WASHINGTON - Ellen Seidman's crusade to curb predatory lending is gaining traction.
The director of the Office of Thrift Supervision, the smallest of the four bank supervisory agencies, has led the regulators' campaign to quash lending practices they deem systemically risky, legally questionable, and ethically unsound.
"I'm pleased to have been out there early. But I'm even happier that other people have really picked it up and folks like the Federal Reserve Board, which has a critically important role, are now moving," Ms. Seidman said in an interview this week.
On Monday the central bank announced plans for three public hearings to discuss how the Home Ownership Equity and Protection Act of 1994, known as HOEPA, can be used to stop abuses - the first step toward fulfilling a promise made in May to review its rule-writing authority to curb predatory lending practices.
The 1994 law subjects lenders making high-cost home-secured loans to price limits and disclosure requirements that go beyond those required under the Truth in Lending Act. Under the law, the Fed has the power to set the "trigger" levels that categorize a loan as high-cost. It also has the authority to declare certain lending practices "unfair and deceptive."
While many propose new laws to stop predatory lending, Ms. Seidman favors tougher enforcement by regulators.
"We've got to do a better job" policing lending practices "that are clearly illegal under current law," she said.
Ms. Seidman's oratory and action against predatory lending can only do so much, she concedes. She supervises roughly 10% of the banking industry, has no jurisdiction over the key laws governing lending and consumer protection, and lacks the status of Federal Reserve Board Chairman Alan Greenspan.
The Fed's review of the act's regulations will provide answers to one of the big questions: how to define predatory lending.
The Home Ownership Equity Protection Act uses rates and fees in defining a high-cost loan: annual percentage rate 10 points higher than Treasury securities with comparable maturities, or customer-paid points and fees exceeding 8% of the loan amount. If Fed officials changed these triggers - and Ms. Seidman said "the evidence suggests something needs to be done" - a new definition of predatory lending would emerge.
Ms. Seidman, 52, has not ceded all policing of predators to the Fed, however, and said she will continue to flex her muscles.
Starting with a pilot program this fall, the OTS will check thrifts during compliance exams to see if they might be engaging in predatory lending. Examiners are developing the new procedures now and trying to decide whether it is better to first look at loan portfolios or at institutions with suspect marketing practices.
"Do we think about the marketing side first or do we deal with the loans first?" she asked. "And if we see loans that have exceptionally large fees or interest rate - or ones that consistently have pre-payment penalties combined with very high interest rates - do we then look at how they are marketed and to whom?"
Ms. Seidman also wants to close a federal loophole that allows state-regulated nonbank mortgage lenders to avoid tough state subprime lending laws. "We need to find the best way to get at the part of the predatory lending problem that we have some ability to deal with on a regulatory basis, while making sure we do not stop innovation," she said.
In April the OTS issued an advance notice of proposed rulemaking that could lead to reform of the Alternative Mortgage Transaction Parity Act, which was passed in 1982 to stimulate lending through variable-rate mortgages and other alternative financing. The parity act lets state-regulated finance companies choose to comply with state or federal lending regulations. In states with strong laws against predatory lending, some lenders are opting for the more lenient federal rules. Ms. Seidman said she is reviewing public comments on the issue, and has yet to decide what regulatory actions or legislative recommendations to make.
Community activists have been asking bank regulators to use their "bully pulpits" to talk Wall Street investment houses into checking their securities pools for predatory loans. Ms. Seidman acknowledges the link.
"There is a connection between being able to do very large quantities of subprime lending and perhaps being able to do some predatory lending and being able to move it off your books [by] selling it into a security," she said. "Exactly what the role of the securities regulators and the underwriters in all of this is something that really is evolving, both in terms of facts and in terms of responsibilities."
While bank regulators do not supervise the securities industry, Ms. Seidman said, they are looking at the extent to which banks have an obligation to do proper due diligence on loan packages they buy from the investment banks. "We've got to look at this as a holistic thing. You can't hone in on just one piece."
Ms. Seidman speaks passionately about lending and housing issues.
"I started out in city planning. I got away from it for a long time, but it's where I think my roots are," she said in an interview in her corner office overlooking her last place of employment - the executive office building of the Clinton White House where she worked on the national economic council from 1993 to 1997.
As a 23-year-old two years out of Radcliffe College, she worked for Housing Innovations in Boston, which established of one of the country's first partnerships between community groups and banks. After getting a law degree from Georgetown University, she began a career that has taken her to the Transportation and Treasury departments, Fannie Mae, and the White House.
Ms. Seidman said that, in 1998, less than a year after taking the helm of OTS, she began seeing signs that a relatively new type of lending called subprime could result in systemic risks and even failures. By spring of 1999, she started hearing more and more tales of people who had been preyed upon.
"I said, 'Wait a minute, there is something going on here that is not localized.'. In addition to all of the damage it was doing to individuals, it had the potential to damage what I truly believe is really important - namely the improved neighborhood fabric that we have been able to create in this country over the last 10 years. I became convinced there was an issue that needed to be dealt with."