WASHINGTON - Federal regulators plan to issue recommendations as early as Tuesday for cracking down on predatory lenders.
The Housing and Urban Development and Treasury departments have been crafting proposals since late March, when they formed a task force to investigate increased reports of lending to borrowers with no means to repay, unnecessary refinancings, and other unethical practices.
Agency officials held public hearings in five cities and got advice from a 14-member advisory group that included industry and community representatives and the mayors of Chicago, Detroit, and other major cities.
Spokesmen for HUD and the Treasury would not divulge details Friday, but the biggest question is how regulators will balance the opposing demands of key Republicans and neighborhood activists.
House Banking Committee Chairman Jim Leach made it clear at a recent hearing that regulators could solve the problem by beefing up enforcement of existing rules. But Democrats, encouraged by community groups, have already proposed bills in the House and Senate that would extend federal anti-predatory-lending protections to more borrowers, expand the list of lending practices that are deemed abusive, and toughen penalties.
"There's room for some of the agencies to do more but that's not sufficient," said Steven Kest, executive director of the Association of Community Organizations for Reform Now. "Clearly, legislation is needed at the congressional level. HUD, Treasury, and the [Clinton] administration should support the strongest possible legislation."
John Taylor, president of the National Community Reinvestment Coalition and, like Mr. Kest, one of the community leaders who advised regulators, predicted regulators would propose legislation that goes further than the Democratic lawmakers' proposals. "[HUD Secretary] Andrew Cuomo strikes me as somebody who is not afraid to go the [whole] nine yards," Mr. Taylor said.
Meanwhile, in a pre-emptive strike last week, the Mortgage Bankers Association of America said an overhaul of the entire home lending system is the best way to confront predatory practices that drive many borrowers into foreclosure.
"While it is absolutely essential that abusive lending practices be eliminated from the mortgage lending business, none of the efforts to do so will be successful without real and comprehensive mortgage reform," said Andrew J. Woodward Jr., chairman of Bank of America Mortgage and the trade group's president-elect.
The group's seven-point plan is a blend of deregulation, legislation, and stepped-up enforcement.
Its core is legislation that would provide lenders incentives to guarantee loan closing costs up front. Under that plan, lenders would have to inform mortgage applicants of their maximum settlement costs and would have to estimate non-lender costs such as municipal or state taxes.
In return, these lenders would be subject to simplified disclosure requirements that would replace notices mandated under the Truth-in-Lending and Real Estate Settlement Procedures acts. They would also be exempted from the section 8 ban on paying referral fees to real estate agents.
The MBA called for more funding for consumer protection agencies to enforce existing laws, and listed 12 practices that should be illegal, such as structuring high-cost loans with payments the borrower cannot afford, changing loan terms at closing, and requiring credit insurance. It also offered several remedies for consumers, such as restrictions on foreclosure sales and the right to sue after giving lenders a chance to correct violations of closing-cost agreements.
Scott McAfee, president of WMC Mortgage, a Woodland Hills, Calif., subprime lender, said he liked some aspects of the reform plan and would even agree to caps on fees. "We as an industry are willing to take whatever steps we need to stamp out predatory lending," he said.
Some activists hailed the plan as a promising first step, but others were skeptical. "It all looked a little vague and seemed to be a way to deflect attention from passing legislation that deals with predatory lending," Mr. Kest said.