WASHINGTON - The Office of Thrift Supervision took the first steps toward stricter regulation of predatory lenders Tuesday by announcing a plan to review its mortgage lending rules.
In an advanced notice of proposed rulemaking, the agency is soliciting comment on how to close a loophole that allows finance companies to avoid state laws against predatory practices.
Since passage of the Alternative Mortgage Transaction Parity Act of 1982, mortgage lenders have been able to opt out of tighter state laws in favor of OTS regulations. However, the OTS is concerned that the Parity Act inadvertently encourages predatory lending practices, including refinancings of low-interest mortgage loans.
"When 0% Habitat for Humanity loans are refinanced, there's no excuse," OTS Director Ellen Seidman said at a press conference Tuesday.
The Parity Act applies in most states because only five or six, including New York, opted out when given the chance in the early 1980s, Ms. Seidman said. The OTS could not identify the other states that opted out.
While a company may choose to follow OTS rules, the agency does not have authority over the finance companies, Ms. Seidman said. The OTS will actively support congressional repeal of the legislation. "The Parity Act may have outlived its usefulness," she said. "It is no longer a recipe for effective supervision."
The agency is seeking comment on how widespread predatory lending has become in the mortgage market. Other questions, such as which neighborhoods have been targeted by predatory lenders and whether such targeting raises discriminatory issues under the Equal Credit Opportunity Act, are also being asked.
In terms of additional regulation, the OTS is asking whether it should impose limits on some of the features characteristic of predatory loans, including fees, refinancings and rollovers, prepayment penalties, and balloon payments.
The agency promised not to impose additional burden or regulation on institutions that lend responsibly. However, Americas Community Bankers president Diane M. Casey was not convinced.
"We believe the tone expressed in both the [proposal] and the press release could have a chilling effect on responsible lenders making subprime loans to serve the mortgage needs of & the very consumers that OTS wants to help," Ms. Casey said Tuesday in a prepared statement.
Defining "predatory lending" is one of the biggest challenges facing regulators, but they have treaded lightly for fear of lumping subprime lending, a legitimate practice, into the category.
The OTS will be working on a definition with its proposal, which is open for comment for 90 days. One of the more appropriate screens for discerning predatory lending practices, Ms. Seidman said, would be the use of prepayment penalties in loan refinancing, because such penalties are rarely used in the conforming loan markets.
Predatory lending has become a hot issue in recent weeks. Federal Reserve Chairman Alan Greenspan announced March 22 that an interagency task force of banking regulators, the Justice Department, the Federal Trade Commission, the National Credit Union Administration, and the Department of Housing and Urban Development is creating a joint policy statement defining specific illegal practices. Legislation is also in the works, with Rep. John J. LaFalce, D-N.Y., and Sen. Paul S. Sarbanes, D-Md., expected to introduce bills aimed at predatory lenders next week.
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