STATEMENT OF COMMISSIONER ORSON SWINDLE
In the Matters of
Barry Cooper Properties, Inc., File No.
In these complaints, the Commission alleges that Barry Cooper Properties, Inc., Capitol Mortgage Corporation, and their principals violated the Truth In Lending Act ("TILA"), 15 U.S.C. § § 1601-1666j, the Home Ownership and Equity Protection Act of 1994 ("HOEPA"), 15 U.S.C. § 1639, and Section 5 of the FTC Act, 15 U.S.C. § 45, while engaging in subprime lending. I agree with my colleagues that there is a sturdy foundation for the allegations that defendants violated TILA, HOEPA, and Section 5's prohibition on deceptive acts or practices. I also agree that strong relief is needed to remedy these violations and that most of the relief contained in the orders is necessary and appropriate. The complaints also allege, however, that defendants engaged in unfair acts or practices, and I dissent from these allegations because the statutory requirements for unfairness are not met.
In Barry Cooper Properties, Inc., the complaint alleges that the practice of asset-based lending(1) and the use of certain loan terms(2) are not only HOEPA violations but also unfair acts or practices in violation of Section 5. In Capitol Mortgage Corporation, the complaint likewise alleges that the inclusion of loan terms prohibited by HOEPA is unfair. The Capitol complaint also alleges unfairness based on the improper modification, waiver, or deprivation of HOEPA's three-day waiting period between when the lender provides the borrower certain disclosures and when the parties close on the loan.
An unfair act or practice is one that is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers themselves and is not outweighed by countervailing benefits to consumers or competition. 15 U.S.C. § 45(n). Consumers can reasonably avoid being injured by asset-based lending by the simple step of not taking loans that obligate them to make monthly payments in excess of their incomes. Loan transactions that involve a security interest in one's home are serious business, and consumers must shoulder some obligation to read loan documents and consider their financial situation before agreeing to the transaction. While Congress may seek to protect vulnerable consumers through the extra restrictions on lenders embodied in HOEPA, this does not absolve those consumers of the duty to act reasonably and responsibly in such loan transactions. This point applies equally to loans that contain terms prohibited by HOEPA; consumers can reasonably avoid being injured by simply not accepting a loan with such terms.
Finally, it is unlikely that the denial of the HOEPA three-day pre-closing waiting period causes consumers substantial injury. Under TILA, these borrowers also have three days after closing to rescind the loan agreement. 15 U.S.C. § 1635(a); 12 C.F.R. § 226.23. There is no evidence that borrowers who are also covered by HOEPA have been substantially injured by having only three days, instead of six, to reconsider and walk away from the loan agreement(3) Moreover, if borrowers are not provided notice of the TILA three-day post-closing rescission period by the lender, they then have up to three years to rescind the loan agreement. 15 U.S.C. § 1635(f); 12 C.F.R. § 226.23(a)(3).
I do not believe that HOEPA tips the balance toward finding these practices unfair under the statute. HOEPA does not alter the fact that the practices simply do not meet the primary statutory requirements of not being reasonably avoidable by consumers and causing substantial injury. See 15 U.S.C. § 45(n) ("In determining whether an act or practice is unfair, the Commission may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.").
The allegations that defendants violated TILA and HOEPA, and engaged in deceptive practices by failing to disclose material loan information, are well supported. It is unnecessary to stretch beyond these solid allegations to construct expansive unfairness theories that do not satisfy our statutory unfairness requirements.
Accordingly, I dissent to the extent that each of these complaints alleges that the defendants engaged in unfair acts or practices.
1. Asset-based lending occurs when credit is extended based not on the borrower's projected future income but on the amount of equity in his or her home or other asset.
2. HOEPA prohibits certain loan terms, including a balloon payment in a loan with a term shorter than 5 years, an increased interest rate after default, and some prepayment penalties. 12 C.F.R. § 226.32(d).
3. Even our own Cooling-Off Rule, which was designed to counteract high-pressure door-to-door sales tactics, provides only three days to rescind a transaction. 16 C.F.R. § 429.1.