Predatory lending practices in the subprime market were the subject of testimony delivered by Ronald G. Isaac, Assistant to the Director of the Federal Trade Commission's Bureau of Consumer Protection. Speaking on behalf of the Commission before the California State Assembly Committee on Banking and Finance, Isaac outlined a number of ways the Commission continues to address predatory lending practices, including law enforcement and consumer education.
Subprime lending refers to the extension of high rate, high fee loans to persons who are considered to be higher risk borrowers. This segment of the lending industry has grown substantially in recent years. In 2000 alone, subprime lenders originated over $140 billion in home equity loans. In addition to an expansion in the number of loans, the Commission's testimony notes that the composition of the industry is changing, attributable in part to the increasingly important role that Wall Street investment banks have played in raising funds for subprime loans over the last five years. In 1995, $18.5 billion in subprime loans were securitized. In 2000, that figure reached almost $56 billion.
The enormous growth of the subprime mortgage industry has enabled many consumers to obtain home loans who previously would have had much more limited access to the credit market. "It is critically important for consumers, especially those who live in lower-income communities, to have access to credit," according to the testimony. "However, this access should not be based on predatory lending practices that take advantage of borrowers. Predatory lending practices hide from consumers essential information they need to make decisions about their single greatest asset -- their home -- and the equity they have spent years building." Lower-income and minority borrowers, as well as elderly homeowners are particularly vulnerable targets, according to the testimony.
The testimony, presented on February 21, addressed the variety of predatory lending practices that are occurring with some lenders in the industry and that concern the Commission, including equity stripping, packing, and flipping. Equity stripping occurs when a loan is made based on the equity in a property rather than on a borrower's ability to repay the loan. As a general rule, loans made to individuals who do not have the income to repay such loans usually are designed to fail. They frequently result in the lender acquiring the borrower's home and any equity the borrower had in the home. Packing is the practice of adding credit insurance or other "extras" to increase the lender's profit on a loan. Lenders often stand to make significant profits from credit insurance and, therefore, have strong incentives to induce consumers to buy it as part of a loan. Flipping occurs when a lender induces a borrower to repeatedly refinance a loan, often within a short time frame, charging high points and fees each time.
"Depending on the particular facts," according to the testimony, "some of the practices may constitute deceptive or unfair practices in violation of Section 5 of the Federal Trade Commission Act ("FTC Act") or a comparable state statute. "In addition, some of these practices may constitute violations of the Truth in Lending Act ("TILA"), as well as violations of the protections for high-rate, high-fee loans under the Home Ownership and Equity Protection Act ("HOEPA"), an amendment to TILA," the testimony stated.
Isaac noted that the Commission has increased its enforcement activities to halt lenders who are engaged in predatory lending practices and outlined several of the FTC's recent law enforcement actions in this area. At the same time, according to the testimony, the Commission has been working with other federal agencies and states to increase and coordinate enforcement efforts. The Commission also is educating consumers in order to help them avoid potential home equity lending abuses, Isaac said.
Isaac also told the Committee that in addition to its casework and ongoing investigations, the Commission is sharing its knowledge and experience with other enforcement agencies and with consumers. In 1997, the Commission's Bureau of Consumer Protection held joint law enforcement sessions on home equity lending abuses with state regulators and law enforcers in six cities around the country. These training sessions were conducted to assist states in exercising their relatively new enforcement authority under HOEPA and to share information about recent trends.
The testimony also addressed the Commission's aggressive consumer education program. Most recently, National Consumer Protection Week 2001 focused on educating consumers about abusive lending tactics, and the FTC has published a series of free publications specifically for homeowners and potential home buyers.
Isaac concluded the Commission's testimony by telling the Committee that the FTC will continue to examine the problem of predatory lending practices and will take appropriate law enforcement action work to protect consumers from these abuses.
The Commission vote to approve the testimony was 5-0.
Copies of the Commission's testimony, information regarding the law enforcement actions, and consumer education material about home equity fraud are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; 877-FTC-HELP (877-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.
(FTC File No.: V010002)