WASHINGTON Even though several major banking companies have decided to stop making subprime loans, policymakers will not and should not soften their anti-predatory-lending efforts, a former Federal Trade Commission official said Thursday.
David Medine, the former associate director of the FTCs financial practices division, said he agrees with the conventional wisdom that credit to underserved markets would dry up if established banking companies followed Bank of America Corp.s lead and exited the subprime market.
If theres a trend of legitimate lenders leaving that market, its going to leave it wide open for predatory lenders to continue to dominate it, said Mr. Medine, now a partner in the Washington law firm of Hogan & Hartson.
But he said he does not believe Bank of Americas move should discourage federal policymakers from tightening enforcement of existing laws, making more loans subject to protections under the Home Ownership Equity and Protection Act, and passing laws to fill in the gaps.
The lesson from the Bank of America experience is to examine the fixes to make sure they are narrowly targeted and dont foreclose on legitimate players, he said a day after the Charlotte, N.C., company announced that it was shedding its subprime units. But thats not to say there isnt room for greater protections. Targeted laws to address real problems are appropriate.
Other prominent companies have given up on subprime. For example, in January, Countrywide Credit Industries Inc., one of the top national lenders, stopped making loans in North Carolina, which last year enacted one of the nations strictest anti-predator laws.
These lenders actions will make regulators and lawmakers more sensitive to striking the right balance between stopping bad practices and choking off credit, Mr. Medine said.
He disagreed with mortgage lenders who say the explosion of state and local laws aimed at curbing predators is the main reason reputable lenders are leaving the business, but he acknowledged that there is legitimate concern about the ad hoc laws.
Still, There clearly is room on the federal level for balanced legal reforms that would leave room for legitimate lenders to operate in that market, he said.
One way to find such balance is by buttressing the FTCs resources for bringing cases against the predators, Mr. Medine suggested.
Since the bulk of abusive lenders are out of the jurisdiction of bank regulators, the burden falls on the FTC to punish them in court instead of through regular exams, for which the FTC lacks sufficient resources, he said.
Because a predators schemes generally vary from borrower to borrower, bringing such cases is very labor-intensive and generally too large a task for private litigants and advocates to take on, Mr. Medine said. The government is one of the only entities with the wherewithal to handle these cases, he said.
With more resources the government could bring more cases against more predatory lenders and clean up the market for legitimate lenders to create honest competition, he said.
Mr. Medine, who opened the FTCs high-profile investigation into the subprime lender Associates First Capital Corp., now a Citigroup Inc. unit, denied that the case and others against mortgage lenders helped to scare Bank of America out of this risky business line.
In fact, banks should applaud actions against predatory lenders, he said. Banks have compliance programs to make sure they are complying with lending laws and arent engaging in deceptive practices. So an institution such as Bank of America would know its complying with the law and wouldnt be at risk from being the target of unfair suits.
The problems that need to be dealt with are deceptive sales practices, balloon payments, the foreclosure process, prepayment penalties, and single-premium credit insurance, Mr. Medine said. And more loans should be defined as high-cost and subject to the homeownership acts disclosure and other requirements, he said.
But like others trying to balance the subprime-predatory teeter-totter, Mr. Medine offered no specific remedies. Theres not one simple solution because theres not one simple problem, he said. There are a lot of different abusive practices. The challenge is to target those practices.
