WASHINGTON Consumer groups hoping for the Federal Reserve Board to start cracking down on predatory lenders may be sorely disappointed when the central bank takes up the issue Wednesday.
Despite calls for action from the Treasury Department, House Banking Committee Chairman Jim Leach, and consumer advocates, the Fed appears poised to pass the buck on deciding if stronger measures should be taken against abusive lending practices. Though the Fed held several hearings this past summer and many activists had high expectations for action, a recent speech by Fed Governor Edward M. Gramlich appeared to confirm that the central bank will do little new for now.
Mr. Gramlich said that the Fed was still sorting through information from recent hearings and that it needed more evidence before it could act.
We should be able to agree that more information is an important prerequisite to sensible policies in this area, he said at a community and consumer affairs conference in Philadelphia on Wednesday. At this point we have plenty of anecdotes about predatory lending but not much hard information.
Consumer groups saw the speech as a clear sign the Fed was backing down.
Gramlichs speech seems to be preparing the ground for the Fed to announce a wait and see approach, as the conclusion to its hearings, said Matthew Lee, executive director for Inner City Press/Community on the Move. That would be overly cautious, and an abdication of the Feds responsibility.
Banking industry officials, however, said they had not been briefed on the Feds plans and were reluctant to predict victory.
The Fed has been very closemouthed about this, said James D. McLaughlin, director of regulatory affairs for the American Bankers Association. The impression Im getting is that they wont make many changes. That is not just good for banks, but for the availability of credit to everyone.
But industry representatives will not be able to relax, as they still have to contend with a mounting number of anti-predatory-lending laws and rules from states and cities.
Some analysts had predicted that the central bank would adopt several of the recommendations made by a joint Treasury-Housing and Urban Development report issued in the summer.
The study recommended that the Fed lower the thresholds for when a loan falls under the Home Ownership and Equity Protection Act, which is often seen as the central banks most potent weapon against predatory lending because it triggers additional disclosure and reporting requirements.
The Treasury-HUD report suggested the Fed change its rules so that any loan with an annual percentage rate eight or more points over the rate for Treasury securities would fall under HOEPA. It also said that more fees should be included in the points and fee test, including the costs of single-premium insurance products and all compensation received by the mortgage broker.
Mr. Gramlich said that if those changes were made, the portion of loans covered by the homeownership act would rise to 5% from 1%, but he made no commitments.
The Treasury-HUD report also asked the Fed to define unfair, deceptive, or abusive practices and prohibit loan flipping, the sale of single-premium products with mortgage loans, and lending without regard for the borrowers ability to repay.
It recommended that the Fed expand the companies that must report to and add additional data items for the Home Mortgage Disclosure Act, as well as conduct risk-based examinations of nonbank lending subsidiaries of financial holding companies that it believes are predatory lenders.
Of those suggestions, the Fed has taken only one. Last month the central bank issued a proposal that would expand HMDA reporting requirements to include annual percentage rates and loans that fall under the homeownership act. But many activists had hoped that was only the first step, not the final act.
Daniel Immergluck, senior vice president of the Woodstock Institute, a nonprofit company in Chicago that analyzes housing policy, said that right now the indications are that the Fed is walking away from substantive stuff.
The proposal to expand loan reporting requirements is quite disappointing, he said. It just put in a couple of fields, and didnt add a field for points and fees. It is just not going to be enough to do anything of value.
But some analysts defended the agencies and said that any rules on predatory lending were premature because no clear definition has been determined.
Bert Ely, an independent financial consultant in Alexandria, Va., said Mr. Gramlichs speech gets to the heart of the problem anecdotes arent enough to get rules passed. You have to be able to measure how big the problem is, and there is no way to do that without a proper definition.
A group representing 11 federal agencies, including the Justice and Treasury Departments, had been expected to issue recommendations this summer on how to clamp down on predatory lending by using existing laws. But that report has not yet materialized and now it is not expected until next year.
Other agencies moved forward with their own proposals after Rep. Leach blasted them at a hearing in May. The question becomes, if there is a problem out there are regulators and the Federal Reserve AWOL? the Iowa Republican had said.
For example, last month the Federal Deposit Insurance Corp. released guidelines warning banks on how to avoid purchasing predatory loans, either directly or in securitizations. The guidelines recommended that banks investigate the originators reputation, practices, underwriting policies, and compliance programs.
But industry groups reacted skeptically to the guidelines and worried the FDIC may have gone too far.
How far do you have to go to find out an originators reputation? said Ann Grochala, director of bank operations at the Independent Community Bankers of America.
Meanwhile, lenders are facing an onslaught of tougher state and city regulations.
North Carolina, New York, Chicago, and Washington, D.C., are among the handful of states and cities that have cracked down recently on predatory lenders, while dozens more have considered similar moves.
North Carolina last year became the first state to put an anti-predatory law on its books that bars certain lending techniques, like balloon payments and early-payment penalties. New York used existing regulations to require lenders to disclose all details of their loans at least three days before closing the contract.
Chicago passed a municipal ordinance in September that prohibits the city government from doing business with any financial institution that cannot certify it does not make predatory loans.
On Wednesday the District of Columbia City Council passed the nations first bill that would let homeowners contest a foreclosure on the grounds that an initial loan was predatory. The bill must be approved by the mayor and Congress, which controls the districts purse-strings and policy decisions.
Mr. Immergluck said that tougher legislation is on the way in other states, including Illinois, Minnesota, Missouri, and Washington.
Michele Heller contributed to this article.
From Our Archive:
- 2 Agencies to Issue Plan for Curbs on Predatory Lending - June 19, 2000
- Leach: No Tough New Laws This Year On Predatory Loans - May 25, 2000
- Additional information from House Banking's predatory lending hearing, including hyperlinks to statements from regulators, indusry sources, and activisits - May 25, 2000
- Democrats Hit 'Predators' In Three Bills - April 13, 2000
- Too Much Or Not Enough? Hud Joins Lending Fray - March 31, 2000