NATIONAL
CONSUMER LAW CENTER
COMMENTS OF THE
NATIONAL CONSUMER LAW CENTER
ON BEHALF OF ITS LOW INCOME CLIENTS, AND
CONSUMER FEDERATION OF AMERICA
CONSUMERS UNION AND
NATIONAL ASSOCIATION OF CONSUMER ADVOCATES
Community Reinvestment Act Regulations
12 CFR Part 25
Docket No. 04-06
Office of the Comptroller of the Currency
12 CFR Part 228, Regulation B
Docket No. R-1181
Board of Governors of the Federal Reserve System
12 CFR Part 345
RIN 3064-AC50
Federal Deposit Insurance Corporation
12 CFR Part 563e
No. 2004-04, RIN 1550-AB48
Office of Thrift Supervision
April 6, 2003
The National
Consumer Law Center1 files these comments
on behalf of its low income clients,
as well as the Consumer Federation of America,
Consumers Union and the National Association of Consumer Advocates2
with a special focus on low and moderate-income consumers who have
been
affected by predatory lending practices. Our primary goal
in writing these comments is to persuade the federal banking regulatory
agencies to either abandon or substantially change the proposal
to include a specific predatory lending finding in an institution’s
CRA performance. Our secondary goal is to applaud the agencies
for including loans made outside a particular geographic area in
the institution’s assessment, yet caution that even this
expansion will not be helpful to addressing predatory lending unless
the standard used is better articulated. Consideration of a bank’s
lending regardless of geographic area must also be extended to
loans made in partnership with third parties such as payday loan
companies that “rent” bank charters to make loans otherwise
illegal under state law.
Unfortunately,
we believe that the regulation, as currently proposed, would actually
serve
to facilitate and mask predatory lending activities
by banking institutions and their affiliates. This is because the
proposal is to evaluate only whether institutions are complying with –
1) current federal laws, which do not themselves prohibit activities
which are abusive or predatory,
2) the FTC Act prohibiting unfair and deceptive trade practices,
which – without additional specific prohibitions to Regulation
AA3 – does not provide sufficient guidance
to the examiners to determine whether the institution has engaged
in predatory lending,
and
3) the stated prohibition against equity stripping, which will not
catch even the most blatant predatory loans based on the equity in
the home rather than the income stream of the borrowers, because
it does not require verification of income.
None of these three standards actually will enable a real evaluation
of whether an institution is engaged in predatory or abusive lending.
The standards do not ask the right questions to find predatory
lending. If the right questions are not asked then the answers
will be incorrect and misleading. The result will be that institutions
will be found to have not engaged in predatory lending, even when
they may have – just because the standards by which their
lending activities are to be judged will not find abusive lending.
If the CRA assessment
for predatory lending does not actually measure predatory lending,
institutions may be given a positive grade which
is incorrect – thereby justifying and shielding the institutions’ real
predatory lending activities. The result of the evaluation proposed
will be that those institutions which have engaged in predatory lending
will have an official assessment from their federal banking regulator
finding that they have not engaged in a dangerous and abusive lending
activity. This makes the proposal not only flawed, but actually affirmatively
misleading. Efforts mounted in other arenas to address predatory
lending by banking institutions, their operating subsidiaries, and
their affiliates, will be significantly undermined by the false findings
produced by this CRA measurement.
Making CRA Assessment of Predatory Lending Meaningful
It would be possible
for the CRA analysis of an institution’s
compliance with the prohibition against engaging in predatory or
abusive lending to be meaningful, but only if the clear standards
articulating predatory or abusive behaviors were to be specified.
However, as much as we and other representatives of consumer and
community groups might agree that certain behaviors are clearly predatory,
it is clear that much of the financial services industry would not
agree, and thus the agencies are in the politically charged position
of prohibiting activities which are technically legal under existing
federal law. Given this dynamic, we find it unlikely that the Federal
Reserve Board, the FDIC, the OCC and the OTS, will actually prohibit
behaviors which are legal but abusive.
Arguably, under
the current proposal despite the fact that the proposed regulations
do not
specify legal but abusive lending activities,
the CRA examiners could find certain behaviors to be abusive. While
we would always be hopeful that this would occur, we all are virtually
certain that it will not. Banking agency employees regularly engaged
in the process of determining institutional compliance based on standards
proposed, which lack the specificity necessary to guide examiners,
are not likely to articulate and implement their own standards in
individual situations. Therefore, the crack in the door provided
by the regulation’s prohibition against engaging in unfair
and deceptive activities, as prohibited by Section 5 of the FTC Act,
is unlikely to yield any real determinations of predatory lending.
Too much uncertainty and too much opposition from the institution
are a lethal combination for CRA evaluators to struggle against to
support a finding of predatory lending.
We agree with
the commenters to the ANPRM who suggested that –
a number of particular loan terms or characteristics, whether or
not specifically prohibited by law, that have been associated with
predatory lending practices should adversely affect an institution’s
CRA evaluation. These include high fees, prepayment penalties,
single-premium credit insurance, mandatory arbitration clauses,
frequent refinancing (“flipping”) , lending without
regard to repayment ability, equity “stripping,” targeting
low- or moderate-income neighborhoods for subprime loans, and failing
to refer qualifying borrowers to prime financial products.4
However, as the Supplementary Information to these Proposed Regulations
indicates that the agencies have already considered and rejected
this approach, it seems superfluous to reiterate the arguments and
factual basis for including these specific identifying factors in
these comments. Suffice it to say that the failure to specify these
standards in a rule identifying predatory lending makes the rule
completely meaningless.
Current Federal Laws Do Not Prohibit Predatory Lending
The primary way
that the agencies propose to evaluate whether institutions have
engaged in predatory lending is by ascertaining whether they
have violated existing federal laws. Specifically, violations of
the Equal Credit Opportunity Act (ECOA), Fair Housing Act, Home Ownership
and Equity Protection Act (HOEPA), Truth in Lending Act (TILA), Real
Estate Settlement Procedures Act (RESPA), and the Federal Trade Commission
Act (FTC Act) only will be relevant to the question of predatory
lending.5
With the exception
of HOEPA, none of the federal laws on which institutions are to
be
evaluated were passed to address predatory lending. To
find violations of the FTC Act it is necessary to make complex evaluations
of the lending environment, the specific consumers, and the history
of dealings between the parties – a highly unlikely analysis
to be made by CRA evaluators in a meaningful way (see below for more
discussion on the FTC Act). As a result, compliance with all of these
other federal laws is not in any way indicative of an institution’s
avoidance of predatory lending. Findings that an institution has
violated one or another of these laws can be useful for a consumer
to defend against a predatory loan because these valuable federal
laws can provide remedies to help save homes from foreclosure, and
recover stripped equity. However, the specific provisions of these
laws do not address predatory lending.
While a violation
of HOEPA can be indicative of predatory lending, it is essential
to recognize
that the reverse is not necessarily
true – a HOEPA loan can be in full compliance with HOEPA, and
still be very abusive. Similarly, a lender’s compliance with
TILA, RESPA, the Fair Housing Act and the ECOA, does not indicate
that the lender has not engaged in a predatory loan. Indeed, even
lack of compliance with RESPA and TILA does not indicate, in and
of itself, that the lender has engaged in predatory lending.
The FTC Act’s prohibition against unfair or deceptive practices
would indeed provide a framework for finding individual cases of
predatory lending – as has been done on several occasions by
the FTC itself in litigation. Indeed, in the instant proposed regulations,
the agencies outline a list of potential activities which could be
indicative of predatory lending: “loan flipping, the refinancing
of special subsidized mortgage loans, other forms of equity stripping,
and fee packing . . . .” However, again we must recognize the
information that will be available in the CRA evaluation, as well
as the dynamics.
To determine
loan flipping one must have available all of the documents related
to a series
all of the loan transactions between the parties – not
just the documents related to a specific loan. To determine the refinancing
of subsidized mortgage loans, one must have information about the
loan being paid off by the specific loan made by the institution.
This information is not typically in the institution’s loan
file – certainly no law or regulation requires this information
to be kept in this way. To determine fee packing, one must closely
evaluate not only the Truth in Lending disclosures, but also the
RESPA disclosures, and compare that information with similar loans
in the geographic area. This is highly specific and scrutinizing
work which has never been engaged in by bank examiners in the past,
and is unlikely to be done in the future.
What do the agencies
mean by “other forms of equity stripping?” The
variety of ways which a lender can strip equity includes flipping,
the charging of excess points and fees, single premium credit insurance
financing, and prepayment penalties. Yet the agencies have already
rejected the use of any of these criteria as a standard to determine
predatory lending. So how are these assessments to be actually made?
To find that
the FTC Act’s
prohibition against unfair or deceptive practices has been violated
a series of complex evaluations about
the relationship between the parties must be made. As was detailed
by the OCC, for deception to be found, each and every of the following
factors must be present:
• First,
there is a representation, omission, act, or practice that is likely
to
mislead;
• Second, the act or practice would be likely to mislead a reasonable
consumer (a reasonable member of the group targeted by the acts or
practices in question); and
• Third, the representation, omission, act, or practice is likely to
mislead in a material way.6
Deception is never evident from the loan documents. Deception of
consumers by lenders can only be determined by talking to consumers.
Bank examiners cannot and will not be engaged in individual conversations
with consumers regarding an institution’s potential violations
of this important by vague law. Therefore it is virtually certain
that deception will never be found.
A similar high standard is established to find a practice to be
unfair, in violation of the FTC Act. Again, each of the following
factors must be present:
• First,
the practice causes substantial consumer injury, such as monetary
harm;
• Second, the injury is not outweighed by benefits to the consumer
or to competition; and
• Third, the injury caused by the practice is one that consumers could
not reasonably have avoided.7
Unfairness under
the FTC Act requires a finding that the injury caused by the practice
could
not reasonably have been avoided. This
is a complex, economic analysis which requires establishing the consumer’s
situation in the marketplace.8 These determinations are beyond the
scope of bank examiners doing a CRA assessment. In fact, it is absurd
to assume that examiners will ever determine that a practice is unfair
under the FTC standard.
The Prohibition Against Equity Stripping Will Not Find or Stop Equity
Stripping
Examiners of
banking institutions will only have available to them the documents
relating to the
loans. In almost all situations, unaffordable
loans which are based on the equity in the home, rather than the
income of the borrowers, do not reveal these aspects on the face
of the documents. Instead, the loan documents – the loan application,
the loan acceptance letter, the note, the TILA and RESPA disclosures,
etc. – will provide a paper trail which looks acceptable. It
is only if there is an analysis of the actual income of the borrowers
that the problems with the loan will become apparent.
Through our work
with legal aid and private attorneys all over the country on predatory
loans, we evaluate the details and the documents
of hundreds of consumer loans every year. Many of these loans are
actually based on the equity value in the home, rather than the income
of the borrowers. However, this fact is never apparent from the loan
documents. Instead, the borrowers’ application always includes
falsified income which would only be discovered to be false if the
originator had been required to verify the income.
The proposed regulation specifically permits originators to rely
on “stated” income, and does not require written documentation.
Again, are the CRA examiners going to personally interview consumers
to determine the factual justification for the paper trail in the
bank’s files? Obviously not. As a result, the prohibition
against equity stripping as articulated in the proposed regulation
will not stop any predatory activities.
Going Forward – What
Can the Agencies Do to Address Predatory Lending?
If the federal
banking regulators want to address predatory lending through their
regulatory
authority there is a great deal that they
can do. First, they should do no harm – and adoption of the
current proposal to add a CRA assessment for predatory based on the
proposed standard will do harm. Harm will result from the CRA assessment
that an institution is not engaged in predatory lending when the
determination was based on factors which would not discover real
abusive or predatory lending.
The Federal Reserve
Board has the power and the duty under the FTC Act to define specific
practices which are unfair or deceptive for
banking institutions.9 The Board has only exercised
this regulatory authority once, when it adopted a version of the
FTC’s Credit
Practices Rule and made it applicable to banks and thrifts.10
We recommend that the Board open a regulatory docket to determine
which practices which are currently legal in the marketplace are
nevertheless unfair or deceptive, as defined by the FTC Act. The
specific suggestions detailed in this proposed Regulation should
be revisited, including the essential question of the legality, fairness
and morality of payday lending.
Expanded Assessment
Area is Good, But Must Apply to Banks’ Activities
as well as Affiliates.
We applaud the
agencies’ proposal
to include loans made by the affiliates of a bank in any geographical
area in the CRA performance
rating. However, the regulations must also include the activities
of the institutions themselves which are outside of the assessment
area. Specifically, this must include bank loans through partners
in other geographic areas.
We are particularly
concerned that banks engaged in renting their charter to payday
loan partners
have all their payday loans included
in their CRA performance rating .11 The first
issue is to ensure that the geographic area in which the loans are
made is included
in the
bank’s CRA assessment. However, the second issue is to label
as “illegal” any payday lending by a bank with a third-party
in states where these loans would violate state law if the bank claim
of exportation privileges were not invoked.
The lists of laws in the proposed regulations illustrating which
types of illegal activities institutions will be evaluated upon
to determine predatory lending, do not include state laws. However,
the Supplementary Information in the Federal Register does state:
Evidence of violations
of other applicable consumer protection laws affecting credit practices,
including State laws if applicable, may
adversely affect the institution’s CRA evaluation. (Emphasis
added.)12
The big question
then becomes whether the federal banking agencies will recognize
bank
involvement in schemes to evade a state’s
laws or regulations to ban check-based loans, enforce a state usury
law, or limit the terms and conditions of small loans within its
borders as an indicator of predatory lending, thereby lowering the
bank’s CRA rating. If a bank in Delaware partners with a loan
servicing agent to market payday loans at 520% APR in New York state
which has a 16% civil usury law and a 25% criminal usury law, the
FDIC should have to downgrade the bank’s CRA rating.
Currently, ten
state-chartered, non Federal Reserve member banks partner with
payday loan companies, pawn shops, and check cashers
in the making of small loans simply to circumvent state usury laws
or small loan regulations that apply in many states to financial
services companies under state law. The banks engaged in payday lending
do not make these loans in their local areas, but only partner with
third-parties in distant states.13
The fact that these banks are deliberately partnering with businesses
for the purpose of circumventing state consumer protection laws should
be clear evidence of predatory lending. However, the current proposed
regulations do not appear to contemplate this standard.
Regulated financial institutions should simply be prohibited from
engaging in abusive credit activities, such as payday lending. Again,
we urge the Federal Reserve Board to use its considerable powers
under the FTC Act to identify and prohibit institutions from engaging
in payday lending, as well as other abusive lending practices. We
stand ready to provide factual and legal assistance in this endeavor.
____________________________
1
The National Consumer Law Center, Inc. (NCLC) is a non-profit
Massachusetts
Corporation,
founded in 1969, specializing in low-income
consumer
issues, with an emphasis on consumer credit. On a daily basis, NCLC
provides legal and technical consulting and assistance on consumer
law issues to legal services, government, and private attorneys representing
low-income consumers across the country. NCLC publishes a series
of sixteen practice treatises and annual supplements on consumer
credit laws, including Truth In Lending, (4th ed. 1999) and Cost
of Credit (2nd ed. 2000) and Repossessions and Foreclosures (4th
ed. 1999) as well as bimonthly newsletters on a range of topics related
to consumer credit issues and low-income consumers. NCLC became aware
of predatory mortgage lending practices in the latter part of the
1980?s, when the problem began to surface in earnest. Since that
time, NCLC’s staff has written and advocated extensively on
the topic, conducted training for thousands of legal services and
private attorneys on the law and litigation strategies to defend
against such loans, and provided extensive oral and written testimony
to numerous Congressional committees on the topic. NCLC?s attorneys
were closely involved with the enactment of the Home Ownership and
Equity Protection Act in Congress, and the initial and subsequent
rules pursuant to that Act. Representatives of NCLC have actively
participated with industry, the Federal Reserve Board, Treasury,
and HUD in extensive discussions about how to address predatory lending.
These comments are written by Margot Saunders, Managing Attorney.
2 The Consumer Federation of America is a nonprofit association
of over 300 consumer groups, established in 1968 to advance the consumer
interest through research, education, and advocacy.
Consumers Union is the nonprofit publisher of Consumer Reports magazine,
is an organization created to provide consumers with information,
education and counsel about goods, services, health, and personal
finance; and to initiate and cooperate with individual and group
efforts to maintain and enhance the quality of life for consumers.
Consumers Union's income is solely derived from the sale of Consumer
Reports, its other publications and from noncommercial contributions,
grants and fees. Consumers Union's publications carry no advertising
and receive no commercial support.
The National Association of Consumer Advocates (NACA) is a non-profit
corporation whose members are private and public sector attorneys,
legal services attorneys, law professors, and law students, whose
primary focus involves the protection and representation of consumers.
NACA's mission is to promote justice for all consumers.
3 12 CFR 227, Regulation AA.
4 Supplementary Information to Proposed Rules on Community
Reinvestment
Act Regulations,
69 Fed. Reg. 5729, Feb. 6, 2004 at 5739.
5 Id.
6 OCC Advisory Letter, Guidelines for National Banks to Guard Against Predatory
and Abusive Lending Practices, AL 2003-2, at 4.
7 Id.
8 See, e.g. Federal Trade Commission, Credit Practices Rule: Statement
of Basis
and Purpose and Regulatory Analysis, 49 FRB 7740, March 1, 1984 (hereinafter “FTC,
Statement of Basis.”); American Financial Services Ass’n v. FTC,
767 F. 2d 957 (D.C. Cir. 1985), cert denied, 475 U.S. 1011 (1986).
9 15 U.S.C. § 57a(f).
10 12 CFR § 227.
11 However the role of the bank is really a sham. Although these payday
loans are technically made by the bank so as to avoid the restrictions of state
law,
the
payday lender typically takes most of the risk, holds the preponderant economic
interest in the loan, and does the marketing and collections. However, these
loans could not be made but for the bank’s involvement.
12 Supplementary Information to Proposed Rules on Community Reinvestment
Act
Regulations,
69 Fed. Reg. 5729, Feb. 6, 2004 at 5740.
13 Jean Ann Fox, Unsafe and Unsound: Payday Lenders Hide Behind FDIC Bank
Charters
to Peddle Usury, Consumer Federation of America, March 30, 2004.
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