Elderly Consumers May Be Targeted for Predatory Lending: 

A Number of Factors Make Elderly Consumers Targets of Predatory 
Lenders: 

Some Education and Enforcement Efforts Focus on Elderly Consumers: 

Appendixes:

Appendix I: FTC Enforcement Actions Related to Predatory Lending: 

Appendix II: Comments from the Board of Governors of the Federal 
Reserve System: 

Appendix III: Comments from the Department of Justice: 

Appendix IV: Comments from the Department of Housing and Urban 
Development: 

Appendix V: Comments from the National Credit Union Administration: 

Appendix VI: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Staff Acknowledgments: 

Table: 

Table 1: Preemption Determinations Issued by OCC, OTS, and NCUA Related 
to Predatory Mortgage Lending Laws: 

Figures: 

Figure 1: Federal Laws and Statutes Used to Address Lending Practices 
Generally Considered to be Predatory: 

Figure 2: Structure and Federal Oversight of Mortgage Lenders: 

Figure 3: States and Localities That Have Enacted Predatory Lending 
Laws:

Figure 4: Steps in the Securitization of Residential Mortgages: 

Abbreviations: 

CRA: Community Reinvestment Act: 

DOJ: Department of Justice:

ECOA: Equal Credit Opportunity Act:

FDIC: Federal Deposit Insurance Corporation:

FHA: Federal Housing Administration:

FTC: Federal Trade Commission:

GAO: General Accounting Office:

GSE: government-sponsored enterprise:

HMDA: Home Mortgage Disclosure Act:

HOEPA: Home Ownership and Equity Protection Act:

HUD: Department of Housing and Urban Development:

NCUA: National Credit Union Administration: 

OCC: Office of the Comptroller of the Currency: 

OTS: Office of Thrift Supervision:

RESPA: Real Estate Settlement Procedures Act:

TILA: Truth in Lending Act:

Transmittal Letter 
January 30, 2004:

The Honorable Larry E. Craig: 
Chairman: 
The Honorable John Breaux: 
Ranking Minority Member: 
Special Committee on Aging: 
United States Senate:

This report responds to your request that we evaluate issues related to 
predatory home mortgage lending. As you requested, this report reviews 
(1) federal laws related to predatory lending and federal agencies' 
efforts to enforce them, (2) actions taken by states to address 
predatory lending, (3) the secondary market's role in facilitating or 
inhibiting predatory lending, (4) how consumer education, mortgage 
counseling, and loan disclosures may deter predatory lending, and (5) 
the relationship between predatory lending activities and elderly 
consumers. This report includes a Matter for Congressional 
Consideration.

As agreed with your office, we plan no further distribution of this 
report until 30 days from its issuance date unless you publicly release 
its contents sooner. We will then send copies of this report to the 
Chairman and Ranking Minority Member of the Senate Committee on 
Banking, Housing, and Urban Affairs; the Chairman and Ranking Minority 
Member of the House Committee on Financial Services; the Secretary of 
the Department of Housing and Urban Development; the Secretary of the 
Department of the Treasury; the Chairman of the Federal Trade 
Commission; the Chairman of the Board of Governors of the Federal 
Reserve System; the Chairman of the Federal Deposit Insurance 
Corporation; the Comptroller of the Currency; the Director of the 
Office of Thrift Supervision; the Chairman of the National Credit Union 
Administration; and other interested parties. Copies will also be made 
available to others upon request. In addition, this report will be 
available at no charge on the GAO Web site at [Hyperlink, http://
www.gao.gov]. 

This report was prepared under the direction of Harry Medina, Assistant 
Director. Please contact Mr. Medina at (415) 904-2000 or me at (202) 
512-8678 if you or your staff have any questions about this report. 
Major contributors to this report are listed in appendix VI.

Signed by:

David G. Wood: 
Director, Financial Markets and Community Investment:

[End of section]

Executive Summary:

Purpose:

Each year, millions of American consumers take out mortgage loans 
through mortgage brokers or lenders to purchase homes or refinance 
existing mortgage loans. While the majority of these transactions are 
legitimate and ultimately benefit borrowers, some have been found to be 
"predatory"--that is, to contain terms and conditions that ultimately 
harm borrowers. Loans with these features, often targeted at the 
elderly, minorities, and low-income homeowners, can strip borrowers of 
home equity built up over decades and cause them to lose their homes.

The Chair and Ranking Member of the Senate Special Committee on Aging 
asked GAO to examine the efforts under way to combat predatory lending. 
GAO reviewed (1) federal laws related to predatory lending and federal 
agencies' efforts to enforce them, (2) actions taken by states to 
address predatory lending, (3) the secondary market's role in 
facilitating or inhibiting predatory lending, (4) how consumer 
education, mortgage counseling, and loan disclosures may deter 
predatory lending, and (5) the relationship between predatory lending 
activities and elderly consumers. The scope of this work was limited to 
home mortgage lending and did not include other forms of consumer 
loans. To address these objectives, GAO reviewed data and interviewed 
officials from federal, state, and local agencies and from industry and 
consumer advocacy groups; examined federal, state, and local laws; and 
reviewed relevant literature. At GAO's request, federal agencies 
identified enforcement or other actions they have taken to address 
predatory lending. GAO also obtained data from publicly available 
databases; the data were analyzed and found to be sufficiently reliable 
for this report. Chapter 1 provides the details of the scope and 
methodology of this report. The work was conducted between January 2003 
and January 2004 in accordance with generally accepted government 
auditing standards.

Background:

While there is no uniformly accepted definition of predatory lending, a 
number of practices are widely acknowledged to be predatory. These 
include, among other things, charging excessive fees and interest 
rates, lending without regard to borrowers' ability to repay, 
refinancing borrowers' loans repeatedly over a short period of time 
without any economic gain for the borrower, and committing outright 
fraud or deception--for example, falsifying documents or intentionally 
misinforming borrowers about the terms of a loan.[Footnote 1] These 
types of practices offer lenders that originate predatory loans 
potentially high returns even if borrowers default, since many of these 
loans require excessive up-front fees. No comprehensive data are 
available on the incidence of these practices, but banking regulators, 
consumer advocates, and industry participants generally agree that 
predatory loans are most likely to occur in the market for "subprime" 
loans. The subprime market serves borrowers who have limited incomes or 
poor or no credit histories, in contrast with the prime market, which 
encompasses traditional lenders and borrowers with credit histories 
that put them at low risk of default. Originators of subprime loans 
most often are mortgage and consumer finance companies but can also be 
banks, thrifts, and other institutions.

Serious data limitations make the extent of predatory lending difficult 
to determine. However, there have been a number of major settlements 
resulting from government enforcement actions or private party lawsuits 
in the last 5 years that have accused lenders of abusive practices 
affecting large numbers of borrowers. For example, in October 2002, 
Household International, a large home mortgage lender, agreed to pay up 
to $484 million to homeowners to settle states' allegations that it 
used unfair and deceptive lending practices to make mortgage loans with 
excessive interest and fees. In addition, the rate of foreclosures of 
subprime loans has increased substantially since 1990, far exceeding 
the rate of increase for subprime originations. Some consumer groups 
and industry observers have attributed this development, at least in 
part, to an increase in abusive lending, particularly of loans made 
without regard to borrowers' ability to repay. Additionally, groups 
such as legal services agencies have reported seeing an ever-greater 
number of consumers, particularly the elderly and minorities, who are 
in danger of losing their homes as a result of predatory lending 
practices.

Results in Brief:

Federal agencies have addressed predatory lending under a variety of 
federal laws, including the Home Ownership and Equity Protection Act 
(HOEPA), which was an amendment to the Truth in Lending Act (TILA) 
designed specifically to combat predatory lending, and other consumer 
protection laws such as the Federal Trade Commission Act (FTC Act), 
TILA generally, and the Real Estate Settlement Procedures Act (RESPA). 
The Federal Trade Commission (FTC) has played a prominent role because 
it is responsible for implementing and enforcing certain federal laws 
among lending institutions that are not supervised by federal banking 
regulators. As of December 2003, FTC reported that it had taken 19 
enforcement actions against mortgage lenders and brokers for predatory 
practices, including some actions that have resulted in multimillion 
dollar settlements. The Department of Housing and Urban Development's 
(HUD) enforcement activities related to abusive lending have focused on 
criminal fraud in its Federal Housing Administration (FHA) loan 
insurance program. The federal banking regulators--the Federal Deposit 
Insurance Corporation (FDIC), Board of Governors of the Federal Reserve 
System (the Board), Office of the Comptroller of the Currency (OCC), 
Office of Thrift Supervision (OTS), and National Credit Union 
Administration (NCUA)--report little evidence of predatory lending by 
the depository institutions that they supervise. However, concerns 
exist about nonbank mortgage lending companies that are owned by 
financial or bank holding companies, which have been involved in 
several notable enforcement actions involving allegations of abusive 
lending practices. While FTC has clear authority to conduct 
investigations and enforce consumer protection laws among these nonbank 
mortgage lending companies, as a law enforcement agency its role is to 
investigate possible violations rather than to act as a supervisory 
agency with routine monitoring and examination responsibilities. The 
Board may be better equipped to monitor and examine these subsidiaries' 
compliance with federal consumer protection laws and thus to deter 
predatory lending, but it does not have clear authority to do so.

According to a database that tracks state and local legislation, 25 
states, 11 localities, and the District of Columbia have passed their 
own laws addressing predatory lending.[Footnote 2] While these laws 
vary, most of them restrict the terms or provisions of mortgage loans 
originated within their jurisdictions. In addition, some states have 
strengthened the regulation and licensing of mortgage lenders and 
brokers, and state law enforcement agencies and banking regulators have 
taken a number of enforcement actions under state consumer protection 
and banking laws. Some federal regulators have asserted that federal 
law preempts some state predatory lending laws for the institutions 
they regulate, stating that federally chartered lending institutions 
should be required to comply with a single uniform set of national 
regulations. Many state officials and consumer advocates, however, 
maintain that federal preemption interferes with the states' ability to 
protect consumers.

The secondary market for mortgage loans--which allows lenders and 
investors to sell and buy mortgages and mortgage-backed securities--
provides lenders with an additional source of liquidity and may benefit 
borrowers by increasing access to credit and lowering interest rates. 
But the secondary market may also inadvertently serve to facilitate 
predatory lending, both by providing a source of funds for unscrupulous 
originators to quickly sell off loans with predatory terms and by 
reducing incentives for these originators to ensure that borrowers can 
repay their loans. Secondary market participants may use varying 
degrees of "due diligence"--a review and appraisal of legal and 
financial information--to avoid purchasing loans with abusive terms. 
Fannie Mae and Freddie Mac--which are relatively recent entrants in the 
subprime market--have due diligence processes that are designed, in 
part, to avoid purchasing loans that may have been harmful to 
consumers. Other firms may use due diligence not necessarily to avoid 
loans that may have harmed consumers but to avoid loans that are not in 
compliance with applicable law or that present undue financial or 
reputation risks. Some states have passed laws making secondary market 
buyers liable for violations by loan originators, although such laws 
may have the unintended consequence of reducing the availability of 
legitimate credit to consumers.

A number of federal, state, nonprofit, and industry-sponsored 
organizations offer consumer education initiatives designed to deter 
predatory lending by, among other things, providing information about 
predatory practices and working to improve consumers' overall financial 
literacy. GAO's review of literature and interviews with consumer and 
federal officials suggest that while tools such as consumer education, 
mortgage counseling, and disclosures are useful, they may be of limited 
effectiveness in reducing predatory lending. For instance, consumer 
education is hampered by the complexity of mortgage transactions and 
the difficulty of reaching the target audience. Similarly, unreceptive 
consumers and counselors' lack of access to relevant loan documents can 
hamper the effectiveness of mortgage counseling efforts, while the 
sheer volume of mortgage originations each year makes providing 
universal counseling difficult. And while efforts are under way to 
improve the federally required disclosures associated with mortgage 
loans, the complexity of mortgage transactions also hinders these 
efforts, especially given the lack of financial sophistication among 
many borrowers who are targeted by predatory lenders.

While there are no comprehensive data, government officials and 
consumer advocacy organizations have reported that elderly consumers 
have been disproportionately targeted and victimized by predatory 
lenders. According to these officials and organizations, elderly 
consumers appear to be favored targets for several reasons--for 
example, because they may have substantial equity in their homes or 
live on limited incomes that make them susceptible to offers for quick 
access to cash. Further, some seniors have cognitive or physical 
impairments such as poor eyesight, hearing, or mobility that may limit 
their ability to access competitive sources of credit. Most consumer 
financial education efforts seek to serve the general consumer 
population, but a few education initiatives have focused specifically 
on predatory lending and the elderly. Most legal assistance related to 
predatory lending aims at assisting the general population of 
consumers, although some is focused on elderly consumers in particular.

Principal Findings:

Federal Agencies Have Taken Enforcement and Other Actions to Address 
Predatory Lending, but Face Challenges:

Federal agencies and regulators have used a number of federal laws to 
combat predatory lending practices. Among the most frequently used 
laws--HOEPA, the FTC Act, TILA, and RESPA--only HOEPA was specifically 
designed to address predatory lending. Enacted in 1994, HOEPA places 
restrictions on certain high-cost loans, including limits on prepayment 
penalties and balloon payments and prohibitions against negative 
amortization. However, HOEPA covers only loans that exceed certain rate 
or fee triggers, and although comprehensive data are lacking, it 
appears that HOEPA covers only a limited portion of all subprime loans. 
The FTC Act, enacted in 1914 and amended on numerous occasions, 
authorizes FTC to prohibit and take action against unfair or deceptive 
acts or practices in or affecting commerce. TILA and RESPA are designed 
in part to provide consumers with accurate information about the cost 
of credit.

Other federal laws that have been used to address predatory lending 
practices include criminal fraud statutes that prohibit certain types 
of fraud sometimes used in abusive lending schemes, such as forgery and 
false statements. Also, the Fair Housing Act and Equal Credit 
Opportunity Act--which prohibit discrimination in housing-related 
transactions and the extension of credit, respectively--have been used 
in cases against abusive lenders that have targeted certain protected 
groups.

Using these or other authorities, federal agencies have taken a number 
of enforcement actions and other steps, such as issuing guidance and 
revising regulations.

* Among federal agencies, FTC has a prominent role in combating 
predatory lending because of its responsibilities in implementing and 
enforcing certain federal laws among lending institutions that are not 
depository institutions supervised by federal banking regulators. FTC 
has reported that it has filed 19 complaints--17 since 1998--alleging 
deceptive or other illegal practices by mortgage lenders or brokers and 
that some actions have resulted in multimillion dollar settlements. For 
example, in 2002 FTC settled a complaint against a lender charged with 
engaging in systematic and widespread deceptive and abusive lending 
practices. According to FTC staff, close to 1 million borrowers will 
receive about $240 million in restitution under the settlement.

* DOJ, which is responsible for enforcing certain federal civil rights 
laws, has filed an enforcement action on behalf of the FTC and 
identified two additional enforcement actions it has taken that are 
related to predatory mortgage lending practices. The statutes DOJ 
enforces only address predatory lending practices when they are alleged 
to be discriminatory.

* HUD has undertaken enforcement activities related to abusive lending 
that primarily focus on reducing losses to the FHA insurance fund, most 
notably violations of criminal fraud statutes and FHA regulations 
through "property flipping" schemes, which in some cases can harm 
borrowers by leaving them with mortgage loans that may far exceed the 
value of their homes.[Footnote 3] HUD has also taken three enforcement 
actions in abusive mortgage lending cases for violations of RESPA's 
prohibitions on certain types of fees.

* Federal banking regulators have stated that their monitoring and 
examination activities have uncovered little evidence of predatory 
lending in federally regulated depository institutions. Four of the 
five federal banking regulators reported taking no formal enforcement 
actions involving predatory mortgage lending against the institutions 
they regulate, while the fifth--OCC--reported that it has taken one 
formal enforcement action against a bank engaged in abusive mortgage 
lending. Regulators noted that they have taken informal enforcement 
actions to address questionable practices raised during the examination 
process and required their institutions to take corrective action.

* The banking regulators have also issued guidance to the institutions 
they supervise on avoiding direct or indirect involvement in predatory 
lending. In addition, the Board has made changes to its regulations 
implementing HOEPA that, among other things, increase the number of 
loans HOEPA covers. The Board also made changes to its regulations 
implementing the Home Mortgage Disclosure Act that make it easier to 
analyze potential patterns of predatory lending.

Federal agencies and banking regulators have coordinated their efforts 
to address predatory lending on certain occasions through participation 
in interagency working groups and through joint enforcement actions. 
For example, FTC, DOJ, and HUD coordinated to take an enforcement 
action against Delta Funding Corporation, with each agency 
investigating and bringing actions for violations of the laws within 
its jurisdiction.

Issues related to federal oversight and regulation of certain nonbank 
mortgage lenders may challenge efforts to combat predatory lending. 
Nonbank mortgage lending companies owned by financial or bank holding 
companies (nonbank mortgage lending subsidiaries), such as finance and 
mortgage companies, account for an estimated 24 percent of subprime 
loan orginations, according to HUD, and some have been the target of 
notable federal and state enforcement actions involving allegations of 
abusive lending.[Footnote 4] FTC is the primary federal enforcer of 
consumer protection laws for these nonbank subsidiaries, but it is a 
law enforcement rather than supervisory agency. Thus, FTC's mission and 
resource allocations are focused on conducting investigations in 
response to consumer complaints and other information rather than on 
routine monitoring and examination responsibilities. In contrast, the 
Board conducts periodic examinations of financial and bank holding 
companies and, under the Bank Holding Company Act, is authorized to 
monitor and examine the subsidiaries of a bank holding company under 
certain circumstances. However, this authority does not clearly extend 
to routine examinations of nonbank subsidiaries of these holding 
companies with regard to laws pertinent to predatory lending. In 
addition, the Board does not have specific authority under pertinent 
federal consumer protection laws to institute an enforcement action 
against a nonbank subsidiary of a financial or bank holding company. 
Granting the Board concurrent enforcement authority with the FTC for 
these nonbank subsidiaries of holding companies could help deter some 
predatory lending.

Many States Have Passed Laws Addressing Predatory Lending, but Federal 
Agencies Have Preempted Some Statutes:

In response to concerns about the growth of predatory lending and the 
limitations of existing laws, 25 states, the District of Columbia, and 
11 localities have passed their own laws addressing predatory lending 
practices, according to a database that tracks such laws. Most of these 
laws regulate and restrict the terms and characteristics of high-cost 
loans--that is, loans that exceed certain rate or fee thresholds. While 
some state statutes follow the thresholds for covered loans established 
in HOEPA, many set lower thresholds in order to cover more loans than 
the federal statute. The statutes vary, but they generally cover a 
variety of predatory practices, such as balloon payments and prepayment 
penalties, and some include restrictions on such things as mandatory 
arbitration clauses that can restrict borrowers' ability to obtain 
legal redress through the courts.

Some states have also increased the regulation of and licensing 
requirements for mortgage lenders and brokers, in part to address 
concerns that some unscrupulous lenders and brokers have been 
responsible for lending abuses and that these entities have not been 
adequately regulated. For example, some states have increased the 
educational requirements that lenders and brokers must meet in order to 
obtain a license. In recent years, state law enforcement agencies and 
banking regulators have also taken a number of actions against mortgage 
lenders involving predatory lending. For example, an official from 
Washington State's Department of Financial Institutions reported that 
the department had taken several enforcement actions to address 
predatory lending, including one that resulted in a lender being 
ordered to return more than $700,000 to 120 Washington borrowers for 
allegedly deceiving them and charging prohibited fees.

Three federal banking regulators--NCUA, OCC, and OTS--have issued 
opinions stating that federal laws preempt some state predatory lending 
laws for the institutions that they regulate. The regulators note that 
such preemption creates a more uniform regulatory framework, relieves 
lending institutions of the burden of complying with a hodgepodge of 
state and federal laws, and avoids state laws that may restrict 
legitimate lending activities. State officials and consumer advocates 
that oppose preemption argue that federal laws do not effectively 
protect consumers against predatory lending practices and that federal 
regulators do not devote sufficient resources toward enforcement of 
consumer protection laws for the institutions they oversee.

The Secondary Market May Benefit Consumers but Can Also Facilitate 
Predatory Lending:

In 2002, an estimated 63 percent of subprime loans, worth $134 billion, 
were securitized and sold on the secondary market.[Footnote 5] The 
existence of a secondary market for subprime loans has benefited 
consumers by increasing the sources of funds available to subprime 
lenders, potentially lowering interest rates and origination costs for 
subprime loans. However, the secondary market may also inadvertently 
facilitate predatory lending by providing a source of funds for 
unscrupulous originators, allowing them to quickly sell off loans with 
predatory terms. Further, originators of subprime mortgage loans 
generally make their profits from high origination fees, and the 
existence of a secondary market may reduce the incentive for these 
lenders to ensure that borrowers can repay.

Purchasers of mortgage loans undertake a process of due diligence 
designed to avoid legal, financial, and reputational risk. Prior to the 
sale, purchasers typically review electronic data containing 
information on the loans, such as the loan amount, interest rate, and 
credit score of the borrower. Purchasers also often physically review a 
sample of individual loans, including such items as the loan 
application and settlement forms. However, the degree of due diligence 
purchasers undertake varies. Fannie Mae and Freddie Mac--which are 
estimated to account for a relatively small portion of the secondary 
market for subprime loans--told us that they undertake a series of 
measures aimed at avoiding the purchase of loans with abusive 
characteristics that may have harmed borrowers. In contrast, according 
to some market participants, the due diligence of other secondary 
market purchasers of residential mortgages may be more narrowly focused 
on the creditworthiness of the loans and on their compliance with 
federal, state, and local laws. However, even the most stringent 
efforts cannot uncover some predatory loans. For example, due diligence 
by secondary market purchasers may be unable to uncover fraud that 
occurred during the loan underwriting or approval process, some 
excessive or unwarranted fees, or loan flipping.

Under some state and local legislation, purchasers of mortgages or 
mortgage-backed securities on the secondary market may be liable for 
violations committed by the originating lenders--referred to as 
"assignee liability" provisions. HOEPA contains such a provision for 
loans above certain thresholds, as do the antipredatory lending laws in 
at least eight states and the District of Columbia, according to a 
database that tracks state predatory lending laws. Assignee liability 
is intended to discourage secondary market participants from purchasing 
loans that may have predatory features and to provide an additional 
source of redress for victims of abusive lenders. However, according to 
some secondary market participants, assignee liability can also 
discourage legitimate lending activity. Secondary market purchasers 
that are unwilling to assume the potential risks associated with 
assignee liability provisions have stopped purchasing, or announced 
their intention to stop purchasing, mortgages originated in areas 
covered by such provisions. Credit rating agencies--whose decisions 
influence securitizers' ability to sell the securities--have asserted 
that assignee liability provisions can make it difficult for them to 
measure the risk associated with pools of loans. Assignee liability 
provisions of the Georgia Fair Lending Act were blamed for causing 
several participants in the mortgage lending industry to withdraw from 
the market, and the provisions were subsequently repealed.

The Usefulness of Consumer Education, Counseling, and Disclosures in 
Deterring Predatory Lending May Be Limited:

In response to widespread concern about low levels of financial 
literacy among consumers, federal agencies have conducted and funded 
financial education for consumers as a means of improving consumers' 
financial literacy and, in some cases, raising consumers' awareness of 
predatory lending practices. For example, FDIC sponsors a financial 
literacy program, MoneySmart, which is designed for low-and moderate-
income individuals with little banking experience. Other federal 
agencies, including the Board, FTC, HUD, and OTS, engage in activities 
such as distributing educational literature, working with community 
groups, and providing institutions they regulate with guidance on 
encouraging financial literacy. Federal agencies have also taken some 
actions to coordinate their efforts to educate consumers about 
predatory lending. For example, in October 2003, the Interagency Task 
Force on Fair Lending, which consists of 10 federal agencies, published 
a brochure that alerts consumers to the potential pitfalls of home 
equity loans, particularly high-cost loans. A number of states, 
nonprofits, and trade organizations also conduct consumer financial 
education activities, which sometimes focus specifically on raising 
awareness about predatory lending.

While representatives of the mortgage lending industry and consumer 
groups have noted that financial education may make some consumers less 
susceptible to abusive lending practices, GAO's review of literature 
and interviews with consumer and federal officials suggest that 
consumer education by itself has limits as a tool for deterring 
predatory lending. First, mortgage loans are complex financial 
transactions, and many different factors--including the interest rate, 
fees, provisions of the loan, and situation of the borrower--determine 
whether a loan is in a borrower's best interests. Even an excellent 
campaign of consumer education is unlikely to provide less 
sophisticated consumers with enough information to properly assess 
whether a loan contains abusive terms. Second, predatory lenders and 
brokers tend to use aggressive marketing tactics that are designed to 
confuse consumers. Broad-based campaigns to make consumers aware of 
predatory lending may not be sufficient to prevent many consumers--
particularly those who may be uneducated or unsophisticated in 
financial matters--from succumbing to such tactics. Finally, the 
consumers who are often the targets of predatory lenders are also some 
of the hardest to reach with educational information.

Prepurchase mortgage counseling--which can offer a "third party" review 
of a prospective mortgage loan--may help borrowers avoid predatory 
loans, in part by alerting consumers to predatory loan terms and 
practices. HUD supports a network of approximately 1,700 HUD-approved 
counseling agencies across the country and in some cases provides 
funding for their activities. While beneficial, the role of mortgage 
counseling in preventing predatory lending is likely to be limited. 
Borrowers do not always attend such counseling, and when they do, 
counselors may not have access to all of the loan documents needed to 
review the full final terms and provisions before closing. In addition, 
counseling may be ineffective against lenders and brokers engaging in 
fraudulent practices, such as falsifying applications or loan 
documents, that cannot be detected during a prepurchase review of 
mortgage loan documents.

Finally, disclosures made during the mortgage loan process, while 
important, may be of limited usefulness in reducing the incidence of 
predatory lending practices. TILA and RESPA have requirements covering 
the content, form, and timing of the information that must be disclosed 
to borrowers. However, industry and consumer advocacy groups have 
publicly expressed dissatisfaction with the current disclosure system. 
HUD issued proposed rules in July 2002 intended to streamline the 
disclosure process and make disclosures more understandable and timely, 
and debate over the proposed rules has been contentious. Although 
improving loan disclosures would undoubtedly have benefits, once again 
the inherent complexity of loan transactions may limit any impact on 
the incidence of predatory lending practices. Moreover, even a 
relatively clear and transparent system of disclosures may be of 
limited use to borrowers who lack sophistication about financial 
matters, are not highly educated, or suffer physical or mental 
infirmities. Finally, as with mortgage counseling, revised disclosure 
requirements would not necessarily help protect consumers against 
lenders and brokers that engage in outright fraud or that mislead 
borrowers about the terms of loans in the disclosure documents 
themselves.

Predatory Lenders May Target Elderly Consumers:

Consistent observational and anecdotal evidence, along with some 
limited data, indicates that, for a variety of reasons, elderly 
homeowners are disproportionately the targets of predatory lending. 
Abusive lenders tend to target homeowners who have substantial equity 
in their homes, as many older homeowners do. In addition, some brokers 
and lenders aggressively market home equity loans as a source of cash, 
particularly for older homeowners who may have limited incomes but 
require funds for major home repairs or medical expenses. Moreover, 
diseases and physical impairments associated with aging--such as 
declining vision, hearing, or mobility--can restrict elderly consumers' 
ability to access financial information and compare credit terms. Some 
older persons may also have diminished cognitive capacity, which can 
impair their ability to comprehend and make informed judgments on 
financial issues. Finally, several advocacy groups have noted that some 
elderly people lack social and family support systems, potentially 
increasing their susceptibility to unscrupulous lenders who may market 
loans by making home visits or offering other personal contact.

Because the elderly may be more susceptible to predatory lending, 
government agencies and consumer advocacy organizations have focused 
some of their education efforts on this population. For example, the 
Justice Department offers on its Web site the guide "Financial Crimes 
Against the Elderly," which includes references to predatory lending. 
The Department of Health and Human Services' Administration on Aging 
provides grants to state and nonprofit agencies for programs aimed at 
preventing elder abuse, including predatory lending practices targeting 
older consumers. The AARP, which represents Americans age 50 and over, 
sponsors a number of financial education efforts, including a 
borrower's kit that contains tips for avoiding predatory lending.

Consumer protection and fair lending laws that have been used to 
address predatory lending do not generally have provisions specific to 
elderly persons, although the Equal Credit Opportunity Act does 
prohibit unlawful discrimination on the basis of age in connection with 
any aspect of a credit transaction. Federal and state enforcement 
actions and private class-action lawsuits involving predatory lending 
generally seek to provide redress to large groups of consumers. Little 
comprehensive data exist on the age of consumers involved in these 
actions, but a few cases have involved allegations of predatory lending 
targeting elderly borrowers. For example, FTC, six states, AARP, and 
private plaintiffs settled a case with First Alliance Mortgage Company 
in March 2002 for more than $60 million. An estimated 28 percent of the 
8,712 borrowers represented in the class-action suit were elderly. The 
company was accused of using misrepresentation and unfair and deceptive 
practices to lure senior citizens and those with poor credit histories 
into entering into abusive loans. In addition, some nonprofit groups--
such as the AARP Foundation Litigation, the National Consumer Law 
Center, and South Brooklyn Legal Services' Foreclosure Prevention 
Project--provide legal services that focus, in part, on helping elderly 
victims of predatory lending.

Matters for Congressional Consideration:

To enable greater oversight of and potentially deter predatory lending 
from occurring at certain nonbank lenders, Congress should consider 
making appropriate statutory changes to grant the Board of Governors of 
the Federal Reserve System the authority to routinely monitor and, as 
necessary, examine the nonbank mortgage lending subsidiaries of 
financial and bank holding companies for compliance with federal 
consumer protection laws applicable to predatory lending practices. 
Also, Congress should consider giving the Board specific authority to 
initiate enforcement actions under those laws against these nonbank 
mortgage lending subsidiaries.

Agency Comments and Our Evaluation:

GAO provided a draft of this report to the Board, DOJ, FDIC, FTC, HUD, 
NCUA, OCC, OTS, and the Department of the Treasury for review and 
comment. The agencies provided technical comments that have been 
incorporated where appropriate. In addition, the Board, DOJ, FDIC, FTC, 
HUD, and NCUA provided general comments, which are discussed in greater 
detail at the end of chapter 2. The written comments of the Board, DOJ, 
HUD, and NCUA are printed in appendixes II through V.

The Board commented that, while the existing structure has not been a 
barrier to Federal Reserve oversight, the approach recommended in our 
Matter for Congressional Consideration would likely be beneficial by 
catching some abusive practices that might not be caught otherwise. The 
Board also noted that the approach would pose tradeoffs, such as 
different supervisory schemes being applied to nonbank mortgage lenders 
based on whether or not they are part of a holding company, and 
additional costs. Because nonbank mortgage lenders that are part of a 
financial or bank holding company currently can be examined by the 
Board in some circumstances, they are already subject to a different 
supervisory scheme than other such lenders. We agree that the costs to 
the lenders and the Board would increase to the extent the Board 
exercised any additional authority to monitor and examine nonbank 
lenders, and believe that Congress should consider both the potential 
costs and benefits of clarifying the Board's authorities.

The FTC expressed concern that our report could give the impression 
that we are suggesting that Congress consider giving the Board sole 
jurisdiction--rather than concurrent jurisdiction with FTC--over 
nonbank subsidiaries of holding companies. Our report did not intend to 
suggest that the Congress make any change that would necessarily affect 
FTC's existing authority for these entities, and we modified the report 
to clarify this point.

DOJ commented that the report will be helpful in assessing the 
department's role in the federal government's efforts to develop 
strategies to combat predatory lending. DOJ disagreed with our 
inclusion in the report of "property or loan flips," which it said was 
a traditional fraud scheme but not a type of predatory lending. As we 
noted in our report, there is no precise definition of predatory 
lending. We incorporated a discussion of property flipping--quick 
resales of recently sold FHA properties--because HUD officials 
characterize some of these schemes as involving predatory practices 
that can harm borrowers. We included loan flipping--the rapid and 
repeated refinancing of a loan without benefit to the borrower--in our 
report because this is widely characterized in the literature and by 
federal, state, and nonprofit agency officials as a predatory lending 
practice.

FDIC noted that our Matter for Congressional Consideration focuses on 
nonbank subsidiaries of holding companies even though these entities 
comprise, according to HUD, only about 20 percent of all subprime 
lenders. We recognize that our Matter does not address all subprime 
lenders or other institutions that may be engaging in predatory 
lending, but believe it represents a potential step in addressing 
predatory lending among a significant segment of mortgage lenders. NCUA 
said that the report provides a useful discussion of the issues and the 
agency concurs with our Matter for Congressional Consideration. HUD, in 
its comment letter, described a variety of actions it has taken that it 
characterized as combating predatory lending, particularly with regard 
to FHA-insured loans.

[End of section]

Chapter 1: Introduction:

In recent years, abuses in home mortgage lending--commonly referred to 
as "predatory lending"--have increasingly garnered the attention and 
concern of policymakers, consumer advocates, and participants in the 
mortgage lending industry.[Footnote 6] Once relatively rare, government 
enforcement actions and private party lawsuits against institutions 
accused of abusive home mortgage lending have increased dramatically in 
the last 10 years. In 2002 alone, there were dozens of settlements 
resulting from accusations of abusive lending. In the largest of these, 
a major national mortgage lender agreed to pay up to $484 million to 
tens of thousands of affected consumers.

The Nature and Attributes of Predatory Lending:

Predatory lending is an umbrella term that is generally used to 
describe cases in which a broker or originating lender takes unfair 
advantage of a borrower, often through deception, fraud, or 
manipulation, to make a loan that contains terms that are 
disadvantageous to the borrower. While there is no universally accepted 
definition, predatory lending is associated with the following loan 
characteristics and lending practices:

* Excessive fees. Abusive loans may include fees that greatly exceed 
the amounts justified by the costs of the services provided and the 
credit and interest rate risks involved. Lenders may add these fees to 
the loan amounts rather than requiring payment up front, so the 
borrowers may not know the exact amount of the fees they are paying.

* Excessive interest rates. Mortgage interest rates can legitimately 
vary based on the characteristics of borrowers (such as 
creditworthiness) and of the loans themselves. However, in some cases, 
lenders may charge interest rates that far exceed what would be 
justified by any risk-based pricing calculation, or lenders may "steer" 
a borrower with an excellent credit record to a higher-rate loan 
intended for borrowers with poor credit histories.

* Single-premium credit insurance. Credit insurance is a loan product 
that repays the lender should the borrower die or become disabled. In 
the case of single-premium credit insurance, the full premium is paid 
all at once--by being added to the amount financed in the loan--rather 
than on a monthly basis. Because adding the full premium to the amount 
of the loan unnecessarily raises the amount of interest borrowers pay, 
single-premium credit insurance is generally considered inherently 
abusive.

* Lending without regard to ability to repay. Loans may be made without 
regard to a borrower's ability to repay the loan. In these cases, the 
loan is approved based on the value of the asset (the home) that is 
used as collateral. In particularly egregious cases, monthly loan 
payments have equaled or exceeded the borrower's total monthly income. 
Such lending can quickly lead to foreclosure of the property.

* Loan flipping. Mortgage originators may refinance borrowers' loans 
repeatedly in a short period of time without any economic gain for the 
borrower. With each successive refinancing, these originators charge 
high fees that "strip" borrowers' equity in their homes.

* Fraud and deception. Predatory lenders may perpetrate outright fraud 
through actions such as inflating property appraisals and doctoring 
loan applications and settlement documents. Lenders may also deceive 
borrowers by using "bait and switch" tactics that mislead borrowers 
about the terms of their loan. Unscrupulous lenders may fail to 
disclose items as required by law or in other ways may take advantage 
of borrowers' lack of financial sophistication.

* Prepayment penalties. Penalties for prepaying a loan are not 
necessarily abusive, but predatory lenders may use them to trap 
borrowers in high-cost loans.

* Balloon payments. Loans with balloon payments are structured so that 
monthly payments are lower but one large payment (the balloon payment) 
is due when the loan matures. Predatory loans may contain a balloon 
payment that the borrower is unlikely to be able to afford, resulting 
in foreclosure or refinancing with additional high costs and fees. 
Sometimes, lenders market a low monthly payment without adequate 
disclosure of the balloon payment.

Predatory lending is difficult to define partly because certain loan 
attributes may or may not be abusive, depending on the overall context 
of the loan and the borrower. For example, although prepayment 
penalties can be abusive in the context of some loans, in the context 
of other loans they can benefit borrowers by reducing the overall cost 
of loans by reducing the lender's prepayment risk.

According to federal and industry officials, most predatory mortgage 
lending involves home equity loans or loan refinancings rather than 
loans for home purchases. Homeowners may be lured into entering 
refinance loans through aggressive solicitations by mortgage brokers or 
lenders that promise "savings" from debt consolidation or the ability 
to "cash out" a portion of a borrower's home equity. Predatory lending 
schemes may also involve home improvement contractors that work in 
conjunction with a lender. The contractor may offer to arrange 
financing for necessary repairs or improvements, and then perform 
shoddy work or fail to complete the job, while leaving the borrower 
holding a high-cost loan. Abuses in loan servicing have also 
increasingly become a concern. Abusive mortgage lenders or servicing 
agents may charge improper late fees, require unjustified homeowner's 
insurance, or not properly credit payments. In November 2003, the 
Federal Trade Commission (FTC) and the Department of Housing and Urban 
Development (HUD) reached a settlement with a large national mortgage 
servicer, Fairbanks Capital, after the company was accused of unfair, 
deceptive, and illegal practices in the servicing of mortgage loans. 
The settlement will provide $40 million to reimburse consumers.

Originating lenders or brokers that engage in abusive practices can 
make high profits through the excessive points and fees that they 
charge, particularly when borrowers make their payments regularly. Even 
when a loan enters foreclosure, the originator of a predatory loan may 
still make a profit due to the high up-front fees it has already 
collected. Moreover, a lender that sells a loan in the secondary market 
shortly after origination no longer necessarily faces financial risk 
from foreclosure.[Footnote 7] Similarly, a mortgage broker that 
collects fees up front is not affected by foreclosure of the loan.

According to HUD and community groups, predatory lending not only harms 
individual borrowers but also can weaken communities and neighborhoods 
by causing widespread foreclosures, which reduce property values. 
Predatory lending also serves to harm the reputation of honest and 
legitimate lenders, casting them in the same suspicious light as those 
making unfair loans and thus increasing their reluctance to extend 
credit to the traditionally underserved communities that are often 
targeted by abusive lenders.

Emergence of Subprime Mortgage Market:

The market for mortgage loans has evolved considerably over the past 20 
years. Among the changes has been the emergence of a market for 
subprime mortgage loans. Most mortgage lending takes place in what is 
known as the prime market, which encompasses traditional lenders and 
borrowers with credit histories that put them at low risk of default. 
In contrast, the subprime market serves borrowers who have poor or no 
credit histories or limited incomes, and thus cannot meet the credit 
standards for obtaining loans in the prime market.[Footnote 8] It is 
widely accepted that the overwhelming majority of predatory lending 
occurs in the subprime market, which has grown dramatically in recent 
years. Subprime mortgage originations grew from $34 billion in 1994 to 
more than $213 billion in 2002 and in 2002 represented 8.6 percent of 
all mortgage originations, according to data reported by the trade 
publication Inside B&C Lending. Several factors account for the growth 
of the subprime market, including changes in tax law that increased the 
tax advantages of home equity loans, rapidly increasing home prices 
that have provided many consumers with substantial home equity, entry 
into the subprime market by companies that had previously made only 
prime loans, and the expansion of credit scoring and automated 
underwriting, which has made it easier for lenders to price the risks 
associated with making loans to credit-impaired borrowers.

Originating lenders charge higher interest rates and fees for subprime 
loans than they do for prime loans to compensate for increased risks 
and for higher servicing and origination costs. In many cases, 
increased risks and costs justify the additional cost of the loan to 
the borrower, but in some cases they may not. Because subprime loans 
involve a greater variety and complexity of risks, they are not the 
uniformly priced commodities that prime loans generally are. This lack 
of uniformity makes comparing the costs of subprime loans difficult, 
which can increase borrowers' vulnerability to abuse.

However, subprime lending is not inherently abusive, and certainly all 
subprime loans are not predatory. Although some advocacy groups claim 
that subprime lending involves abusive practices in a majority of 
cases, most analysts believe that only a relatively small portion of 
subprime loans contain features that may be considered abusive. In 
addition, according to officials at HUD and the Department of the 
Treasury, the emergence of a subprime mortgage market has enabled a 
whole class of credit-impaired borrowers to buy homes or access the 
equity in their homes. At the same time, however, federal officials and 
consumer advocates have expressed concerns that the overall growth in 
subprime lending and home equity lending in general has been 
accompanied by a corresponding increase in predatory lending. For 
example, lenders and brokers may use aggressive sales and marketing 
tactics to convince consumers who need cash to enter into a home equity 
loan with highly disadvantageous terms.

Originators of subprime loans are most often mortgage and consumer 
finance companies, but can also be banks, thrifts, and other 
institutions. Some originators focus primarily on making subprime 
loans, while others offer a variety of prime and subprime loans. 
According to HUD, 178 lenders concentrated primarily on subprime 
mortgage lending in 2001. Fifty-nine percent of these lenders were 
independent mortgage companies (mortgage bankers and finance 
companies), 20 percent were nonbank subsidiaries of financial or bank 
holding companies, and the remainder were other types of financial 
institutions. Only 10 percent were federally regulated banks and 
thrifts.[Footnote 9]

About half of all mortgage loans are made through mortgage brokers that 
serve as intermediaries between the borrower and the originating 
lender. According to government and industry officials, while the great 
majority of mortgage brokers are honest, some play a significant role 
in perpetrating predatory lending. A broker can be paid for his 
services from up-front fees directly charged to the borrower and/or 
through fees paid indirectly by the borrower through the lender in what 
is referred to as a "yield spread premium."[Footnote 10] Some consumer 
advocates argue that compensating brokers this way gives brokers an 
incentive to push loans with higher interest rates and fees. Brokers 
respond that yield spread premiums in fact allow them to reduce the 
direct up-front fees they charge consumers.

The Extent of Predatory Lending Is Unknown:

Currently no comprehensive and reliable data are available on the 
extent of predatory lending nationwide, for several reasons. First, the 
lack of a standard definition of what constitutes predatory lending 
makes it inherently difficult to measure. Second, any comprehensive 
data collection on predatory lending would require access to a 
representative sample of loans and to information that can only be 
extracted manually from the physical loan files. Given that such 
records are not only widely dispersed but also generally proprietary, 
to date comprehensive data have not been collected.[Footnote 11] 
Nevertheless, policymakers, advocates, and some lending industry 
representatives have expressed concerns in recent years that predatory 
lending is a significant problem. Although the extent of predatory 
lending cannot be easily quantified, several indicators suggest that it 
may be prevalent. Primary among these indicators are legal settlements, 
foreclosure patterns, and anecdotal evidence.

In the past 5 years, there have been a number of major settlements 
resulting from government enforcement actions and private party 
lawsuits accusing lenders of abusive lending practices affecting large 
numbers of borrowers. Among the largest of these settlements have been 
the following:

* In October 2002, the lender Household International agreed to pay up 
to $484 million to homeowners across the nation to settle allegations 
by states that it used unfair and deceptive lending practices to make 
mortgage loans with excessive interest and charges.

* In September 2002, Citigroup agreed to pay up to $240 million to 
resolve charges by FTC and private parties that Associates First 
Capital Corporation and Associates Corporation of North America (The 
Associates) engaged in systematic and widespread deceptive and abusive 
lending practices.[Footnote 12] According to FTC staff, under the 
settlement close to 1 million borrowers will receive compensation for 
loans that misrepresented insurance products and that contained other 
abusive terms.

* In response to allegations of deceptive marketing and abusive 
lending, First Alliance Mortgage Company entered into a settlement in 
March 2002 with FTC, six states, and private parties to compensate 
nearly 18,000 borrowers more than $60 million dollars.

Further, between January 1998 and September 1999, the foreclosure rate 
for subprime loans was more than 10 times the foreclosure rate for 
prime loans.[Footnote 13] While it would be expected that loans made to 
less creditworthy borrowers would result in some increased rate of 
foreclosure, the magnitude of this difference has led many analysts to 
suggest that it is at least partly the result of abusive lending, 
particularly of loans made without regard to the borrower's ability to 
repay. Moreover, the rate of foreclosures of subprime mortgage loans 
has increased substantially since 1990, far exceeding the rate of 
increase for subprime originations. A study conducted for HUD noted 
that while the increased rate in subprime foreclosures could be the 
result of abusive lending, it could also be the result of other 
factors, such as an increase in subprime loans that are made to the 
least creditworthy borrowers.[Footnote 14]

In the early 1990s, anecdotal evidence began to emerge suggesting that 
predatory lending was on the rise. Legal services agencies throughout 
the country reported an increase in clients who were facing foreclosure 
as a result of mortgage loans that included abusive terms and 
conditions. These agencies noted that for the first time they were 
seeing large numbers of consumers, particularly elderly and minority 
borrowers, who were facing the loss of homes they had lived in for many 
years because of a high-cost refinancing. Similar observations were 
also reported extensively at forums on predatory lending sponsored by 
HUD and the Department of the Treasury in five cities during 2000, at 
hearings held in four cities during 2000 by the Board of Governors of 
the Federal Reserve System (the Board), and at congressional hearings 
on the issue in 1998, 2001, 2002, and 2003.[Footnote 15]

Federal officials and consumer advocates maintain that predatory 
lenders often target certain populations, including the elderly and 
some low-income and minority communities. Some advocates say that in 
many cases, predatory lenders target communities that are underserved 
by legitimate institutions, such as banks and thrifts, leaving 
borrowers with limited credit options. According to government 
officials and legal aid organizations, predatory lending appears to be 
more prevalent in urban areas than in rural areas, possibly because of 
the concentration of certain target groups in urban areas and because 
the aggressive marketing tactics of many predatory lenders may be more 
efficient in denser neighborhoods.[Footnote 16]

Emergence of Predatory Lending As Policy Issue:

The federal government began addressing predatory home mortgage lending 
as a significant policy issue in the early 1990s. In 1994, the Congress 
passed the Home Ownership and Equity Protection Act (HOEPA), an 
amendment to the Truth in Lending Act that set certain restrictions on 
"high-cost" loans in order to protect consumers.[Footnote 17] In 1998, 
as part of an overall review of the statutory requirements for mortgage 
loans, HUD and the Board released a report recommending that additional 
actions be taken to protect consumers from abusive lending 
practices.[Footnote 18] HUD and the Department of the Treasury formed a 
task force in 2000 that produced the report Curbing Predatory Home 
Mortgage Lending, which made several dozen recommendations for 
addressing predatory lending.[Footnote 19], [Footnote 20]

As discussed in chapters 2 and 3, a variety of federal, state, and 
local laws have been used to take civil and criminal enforcement 
actions against institutions and individuals accused of abusive lending 
practices. Various federal agencies have responsibilities for enforcing 
laws related to predatory lending. In addition, some state or local 
enforcement authorities--including attorneys general, banking 
regulators, and district attorneys--have used state and local laws 
related to consumer protection and banking to address predatory lending 
practices. In addition, many private attorneys and advocacy groups have 
pursued private legal actions, including class actions, on behalf of 
borrowers who claim to have been victimized by abusive lending.

Objectives, Scope, and Methodology:

Our objectives were to describe (1) federal laws related to predatory 
lending and federal agencies' efforts to enforce them; (2) the actions 
taken by the states in addressing predatory lending; (3) the secondary 
market's role in facilitating or inhibiting predatory lending; (4) how 
consumer education, mortgage counseling, and loan disclosures may deter 
predatory lending; and (5) the relationship between predatory lending 
activities and elderly consumers. The scope of this work was limited to 
home mortgage lending and did not include other forms of consumer 
loans.

To identify federal laws and enforcement activities related to 
predatory lending, we interviewed officials and reviewed documents from 
HUD, the Department of Justice (DOJ), the Department of the Treasury, 
the Federal Deposit Insurance Corporation (FDIC), FTC, the Board, the 
National Credit Union Administration (NCUA), the Office of the 
Comptroller of the Currency (OCC), and the Office of Thrift Supervision 
(OTS). We asked each agency to provide us with the enforcement actions 
they have taken that--in their assessment--were related to predatory 
home mortgage lending. We compiled and reviewed data on these 
enforcement actions and other steps these agencies have taken to 
address abusive lending practices. We also reviewed and analyzed 
federal laws that have been used to combat these practices.

To identify actions taken by states and localities, we reviewed and 
analyzed a publicly available database maintained by the law firm of 
Butera & Andrews that tracks state and municipal antipredatory lending 
legislation. We reviewed information related to this database and 
conducted interviews with the person who maintains it. In order to 
identify gaps in the completeness or accuracy of data, we compared data 
elements from this database and from three similar databases maintained 
by Lotstein Buckman, the National Conference of State Legislatures, and 
the Mortgage Bankers Association of America. We determined that the 
data were sufficiently reliable for use in this report. We also 
interviewed officials representing a wide range of state and local 
government agencies, lending institutions, and advocacy groups in a 
number of states and municipalities. In order to illustrate approaches 
taken in certain states with regard to predatory lending, we collected 
and analyzed additional information from two states, North Carolina and 
Ohio. We chose these states to illustrate the differing characteristics 
of two states' approaches to addressing predatory lending--particularly 
with regard to legislation restricting high-cost loans and tightening 
regulation of mortgage lenders and brokers. We also conducted meetings 
with the Conference of State Bank Supervisors and the National 
Association of Attorneys General that included representatives from 
several states. Additionally, we conducted interviews with OCC, OTS, 
and NCUA to understand their policies and processes on federal 
preemption of state antipredatory lending laws.

To describe the secondary market's role, we interviewed officials and 
reviewed documents from the Bond Market Association, the Securities 
Industry Association, Fannie Mae, Freddie Mac, a due diligence 
contractor, and two credit rating agencies. We also spoke with 
officials representing federal and state agencies, and with 
representatives of the lending industry and consumer groups. In 
addition, we reviewed and analyzed several local and state laws 
containing assignee liability provisions.

To describe the role of consumer education, mortgage counseling, and 
disclosures in deterring predatory lending, we interviewed officials 
from entities that engage in consumer financial education, including 
several federal and state agencies, industry trade groups, and local 
nonprofit organizations such as the Long Island Housing Partnership, 
the Greater Cincinnati Mortgage Counseling Service, and the Foreclosure 
Prevention Project of South Brooklyn Legal Services. We also reviewed 
and analyzed the materials these entities produce. Additionally, we 
conducted a literature review of studies that have evaluated the 
effectiveness of consumer education and homeownership counseling.

To describe the impact on older consumers, we conducted a literature 
review on predatory lending and the elderly and examined studies on 
financial exploitation of the elderly. We also examined certain 
enforcement activities and private party lawsuits in which elderly 
consumers may have been targeted by abusive lenders. We interviewed 
federal and state agencies that have addressed issues of financial 
abuse of the elderly, including the Department of Health and Human 
Services' Administration on Aging and the National Institute on Aging, 
as well as nonprofit groups that have addressed this issue, including 
AARP (formerly known as the American Association of Retired Persons).

In addressing all of the objectives, we met with a wide range of 
organizations that represent consumers, among them the National 
Community Reinvestment Coalition, the Coalition for Responsible 
Lending, the National Consumer Law Center, the Association of Community 
Organizations for Reform Now, and AARP. We also met with organizations 
representing various aspects of the mortgage lending industry, among 
them the American Financial Services Association, the Consumer Mortgage 
Coalition, the Coalition for Fair and Affordable Lending, America's 
Community Bankers, the National Association of Mortgage Brokers, the 
Mortgage Bankers Association of America, and the National Home Equity 
Mortgage Association.

We provided a draft of this report to the Board, DOJ, FDIC, FTC, HUD, 
NCUA, OCC, OTS, and the Department of the Treasury for review and 
comment. The agencies provided technical comments that have been 
incorporated, as appropriate, as well as general comments that are 
discussed at the end of chapter 2. The written comments of the Board, 
DOJ, HUD, and NCUA are printed in appendixes II through V. We conducted 
our work between January 2003 and January 2004 in accordance with 
generally accepted government auditing standards in Atlanta, Boston, 
New York, San Francisco, and Washington, D.C.

[End of section]

Chapter 2: Federal Agencies Have Taken Steps to Address Predatory 
Lending, but Face Challenges:

While HOEPA is the only federal law specifically designed to combat 
predatory mortgage lending, federal agencies, including federal banking 
regulators, have used a number of federal consumer protection and 
disclosure statutes to take actions against lenders that have allegedly 
engaged in abusive or predatory lending.[Footnote 21] These statutes 
have enabled agencies to file complaints on behalf of consumers over 
issues such as excessive interest rates and fees, deceptive lending 
practices, and fraud. FTC, DOJ, HUD, and federal banking regulators 
have taken steps to address predatory lending practices through 
enforcement and civil actions, guidance, and regulatory changes. In 
some cases, agencies have coordinated their efforts through joint 
enforcement actions and participation in interagency working groups or 
task forces. However, questions of jurisdiction regarding certain 
nonbank mortgage lenders may challenge efforts to combat predatory 
lending. While the Board has authority to examine many such nonbank 
mortgage lenders under certain circumstances, it lacks clear authority 
to enforce federal consumer protection laws against them.

Federal Agencies Use a Variety of Laws to Address Predatory Lending 
Practices:

As shown in figure 1, Congress has passed numerous laws that can be 
used to protect consumers against abusive lending practices. Federal 
agencies have applied provisions of these laws to seek redress for 
consumers who have been victims of predatory lending. Among the most 
frequently used laws are TILA, HOEPA, the Real Estate Settlement 
Procedures Act (RESPA), and the FTC Act.[Footnote 22] Congress has also 
given certain federal agencies responsibility for writing regulations 
that implement these laws. For example, the Board writes Regulation Z, 
which implements TILA and HOEPA, and HUD writes Regulation X, which 
implements RESPA. Also, in some cases, DOJ has brought actions under 
criminal fraud statutes based on conduct that can constitute predatory 
lending.

Figure 1: Federal Laws and Statutes Used to Address Lending Practices 
Generally Considered to be Predatory:

[See PDF for image]

[A] HOEPA covers only a limited portion of all subprime loans.

[End of figure]

TILA, which became law in 1968, was designed to provide consumers with 
accurate information about the cost of credit. Among other things, the 
act requires lenders to disclose information about the terms of loans-
-including the amount being financed, the total finance charge, and 
information on the annual percentage rate--that can help borrowers 
understand the overall costs of their loans. TILA also provides 
borrowers with the right to cancel certain loans secured by a principal 
residence within 3 days of closing or 3 days of the time at which the 
final disclosure is made, whichever is later.[Footnote 23]

In 1994, Congress enacted the HOEPA amendments to TILA in response to 
concerns about predatory lending. HOEPA covers certain types of loans 
made to refinance existing mortgages, as well as home equity loans, 
that satisfy specific criteria.[Footnote 24] HOEPA covers only a 
limited portion of all subprime loans, although there is no 
comprehensive data on precisely what that portion is.[Footnote 25] The 
law is designed to limit predatory practices for these so-called "high-
cost" HOEPA loans in several ways. First, it places restrictions on 
loans that exceed certain rate or fee thresholds, which the Board can 
adjust within certain limits prescribed in the law. For these loans, 
the law restricts prepayment penalties, prohibits balloon payments for 
loans with terms of less than 5 years, prohibits negative amortization, 
and contains certain other restrictions on loan terms or 
payments.[Footnote 26] Second, HOEPA prohibits lenders from routinely 
making loans without regard to the borrower's ability to repay. Third, 
the law requires lenders to include disclosures in addition to those 
required by TILA for consumer credit transactions to help borrowers 
understand the terms of the high-cost loan and the implications of 
failing to make required payments. Each federal banking regulator is 
charged with enforcing TILA and HOEPA with respect to the depository 
institutions it regulates, and FTC is primarily responsible for 
enforcing the statutes for most other financial institutions, including 
independent mortgage lenders and nonbank subsidiaries of holding 
companies. In enforcing TILA and HOEPA, FTC has required violators to 
compensate borrowers for statutory violations. Under certain 
circumstances, HOEPA provides for damages in addition to the actual 
damages a person sustains as a result of a creditor's violation of the 
act.[Footnote 27]

RESPA, passed in 1974, seeks to protect consumers from unnecessarily 
high charges in the settlement of residential mortgages by requiring 
lenders to disclose details of the costs of settling a loan and by 
prohibiting certain other costs.[Footnote 28] Among its provisions is a 
prohibition against kickbacks--payments made in exchange for referring 
a settlement service, such as lender payments to real estate agents for 
the referral of business. RESPA also prohibits unearned fees such as 
adding an additional charge to a third party fee when no or nominal 
services are performed. These practices can unjustly increase the costs 
of loans and the settlement process. HUD enforces RESPA, working 
closely with federal banking regulators and other federal agencies such 
as the FTC and the Department of Justice. HUD often brings joint 
enforcement actions with these agencies, using RESPA and the statutes 
enforced by the other federal agencies. In addition, the banking 
regulators may prohibit violations of RESPA in their own regulations.

The FTC Act, enacted in 1914 and amended on numerous occasions, 
provides the FTC with the authority to prohibit and take action against 
unfair or deceptive acts or practices in or affecting commerce. FTC has 
used the act to address predatory lending abuses when borrowers have 
been misled or deceived about their loan terms.[Footnote 29]

Various criminal fraud statutes prohibit certain types of fraud 
sometimes used in abusive lending schemes, including forgery and false 
statements. DOJ and HUD have used these statutes to fight fraudulent 
schemes that have resulted in borrowers purchasing homes worth 
substantially less than their mortgage amounts or borrowers being 
unfairly stripped of the equity in their homes. HUD officials have 
described some of these fraudulent activities as constituting predatory 
lending.

The following other federal laws have been used to a lesser extent to 
address abusive lending:

* The Fair Housing Act prohibits discrimination based on race, sex, and 
other factors in housing-related transactions, and the Equal Credit 
Opportunity Act (ECOA) prohibits discrimination against borrowers in 
the extension of credit. Federal agencies have used both laws in cases 
against lenders that have allegedly targeted certain protected groups 
with abusive loans.

* The Home Mortgage Disclosure Act (HMDA) requires lenders to make 
publicly available certain data about mortgage loans. Federal agencies 
have used the data provided by HMDA to help identify possible 
discriminatory lending patterns, including those that involve abusive 
lending practices.

* The Community Reinvestment Act (CRA) requires that banking regulators 
consider a depository institution's efforts to meet the credit needs of 
its community--including low-and moderate-income neighborhoods--in 
examinations and when it applies for permission to take certain actions 
such as a merger or acquisition. An institution's fair lending record 
is taken into account in assessing CRA performance. CRA regulations 
state that abusive lending practices that violate certain federal laws 
will adversely affect an institution's CRA performance.[Footnote 30]

* Also, federal banking regulators may rely on their supervisory and 
enforcement authorities under the laws they administer, as well as on 
the Federal Deposit Insurance Act, to enforce these consumer 
protections laws and ensure that an institution's conduct with respect 
to compliance with consumer protection laws does not affect its safety 
and soundness or that of an affiliated institution.

* Finally, FTC and the banking regulators can also use the Fair Debt 
Collection Practices Act and Fair Credit Reporting Act in enforcement 
actions related to predatory lending that involve violations of credit 
reporting and loan servicing provisions.

Although a number of federal laws have been used to protect borrowers 
from abusive lending or to provide them redress, not all potentially 
abusive practices are illegal under federal law. Enforcement officials 
and consumer advocates have stated that some lenders make loans that 
include abusive features but are designed to remain below the 
thresholds that would subject them to the restrictions of HOEPA. For 
loans not covered under HOEPA, certain lending practices many consider 
to be abusive are not, depending on the circumstances, necessarily a 
violation of any federal law. For example, it is not necessarily 
illegal to charge a borrower interest rates or fees that exceed what is 
justified by the actual risk of the mortgage loan. Nor is it per se 
illegal under federal law to "steer" a borrower with good credit who 
qualifies for a prime loan into a higher cost subprime loan.[Footnote 
31] Finally, with the exception of loans covered under HOEPA, there are 
no federal statutes that expressly prohibit making a loan that a 
borrower will likely be unable to repay.[Footnote 32]

Federal Agencies Have Taken Some Enforcement Actions, but Banking 
Regulators Have Focused on Guidance and Regulatory Changes:

FTC, DOJ, and HUD have taken enforcement actions to address violations 
related to abusive lending.[Footnote 33] As of December 2003, FTC 
reported that the agency had taken 19 actions against mortgage lenders 
and brokers for predatory practices. DOJ has addressed predatory 
lending that is alleged to be discriminatory by enforcing fair lending 
laws in a limited number of cases. HUD's efforts have generally focused 
on reducing losses to the Federal Housing Administration (FHA) 
insurance fund, including implementing a number of initiatives to 
monitor lenders for violations of FHA guidelines.[Footnote 34] HUD 
reported having taken a small number of actions to enforce RESPA and 
the Fair Housing Act in cases involving predatory lending.

Federal banking regulators stated that their monitoring and examination 
activities have revealed little evidence of predatory lending practices 
by federally regulated depository institutions. Accordingly, most 
banking regulators reported that they have taken no formal enforcement 
actions related to predatory mortgage lending abuses by the 
institutions they supervise. Regulators have addressed predatory 
lending primarily by issuing guidance to their institutions on guarding 
against direct or indirect involvement in predatory lending practices 
and by making certain changes to HOEPA and HMDA regulations. In 
addition, several federal agencies have coordinated certain efforts to 
pursue enforcement actions related to predatory lending and have shared 
information on their efforts to address fair lending and predatory 
lending.

FTC Has Played the Predominant Federal Role in Enforcement Actions 
Related to Predatory Lending:

FTC is responsible for implementing and enforcing certain federal laws 
among lending institutions that are not supervised by federal banking 
regulators. FTC reported that between 1983 and 2003, it filed 19 
complaints alleging deceptive or other illegal practices by mortgage 
lenders and brokers, 17 of them filed since 1998.[Footnote 35] For a 
list of these FTC enforcement actions, see appendix I. As of December 
2003, FTC had reached settlements in all but one of the cases. In most 
of these settlements, companies have agreed to provide monetary redress 
to consumers and to halt certain practices in the future. In some 
cases, the settlements also imposed monetary penalties that the 
companies have paid to the government. Among the recent enforcement 
actions related to predatory lending that the FTC identified are the 
following:

* The Associates. In 2002, FTC settled a complaint against Associates 
First Capital Corporation and Associates Corporation of North America 
(collectively, The Associates), as well as their successor, Citigroup. 
The complaint alleged that the lender violated the FTC Act and other 
laws by, among other things, deceiving customers into refinancing debts 
into home loans with high interest rates and fees and purchasing high-
cost credit insurance. The settlement, along with a related settlement 
with private parties, provides for up to $240 million in restitution to 
borrowers.[Footnote 36]

* First Alliance. In 2002, FTC, along with several states and private 
plaintiffs, settled a complaint against First Alliance Mortgage Company 
alleging that it violated federal and state laws by misleading 
consumers about loan origination and other fees, interest rate 
increases, and monthly payment amounts on adjustable rate mortgage 
loans. The company agreed to compensate nearly 18,000 borrowers more 
than $60 million in consumer redress and to refrain from making 
misrepresentations about future offers of credit.

* Fleet Finance and Home Equity U.S.A. In 1999, Fleet Finance, Inc., 
and Home Equity U.S.A., Inc., settled an FTC complaint alleging 
violations of the FTC Act, TILA, and related regulations. These 
violations included failing to provide required disclosures about home 
equity loan costs and terms and failing to alert borrowers to their 
right to cancel their credit transactions. To settle, the company 
agreed to pay up to $1.3 million in redress and administrative costs 
and to refrain from violating TILA in the future.

* Operation Home Inequity. In 1999, FTC conducted "Operation Home 
Inequity," a law enforcement and consumer education campaign that 
sought to curb abusive practices in the subprime mortgage lending 
market. FTC reached settlements with seven subprime mortgage lenders 
that had been accused of violating a number of consumer protections 
laws, including the FTC Act, TILA, and HOEPA. Six companies were 
required to pay $572,000 in consumer redress, and all lenders were 
required to adhere to future lending restrictions. FTC staff told us 
that the operation was intended in large part to increase consumers' 
awareness of predatory lending and to provide a deterrent effect by 
warning lenders that FTC is able and willing to take action against 
them.

FTC staff expressed their belief that the agency's enforcement actions 
over the years have been successful in deterring other lenders from 
engaging in abusive practices. However, in a congressional hearing in 
2000 FTC had requested statutory changes that would improve its ability 
to enforce HOEPA. For example, FTC recommended that Congress expand 
HOEPA to prohibit the financing of lump-sum credit insurance premiums 
in loans covered by HOEPA and to give FTC the power to impose civil 
penalties for HOEPA violations.[Footnote 37]

DOJ Has Enforced Fair Lending Laws in Connection with Predatory 
Lending:

DOJ's Housing and Civil Enforcement Section is responsible for 
enforcing certain federal civil rights laws, including the Fair Housing 
Act and ECOA. DOJ identified two enforcement actions it has taken 
related to predatory mortgage lending practices that it alleged were 
discriminatory.[Footnote 38]

* Delta Funding. In 2000, DOJ, in cooperation with FTC and HUD, brought 
charges against Delta Funding Corporation, accusing the consumer 
finance company of violations of the Fair Housing Act, HOEPA, ECOA, 
RESPA, and related federal regulations.[Footnote 39] Delta allegedly 
approved and funded loans that carried substantially higher broker fees 
for African American females than for similarly situated white males. 
Delta was also accused of violating certain consumer protection laws by 
paying kickbacks and unearned fees to brokers to induce them to refer 
loan applicants to Delta and by systematically making HOEPA loans 
without regard to borrowers' ability to repay. The settlement placed 
restrictions on the company's future lending operations and victims 
were compensated from previously established monetary relief 
funds.[Footnote 40]

* Long Beach Mortgage. In 1996 DOJ settled a complaint alleging 
violations of the Fair Housing Act and ECOA against Long Beach Mortgage 
Company.[Footnote 41] According to the complaint, the company's loan 
officers and brokers charged African American, Hispanic, female, and 
older borrowers higher loan rates than it charged other similarly 
situated borrowers. The company agreed to set up a $3 million fund to 
reimburse 1,200 consumers who had received Long Beach loans.[Footnote 
42]

Representatives from both FTC and DOJ have stated that their 
enforcement actions can be very resource intensive and can involve 
years of discovery and litigation. For example, FTC filed a complaint 
against Capitol City Mortgage Corporation in 1998 that is still in 
litigation more than 5 years later. FTC staff told us that because 
cases involving predatory lending can be so resource intensive, the 
agencies try to focus their limited resources on the cases that will 
have the most impact, such as those that may result in large 
settlements to consumers or that will have some deterrent value by 
gaining national exposure. Similarly, DOJ officials select certain 
discrimination cases, including those mentioned above, in part because 
of their broad impact.

HUD's Enforcement Activities Focus on FHA Loans:

HUD's enforcement and regulatory activity with regard to abusive 
mortgage lending comes primarily through its management of the FHA 
single-family mortgage insurance programs, its rule-making and 
enforcement authority under RESPA, and its enforcement of the Fair 
Housing Act.

Most of HUD's enforcement activities related to abusive lending have 
focused on reducing losses to the FHA insurance fund. Investigators 
from HUD's Office of the Inspector General have worked with 
investigators from U.S. Attorneys' Offices and the FBI in a joint law 
enforcement effort to target fraud in the FHA mortgage insurance 
program, which can result in defaults and thus in losses to the 
insurance fund.[Footnote 43] The fraudulent activities sometimes 
involve property flipping schemes, which can harm borrowers by leaving 
them with mortgage loans that may far exceed the value of their 
homes.[Footnote 44] Under certain circumstances, such activity can 
involve predatory lending practices. To address these crimes, 
investigators have presented evidence of false statements and other 
criminal fraud and deception. In addition, representatives from HUD 
told us that they have processes in place to ensure that lenders adhere 
to agency guidelines and make loans that satisfy FHA requirements. The 
Office of Lender Activities and Program Compliance approves, 
recertifies, and monitors FHA lenders and works with them to ensure 
compliance. If necessary, the office refers violating lenders to HUD's 
Mortgagee Review Board, which has the authority to take administrative 
actions such as withdrawing approval for a lender to make FHA-insured 
loans. HUD officials told us that the board has taken many 
administrative actions to address violations that could be indicative 
of predatory lending, such as charging excessive and unallowable fees, 
inflating appraisals, and falsifying documents showing income or 
employment. In an effort to address abusive property flipping schemes 
involving homes secured by FHA-insured loans, HUD issued a final rule 
in May 2003 that prohibits FHA insurance on properties resold less than 
90 days after their previous sale.

HUD officials say that programs they have in place to improve the 
monitoring of FHA lenders also serve to deter predatory lending. For 
example, HUD's Credit Watch Program routinely identifies those lenders 
with the highest early default and insurance claim rates and 
temporarily suspends the FHA loan origination approval agreements of 
the riskiest lenders, helping to ensure that lenders are not making 
loans that borrowers cannot repay. Also, the Neighborhood Watch program 
provides information to FHA participants about lenders and appraisers 
whose loans have high default and FHA insurance claim rates. HUD told 
us that it has also taken a series of actions to better ensure the 
integrity of appraisals used to finance FHA insured loans. As of 
December 2003, HUD was in the final stages of issuing a rule that would 
hold lenders accountable for appraisals associated with loans they 
make.

HUD's Office of RESPA and Interstate Land Sales is responsible for 
handling complaints, conducting investigations, and taking enforcement 
actions related to RESPA. HUD has taken several enforcement actions 
related to RESPA's prohibition of kickbacks and referral fees, three of 
which related directly to abusive mortgage lending, as of December 
2003.[Footnote 45] Also, as discussed above, in November 2003 HUD and 
FTC jointly filed a case against and reached settlement with a mortgage 
loan servicing company charged with violations of the FTC Act, RESPA, 
and other laws.[Footnote 46] HUD has also recently hired additional 
staff to enhance its RESPA enforcement efforts. Finally, in 2002, HUD 
issued a proposed rule designed to change the regulatory requirements 
of RESPA to simplify and potentially lower the costs of the home 
mortgage settlement process. According to HUD, as of December 2003, the 
final rule had been submitted to the Office of Management and Budget 
and was being reviewed.

HUD's Office of Fair Housing and Equal Opportunity is responsible for 
enforcing the Fair Housing Act. HUD identified one action--a letter of 
reprimand to a financial institution--related to enforcement of this 
act in a case involving predatory lending.

Federal Banking Regulators Have Issued Guidance and Made Regulatory 
Changes:

According to federal banking regulators and state enforcement 
authorities, federally regulated depository institutions--banks, 
thrifts, and credit unions--have not typically engaged in predatory 
lending practices. Federal banking regulators have systems in place to 
track customer complaints and reported that they have received few 
complaints related to predatory lending by the institutions they 
supervise. The regulators conduct routine examinations of these 
institutions and have the authority, in cases of suspected predatory 
lending, to enforce a variety of fair lending and consumer protection 
laws. Banking regulators noted that the examination process, which 
involves routine on-site reviews of lenders' activities, serves as a 
powerful deterrent to predatory lending by the institutions they 
examine.

Officials of OTS, FDIC, the Board, and NCUA said that they had taken no 
formal enforcement actions related to predatory mortgage lending 
against the institutions they regulate.[Footnote 47] Officials at OCC 
said they have taken one formal enforcement action related to predatory 
mortgage lending to address fee packing, equity stripping, and making 
loans without regard to a borrower's ability to pay. In November 2003, 
the agency announced an enforcement action against Loan Star Capital 
Bank seeking to reimburse 30 or more borrowers for more than $100,000 
in abusive fees and closing costs that violated the FTC Act, HOEPA, 
TILA, and RESPA.[Footnote 48] The bank also was required to conduct a 
comprehensive review of its entire mortgage portfolio and to provide 
restitution to any additional borrowers who may have been harmed.

While most federal banking regulators stated that they have taken no 
formal enforcement actions, representatives from some said they had 
taken informal enforcement actions to address some questionable 
practices among their institutions. For example, OTS has examined 
institutions that may have charged inappropriate fees or violated HOEPA 
and resolved the problems by requiring corrective action as part of the 
examination process. In addition, most of the banking regulators have 
taken formal enforcement actions, including issuing cease-and-desist 
orders, in response to activities that violated fair lending and 
consumer protection laws but were not necessarily deemed to constitute 
"predatory lending.":

Guidance:

Federal banking regulators have issued guidance to their institutions 
about both predatory lending and subprime lending in general. In 
February 2003, OCC issued two advisory letters related to predatory 
lending to the national banks and the operating subsidiaries it 
supervises. One letter provided specific guidelines for guarding 
against predatory lending practices during loan originations, and the 
other alerted institutions to the risk of indirectly engaging in 
predatory lending through brokered or purchased loans.[Footnote 49] The 
advisory letters described loan attributes that are often considered 
predatory and established standards for policies and procedures for 
monitoring loan transactions to avoid making, brokering, or purchasing 
loans with such attributes. For example, the first letter stated that 
banks should establish underwriting policies and procedures to 
determine that borrowers have the capacity to repay their loans. The 
advisory letter also stated OCC's position that predatory lending will 
also affect a national bank's CRA rating. The advisories have also 
clarified ways in which predatory practices can create legal, safety 
and soundness, and reputation risks for national banks. For example, 
they laid out ways in which the origination or purchase of predatory 
loans may constitute violations of TILA, RESPA, HOEPA, the FTC Act, and 
fair lending laws. In addition, in January 2004, OCC issued a rule 
adopting antipredatory lending standards that expressly prohibit 
national banks from making loans without regard to the borrower's 
ability to repay and from engaging in unfair and deceptive practices 
under the FTC Act.[Footnote 50]

In 1999 and 2001, the Board, FDIC, OCC, and OTS issued joint guidance 
to their institutions on subprime lending in general.[Footnote 51] The 
guidance highlighted the additional risks inherent in subprime lending 
and noted that institutions engaging in such lending need to be aware 
of the potential for predatory practices and be particularly careful to 
avoid violating fair lending and consumer protection laws and 
regulations. The NCUA issued similar guidance to insured credit unions 
in 1999.[Footnote 52] Federal banking regulators have also previously 
issued guidance about abusive lending practices, unfair or deceptive 
acts or practices, and other issues related to predatory 
lending.[Footnote 53]

Regulatory Changes:

The Board is responsible for issuing regulations that implement HOEPA 
and HMDA, two laws that play a role in addressing predatory lending. In 
December 2001, in response to concerns that HOEPA may not be adequately 
protecting consumers from abusive lending practices, the Board amended 
Regulation Z, which implements HOEPA, to:

* lower the interest rate "trigger" that determines whether loans are 
covered under HOEPA in order to bring more loans under the protection 
of the law,[Footnote 54]

* require that fees paid for credit insurance and similar debt 
protection products be included when determining whether loans are 
subject to HOEPA,

* prohibit creditors that make HOEPA loans from refinancing the loan 
within one year of origination with another HOEPA loan, unless the 
refinancing is in the borrower's interest, and:

* clarify the prohibition against engaging in a "pattern or practice" 
of lending without regard to borrowers' ability to repay.[Footnote 55]

In February 2002, the Board also made changes to Regulation C, which 
implements HMDA. The changes, which went into effect in January 2004, 
require lenders to provide additional data that may facilitate analyses 
of lending patterns that may be predatory. For example:

* if the costs to the borrower of financing a loan exceed a certain 
threshold determined by the Board, the lender must report the cost of 
the loan;[Footnote 56]

* if an application or loan involves a manufactured home, the lender is 
required to identify that fact, in part to help identify predatory 
practices involving these types of homes; and:

* if a loan is subject to HOEPA, the lender is required to identify 
that fact in order to give policymakers more specific information about 
the number and characteristics of HOEPA loans.[Footnote 57]

Because HOEPA expressly grants the Board broad authority to issue rules 
to regulate unfair or deceptive acts and practices, some consumer 
advocacy organizations have argued that the Board should use its 
authority to do more to curb predatory lending.[Footnote 58] For 
example, some consumer groups have called on the Board to use its rule-
making authority to prohibit the financing of single-premium credit 
insurance--a product that is believed by many to be inherently 
predatory.[Footnote 59] Under the McCarran Ferguson Act,[Footnote 60] 
unless a federal statute is specifically related to the business of 
insurance, the federal law may not be construed to invalidate, impair, 
or supercede any state law enacted to regulate the business of 
insurance. Board officials say it is not clear the extent to which 
rules issued by the Board under HOEPA seeking to regulate the sale of 
single-premium credit insurance would be consistent with that standard. 
The Board has previously recommended that it would be more appropriate 
for Congress to address this issue through changes in law. Some 
consumer groups also have argued that the Board should increase the 
loan data reporting requirements of HMDA to help detect abusive 
lending. The Board has added certain loan pricing and other items to 
the HMDA reporting requirements, effective in January 2004, but did not 
add other data reporting requirements, such as the credit score of the 
applicant. Board officials said this is based on the belief that the 
need for additional loan data to ensure fair lending must be weighed 
against the costs and burdens to the lender of gathering and reporting 
the additional information.

Agencies Have Coordinated on Enforcement Actions and Participated in 
Interagency Groups:

Federal agencies have worked together to investigate and pursue some 
cases involving predatory lending. For example, FTC, DOJ, and HUD 
coordinated to take enforcement action against Delta Funding 
Corporation, with each agency investigating and bringing actions for 
violations of the laws under its jurisdiction. DOJ conducted its 
enforcement action against Long Beach Mortgage Company in coordination 
with OTS, which investigated the initial complaint in 1993 when the 
company was a thrift. Federal agencies have also coordinated with state 
authorities and private entities in enforcement actions. For example, 
in 2002, FTC joined six states, AARP, and private attorneys to settle a 
complaint against First Alliance Mortgage Company alleging that the 
company used deception and manipulation in its lending practices.

Federal regulators have also coordinated their efforts to address fair 
lending and predatory lending through working groups. For example:

* In the fall of 1999 the Interagency Fair Lending Task Force, which 
coordinates federal efforts to address discriminatory lending, 
established a working group to examine the laws related to predatory 
lending and determine how enforcement and consumer education could be 
strengthened.[Footnote 61] Because of differing views on how to define 
and combat predatory lending, the group was unable to agree on a 
federal interagency policy statement related to predatory lending in 
2001. The Task Force then continued its efforts related to consumer 
education and published a brochure in 2003 to educate consumers about 
predatory lending practices.

* The five banking regulators have conducted additional coordination 
activities through the Federal Financial Institutions Examination 
Council's Task Force on Consumer Compliance.[Footnote 62] The task 
force coordinates policies and procedures for ensuring compliance with 
fair lending laws and the Community Reinvestment Act, both of which 
have been identified as tools that can be used to address predatory 
lending. The council publishes a document that responds to frequently 
asked questions about community reinvestment, including how examiners 
should consider illegal credit practices, which may be abusive, in 
determining an institution's Community Reinvestment Act rating.

* In 2000, HUD and the Department of the Treasury created the National 
Task Force on Predatory Lending, which convened forums around the 
country to examine the issue and released a report later in the 
year.[Footnote 63] The report made specific recommendations to 
Congress, federal agencies, and other stakeholders that were aimed at 
(1) improving consumer literacy and disclosure, (2) reducing harmful 
sales practices, (3) reducing abusive or deceptive loan terms and 
conditions, and (4) changing structural aspects of the lending market.

Some of the recommendations made in the HUD-Treasury task force report 
have been implemented. For example, as recommended in the report, the 
Board has adopted changes to HOEPA regulations that have increased the 
number of loans covered and added additional restrictions. In addition, 
as the report recommended, FTC and some states have devoted more 
resources in the past few years to actively pursuing high-profile 
enforcement cases. As discussed in chapter 5, federal and state 
agencies have also worked to improve one of the areas highlighted in 
the report: public awareness about predatory lending issues. Other 
recommendations made in the report have not been implemented, however. 
For example, Congress has not enacted legislation to expand penalties 
for violations of TILA, HOEPA, and RESPA or to increase the damages 
available to borrowers harmed by such violations. HUD and the 
Department of the Treasury told us that they have not formally tracked 
the status of the recommendations made in the report, although HUD 
officials said they are informally monitoring the recommendations in 
the report that relate to their agency. Officials at both agencies also 
noted that the report and its recommendations were the product of a 
previous administration and may or may not reflect the views of the 
current administration.

In addition to participating in interagency groups, agencies share 
information related to fair lending violations under statutory 
requirements and formal agreements. For example, since 1992 HUD and the 
banking regulators have had a memorandum of understanding stating that 
HUD will refer allegations of fair lending violations to banking 
regulators and a 1994 executive order requires that executive branch 
agencies notify HUD of complaints and violations of the Fair Housing 
Act. In addition, whenever the banking regulatory agencies or HUD have 
reason to believe that an institution has engaged in a "pattern or 
practice" of illegal discrimination, they are required to refer these 
cases to DOJ for possible civil action.

Jurisdictional Issues Related to Nonbank Subsidiaries Challenge Efforts 
to Combat Predatory Lending:

Jurisdictional issues related to the regulation of certain nonbank 
mortgage lenders may challenge efforts to combat predatory lending. 
Many federally and state-chartered banks and thrifts, as well as their 
subsidiaries, are part of larger financial holding companies or bank 
holding companies.[Footnote 64] These holding companies may also 
include nonbank financial companies, such as finance and mortgage 
companies, that are subsidiaries of the holding companies themselves. 
These holding company subsidiaries are frequently referred to as 
affiliates of the banks and thrifts because of their common ownership 
by the holding company. As shown in figure 2, the federal regulators of 
federally and state-chartered banks and thrifts also regulate the 
subsidiaries of those institutions. For example, as the primary 
regulator for national banks, OCC also examines operating subsidiaries 
of those banks. On the other hand, federal regulators generally do not 
perform routine examinations of independent mortgage lenders and 
affiliated nonbank subsidiaries of financial and bank holding companies 
engaged in mortgage lending.

Figure 2: Structure and Federal Oversight of Mortgage Lenders:

[See PDF for image]

Note: The primary federal agency for enforcement of the various federal 
laws used to combat abusive or predatory lending activities is shown in 
parentheses.

[A] FTC is responsible for enforcing federal laws for lenders that are 
not depository institutions but it is not a supervisory agency and does 
not conduct routine examinations.

[End of figure]

Some disagreement exists between states and some federal banking 
regulators over states' authority to regulate and supervise the 
operating subsidiaries of federally chartered depository institutions. 
For example, OCC issued an advisory letter in 2002 noting that federal 
law provides the agency with exclusive authority to supervise and 
examine operating subsidiaries of national banks and that the states 
have no authority to regulate or supervise these subsidiaries.[Footnote 
65] Some representatives of state banking regulators expressed concerns 
to us about this because of the subsidiaries' potential involvement in 
predatory lending practices. OCC has stated that the subsidiaries of 
the institutions it regulates do not play a large role in subprime 
lending and that little evidence exists to show that these subsidiaries 
are involved in predatory lending. But some state enforcement 
authorities and consumer advocates argue otherwise, citing some 
allegations of abuses at national bank subsidiaries. However, several 
state attorneys general have written that predatory lending abuses are 
"largely confined" to the subprime lending market and to non-depository 
institutions, not banks or direct bank subsidiaries.[Footnote 66] OCC 
officials stated that the agency has strong monitoring and enforcement 
systems in place and can and will respond vigorously to any abuses 
among institutions it supervises.[Footnote 67] For example, OCC 
officials pointed to an enforcement action taken in November 2003 that 
required restitution of more than $100,000 to be paid to 30 or more 
borrowers for fees and interest charged in a series of abusive loans 
involving small "tax-lien loans.":

A second issue relates to the monitoring and supervision of certain 
nonbank subsidiaries of holding companies. As noted previously, many 
federally and state-chartered banks and thrifts, as well as their 
subsidiaries, are part of larger financial or bank holding 
companies.[Footnote 68] These holding companies may also include 
nonbank subsidiaries, such as finance and mortgage companies, that are 
affiliates but not subsidiaries of the federally regulated bank or 
thrift. Although these affiliates engage in financial activities that 
may be subject to federal consumer protection and fair lending laws, 
unlike depository institutions they are not subject to routine 
supervisory examinations for compliance with those laws. While the 
Board has jurisdiction over these entities for purposes of the Bank 
Holding Company Act, it lacks authority to ensure and enforce their 
compliance with federal consumer protection and fair lending laws in 
the same way that the federal regulators monitor their depository 
institutions.

One reason for the concern about these entities is that nonbank 
subsidiaries of holding companies conduct a significant amount of 
subprime mortgage lending. Of the total subprime loan originations made 
by the top 25 subprime lenders in the first 6 months of 2003, 24 
percent were originated by nonbank subsidiaries of holding companies. 
In addition, of the 178 lenders on HUD's 2001 subprime lender list, 20 
percent were nonbank subsidiaries of holding companies. These types of 
subsidiaries have also been targets of some of the most notable federal 
and state enforcement actions involving abusive lending. For example, 
The Associates and Fleet Finance, which were both nonbank subsidiaries 
of bank holding companies, were defendants in two of the three largest 
cases involving subprime lending that FTC has brought.[Footnote 69]

The Associates case illustrates an important aspect of the current 
federal regulatory oversight structure pertinent to predatory lending. 
The Board has authority under the Bank Holding Company Act to condition 
its approval of holding company acquisitions. The Board used this 
authority in connection with Citigroup's acquisition of European 
American Bank because of concerns about the subprime lending activities 
of The Associates, which Citigroup had acquired and merged into its 
CitiFinancial subsidiary. As a condition of approving the acquisition 
of European American Bank, the Board directed that an examination of 
certain subprime lending subsidiaries of Citigroup be carried out to 
determine whether Citigroup was effectively implementing policies and 
procedures designed to ensure compliance with fair lending laws and 
prevent abusive lending practices. However, the Board does not have 
clear authority to conduct the same type of monitoring outside of the 
Bank Holding Company Act approval process. Although the Board has the 
authority to monitor and perform routine inspections or examinations of 
a bank holding company, this authority apparently does not extend to 
routine examinations of nonbank subsidiaries of bank holding companies 
with regard to compliance with consumer protection laws. The Bank 
Holding Company Act, as amended by the Gramm-Leach-Bliley Act, 
authorizes the Board to examine a nonbank subsidiary for specific 
purposes, including "to monitor compliance with the provisions of (the 
Bank Holding Company Act) or any other Federal law that the Board has 
specific jurisdiction to enforce against such company or subsidiary." 
Federal consumer protection laws do not give the Board specific 
enforcement jurisdiction over nonbank subsidiaries.

For this reason, FTC is the primary federal agency monitoring nonbank 
subsidiaries' compliance with consumer protection laws. FTC is the 
primary federal enforcer of consumer protection laws for these nonbank 
subsidiaries, but it is a law enforcement rather than supervisory 
agency. Thus, FTC's mission and resource allocations are focused on 
conducting investigations in response to consumer complaints and other 
information rather than on routine monitoring and examination 
responsibilities. Moreover, as discussed elsewhere in this report, 
states vary widely in the extent to which they regulate practices that 
can constitute predatory lending.

The HUD-Treasury report on predatory lending argued that the Board 
should take more responsibility for monitoring nonbank subsidiaries of 
bank holding companies, in part to ensure that consumer protection laws 
are adequately enforced for these institutions. Similarly, in 1999, GAO 
recommended that the Board monitor the lending activities of nonbank 
mortgage lending subsidiaries of bank holding companies and consider 
examining these entities if patterns in lending performance, growth, or 
operating relationships with other holding company entities indicated 
the need to do so.[Footnote 70] In its written response to GAO's 
recommendation, the Board said that while it has the general legal 
authority to examine these entities, it has neither the clear 
enforcement jurisdiction nor the legal responsibility for engaging in 
such activities, as Congress has directly charged FTC with primary 
responsibility over enforcement with regard to these entities.

Among federal agencies, the Board is uniquely situated to monitor the 
activities of the nonbank mortgage lending subsidiaries of financial 
and bank holding companies by virtue of its role as the regulator of 
holding companies and its corresponding access to data (such as 
internal operating procedures, loan level data, and current involvement 
in subprime lending) that are not readily available to the public. In 
addition, the Board has extensive experience monitoring and analyzing 
HMDA data. The recent changes in HMDA reporting requirements will 
increase the Board's ability to effectively monitor nonbank mortgage 
lending subsidiaries of holding companies for lending abuses.

In contrast to the specific limits on the Board's examination 
authority, its authority to enforce the federal consumer protection 
laws against nonbank subsidiaries is somewhat less clear. The laws 
themselves specify the institutions subject to enforcement by the 
Board, but those institutions generally do not include nonbank 
subsidiaries. The Board has concluded that it must defer enforcement 
action at least where, as here, a statute specifically prescribes its 
enforcement jurisdiction to cover only certain entities and 
specifically grants enforcement authority for other entities to another 
agency.

Conclusions:

Under a number of laws, federal agencies have taken action to protect 
consumers from abusive lending practices. While FTC has taken a number 
of significant enforcement actions to battle abuses in the industry, 
its resources are finite and, as a law enforcement agency, it does not 
routinely monitor or examine lenders, including the mortgage lending 
subsidiaries of financial and bank holding companies.

Congress provided banking regulators with the authority to ensure 
compliance with consumer protection laws by the institutions they 
regulate, in part because it recognized the efficiencies of having 
banking regulators monitor for compliance with these laws while 
examining their institutions for safety and soundness. The Board is in 
a position to help ensure compliance with federal consumer protection 
laws by certain subsidiaries of financial and bank holding companies if 
it were clearly authorized to do so. While concerns about predatory 
lending extend well beyond the activities of the nonbank subsidiaries 
of holding companies, these entities represent a significant portion of 
the subprime mortgage market. Monitoring the mortgage lending 
activities of the nonbank subsidiaries would help the Board determine 
when it would be beneficial to conduct examinations of specific nonbank 
subsidiaries. The Board could then refer its findings to DOJ, HUD, or 
FTC or take its own enforcement action if a problem exists. Granting 
the Board concurrent enforcement authority--with the FTC--for these 
nonbank subsidiaries of holding companies would not diminish FTC's 
authority under federal laws used to combat predatory lending.

The significant amount of subprime lending among holding company 
subsidiaries, combined with recent large settlements in cases involving 
allegations against such subsidiaries, suggests a need for additional 
scrutiny and monitoring of these entities. The Board is in an optimal 
position to play a larger role in such monitoring but does not have 
clear legal authority and responsibility to do so for these entities 
with regard to monitoring compliance of consumer protection laws.

Matters for Congressional Consideration:

To enable greater oversight of and potentially deter predatory lending 
from occurring at certain nonbank lenders, Congress should consider 
making appropriate statutory changes to grant the Board of Governors of 
the Federal Reserve System the authority to routinely monitor and, as 
necessary, examine the nonbank mortgage lending subsidiaries of 
financial and bank holding companies for compliance with federal 
consumer protection laws applicable to predatory lending practices. 
Also, Congress should consider giving the Board specific authority to 
initiate enforcement actions under those laws against these nonbank 
mortgage lending subsidiaries.

Agency Comments and Our Evaluation:

GAO provided a draft of this report to the Board, DOJ, FDIC, FTC, HUD, 
NCUA, OCC, OTS, and the Department of the Treasury for review and 
comment. The agencies provided technical comments that have been 
incorporated, as appropriate. In addition, the Board, DOJ, FDIC, FTC, 
HUD, and NCUA provided general comments, which are discussed below. The 
written comments of the Board, DOJ, HUD, and NCUA are printed in 
appendixes II through V.

The Board commented that, while the existing structure has not been a 
barrier to Federal Reserve oversight, the approach recommended in our 
Matter for Congressional Consideration would likely be beneficial by 
catching some abusive practices that might not be caught otherwise. The 
Board also noted that the approach would pose tradeoffs, such as 
different supervisory schemes being applied to nonbank mortgage lenders 
based on whether or not they are part of a holding company. Because 
nonbank mortgage lenders that are part of a financial or bank holding 
company are already subject to being examined by the Board in some 
circumstances, they are already subject to a different supervisory 
scheme than other such lenders. For example, in its comments the Board 
noted that it may on occasion direct an examination of a nonbank 
lending subsidiary of a holding company when necessary in the context 
of applications that raise serious fair lending or compliance issues. 
Accordingly, we do not believe that clarifying jurisdiction as 
contemplated in the Matter would result in a significant departure from 
the current supervisory scheme for nonbank mortgage lenders. The Board 
also noted that that there could be some additional cost to the nonbank 
mortgage lending subsidiaries of financial or bank holding companies, 
as well as to the Board, if the Board were to exercise additional 
authority. We agree and believe that Congress should consider both the 
potential costs as well as the benefits of clarifying the Board's 
authorities.

The FTC expressed concern that our report could give the impression 
that we are suggesting that Congress consider giving the Board sole 
jurisdiction--rather than concurrent jurisdiction with FTC--over 
nonbank subsidiaries of holding companies. Our report did not intend to 
suggest that the Congress make any change that would necessarily affect 
FTC's existing authority for these entities and we modified our report 
to clarify this point. To illustrate the difference in regulatory and 
enforcement approaches, our draft report contrasted the Board's routine 
examination authority with the FTC's role as a law enforcement agency. 
In its comments, FTC noted that it uses a number of tools to monitor 
nonbank mortgage lenders, of which consumer complaints is only one. The 
agency also commented that a key difference between the FTC and the 
Board is that the Board has access to routine information to aid in its 
oversight as part of the supervisory process. Our report did not intend 
to suggest that the FTC's actions are based solely on consumer 
complaints, and we revised the report to avoid this impression.

DOJ commented that the report will be helpful in assessing the 
department's role in the federal government's efforts to develop 
strategies to combat predatory lending. DOJ disagreed with our 
inclusion in the report of "property or loan flips," which it 
characterized as a traditional fraud scheme rather than an example of 
predatory lending. As our report states, there is no precise definition 
of predatory lending. We included a discussion of efforts to combat 
"property flipping" because HUD officials told us that these schemes 
sometimes involve predatory practices that can harm borrowers. As we 
note in the report, while HUD categorizes property flipping as a 
predatory lending practice, not all federal agencies concur with this 
categorization. Distinct from property flipping is "loan flipping"--the 
rapid and repeated refinancing of a loan without benefit to the 
borrower. This practice is widely noted in literature and by federal, 
state, industry, and nonprofit officials as constituting predatory 
lending.

FDIC noted that our Matter for Congressional Consideration focuses on 
nonbank subsidiaries of financial and bank holding companies even 
though these entities comprise, according to HUD, only about 20 percent 
of all subprime lenders. We acknowledge that our Matter does not 
address all subprime lenders or institutions that may be engaging in 
predatory lending, but believe it represents a step in addressing 
predatory lending among a significant category of mortgage lenders. 
NCUA said that the report provides a useful discussion of the issues 
and that the agency concurs with our Matter for Congressional 
Consideration. HUD, in its comment letter, described a variety of 
actions it has taken that it characterized as combating predatory 
lending, particularly with regard to FHA-insured loans.

[End of section]

Chapter 3: States Have Enacted and Enforced Laws to Address Predatory 
Lending, but Some Laws Have Been Preempted:

In part because of concerns about the growth of predatory lending and 
the limitations of existing state and federal laws, 25 states, the 
District of Columbia, and 11 localities had passed their own laws 
addressing predatory lending practices as of January 9, 2004.[Footnote 
71] Most of the state laws restrict the terms or provisions of certain 
high-cost loans, while others apply to a broader range of loans. In 
addition, some states have taken measures to strengthen the regulation 
and licensing of mortgage lenders and brokers, and some have used 
existing state consumer protection and banking laws to take enforcement 
actions related to abusive lending. However, regulators of federally 
chartered financial institutions have issued opinions stating that 
federal laws may preempt some state predatory lending laws and that 
nationally chartered lending institutions should have to comply only 
with a single uniform set of national standards. Many state officials 
and consumer advocates have opposed federal preemption of state 
predatory lending laws on the grounds that it interferes with the 
states' ability to protect consumers.

States and Localities Have Addressed Predatory Lending through 
Legislation, Regulation, and Enforcement Actions:

Since 1999, many states and localities have passed laws designed to 
address abusive mortgage lending by restricting the terms or provisions 
of certain loans. In addition, states have increased the registration 
or licensing requirements of mortgage brokers and mortgage lenders and 
have undertaken enforcement activities under existing consumer 
protection laws and regulations to combat abusive lending.

A Growing Number of States and Localities Have Passed Laws to Address 
Abusive Lending:

According to the database of state laws, as of January 9, 2004, 25 
states and the District of Columbia had passed laws that were 
specifically designed to address abusive lending practices.[Footnote 
72] (See fig. 3.) These laws were motivated, at least in part, by 
growing evidence of abusive lending and by concerns that existi