WASHINGTON - House Banking Committee Chairman Jim Leach on Wednesday ruled out passage this year of aggressive new laws to curb predatory loans, but his criticism of the federal agencies' enforcement of existing laws means bankers could face more regulatory scrutiny of their lending practices.
The Iowa Republican waited until nine federal and state regulators finished testifying about the danger to borrowers posed by unscrupulous lenders and the need for more laws before he pounced. Congress passed "a very strong law" in 1994 to rein in such lenders, but he said the Federal Reserve Board and other agencies have not fulfilled their responsibility to issue detailed implementing regulations.
"We have in place in statute very powerful words on this subject. [The need for] any additional legislation is probably at the margins," Rep. Leach said. "The question becomes if there is a problem out there & are regulators and the Federal Reserve AWOL?"
Regulators responded that predatory lending is difficult to define and combat without inadvertently curbing legitimate higher-priced subprime loans to high-risk borrowers.
"It is important to ensure that any reform be carefully crafted to avoid unintended consequences," warned Comptroller of the Currency John D. Hawke Jr. "While we clearly need to address real abuses that exist, particularly in connection with home-secured loans, we also need to preserve and encourage consumer access to credit & and competition in the provision of financial services to low- and moderate-income families."
Fed Governor Edward M. Gramlich said that the central bank and the Department of Housing and Urban Development proposed some fixes in a 1998 report that included necessary legislative changes. For instance, he said, altering the annual percentage rates that trigger anti-predatory-lending laws would require simultaneous amendments to the Truth-in-Lending Act.
Ironically, though pressure on the agencies may translate to tougher examination of banks, regulators and lawmakers said that few banks are the culprits. They said payday lenders and other nonbanks are more frequently guilty of making loans to borrowers with no means to repay them, charging high fees, and improperly refinancing credits.
Yet Mr. Hawke said that the Comptroller's Office plans to issue guidelines that will direct examiners to review lending policies more thoroughly to ensure national banks are not making home equity or other loans without "reasonable expectation" of repayment. Examiners will be instructed to adversely classify these loans and prohibit further accrual of interest.
Also, the Comptroller's Office is developing guidelines that would help examiners attack abusive lending practices using anti-discrimination laws. "This guidance will help set the scope and focus for our fair lending examinations and may lead to targeted fair lending investigations," Mr. Hawke testified.
Community Reinvestment Act exams also could be used to discourage predatory practices, regulators said. An interagency effort is under way to revise CRA exams so that a bank's purchase of loans, or securities backed by loans, that have predatory terms cannot be used to boost a bank's CRA rating. Indeed, Mr. Hawke said regulators should consider lowering a bank's CRA score for originating or buying such loans.
Rep. Leach was unsatisfied. He said regulators were guilty of preempting some state consumer protection laws to make their charters more attractive, and he issued 11 "anti-predatory lending precepts" that he said regulators should immediately adopt. Among other things, Rep. Leach proposed requiring clear disclosures about the terms of loan agreements, and prohibiting loans granted without a proper analysis of the borrower's ability to pay.
Democrats and consumer advocates insisted they will press ahead with bills introduced in April. "While not all subprime lending is predatory, all predatory lending is subprime," testified Sen. Charles E. Schumer, D-N.Y., who sponsored a Senate bill. "This is a huge problem throughout our country. & We have to move with alacrity on this subject."
Sen. Schumer partly blamed banks for the rise of unethical nonbank lenders because, he said, banks have abandoned inner cities and left a "vacuum" filled by these other entities.
Editor's Note: Each link opens a new browser window. We have no control over the content or availability of sites not part of American Banker Online.