A three-pronged attack on predatory lending was urged by John Bley, Washington state's Financial Institutions Director, at a Federal Reserve Board hearing yesterday in San Francisco. Saying that his department had been waging a front-line battle with predatory lending long before it became a national issue, Bley called for correcting the problem "surgically."
The three-fold approach Bley proposes includes simplified loan disclosure statements, new laws prohibiting unfair and deceptive trade practices in mortgage lending, and aggressive enforcement with harsh penalties for those found guilty.
Predatory lending isn't a new problem, Bley told the hearing on home-equity lending, it's just that the name has changed. "What was once called mortgage fraud is now called predatory lending," he said, adding that, "Under either name, our mission to investigate violations and enforce the law has remained the same.
Bley was invited to a hearing before Federal Reserve Board Governor Edward M. Gramlich to address proposed changes to regulations enforcing the Home Ownership and Equity Protection Act (HOEPA) amendments to the Truth in Lending Act. But Bley said his department's experience was that the amendments had very little impact on predatory mortgage lending practices, and the proposed changes weren't likely to get to the problem either.
Bley said he defines predatory lending as the "use of deceptive or fraudulent sales practices in the origination of a loan secured by real estate." Federal disclosures are too complex for many borrowers, he said, and borrowers trust loan officers to explain the terms of their loan. When a loan officer commits deception by abusing this trust, predatory lending becomes possible.
"The Federal Reserve Board shares some of the responsibility for creating an environment in which the only thing most borrowers can do is to trust the loan officer to tell them their rates and terms," He called current mandatory disclosures "so voluminous and so confusing that borrowers don't understand them." Complex federal regulations, Bley said, "lay traps and create uncertainty in disclosure by mortgage companies." He called for "simple disclosures, simply provided and simply explained."
He also called for new statutory provisions prohibiting the use of unfair and deceptive sales practices in the origination of mortgage loans, saying they may be the only true solution to predatory lending. Such provisions, he said, could also refer to a state's consumer protection law and perhaps open the way for more private actions against predatory lenders.
"We remain perplexed," Bley testified, "at the existence of federal criminal penalties for any consumer defrauding a lending institution, while the penalties against lenders for defrauding consumers are for the most part administrative and financial in nature. Some lenders," he said, "see no downside to the undertaking of mortgage fraud. At worst, the penalty is to stop enriching themselves."
The harm realized directly by consumers from predatory lending is far greater than the harm realized by financial institutions as victims, Bley emphasized. "How can we compare the emotional devastation, impairment of access to credit and loss of home to a bottom-line corporate write-off?" he asked.
Bley said his department encourages harsh penalties for acts of predatory lending, including restitution, monetary fines, permanent injunctions from lending, and criminal convictions with prison time for violators, if warranted. In the past five years, he said, his department has conducted more than 100 enforcement actions to correct abusive practices and forced the return of over $1.2 million to Washington consumers.