Predatory practices in the subprime mortgage lending market such as "equity stripping," "packing," and "flipping" and the threat these practices pose to vulnerable homeowners were the subjects of testimony delivered today by Jodie Bernstein, Director of the Federal Trade Commission's Bureau of Consumer Protection. Bernstein, who spoke on behalf of the Commission, outlined for members of the Senate Special Committee on Aging why the FTC has focused increased attention on abusive lending practices.
"It is critically important for all consumers, especially those who live in lower-income communities, to have access to capital. Access that is based on deceptive mortgage lending, however, is false access. Deceptive lending practices hide from consumers essential information they need to make decisions about their single largest asset -- their home -- and the equity they have spent years building," the Commission testimony states.
According to the testimony, deceptive lending practices are particularly devastating because these loans usually are sought at a time of great need, when borrowers are most susceptible to practices that can strip them of substantial sums of money and, ultimately, of their homes.
Subprime lending refers to the extension of high interest rates or higher fee loans to higher risk borrowers. This segment of the lending industry has grown substantially since the early 1990s. In 1997 alone, subprime lenders originated over $125 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. One of the most dramatic changes has been the growth in subprime mortgage lending by large corporations that operate nationwide.
Noting that there are lenders in the subprime mortgage market who play by the rules and serve communities that may have been underserved by other lenders in the past, Bernstein addressed three of the abusive practices that reportedly are occurring with some lenders in the industry and that concern the Commission -- 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.
Bernstein stated that the Commission believes some of these practices may be illegal and the Commission is increasing its enforcement activities to halt any unlawful practices.
She outlined for the Committee the allegations the agency made in a January 1998 complaint filed in U.S. District Court against a Washington, DC-area lender, Capital City Mortgage Corporation. The FTC alleged that the company engaged in deceptive and unfair practices against borrowers at the beginning, during, and at the end of the lending relationship.
In addition to charging that Capital City violated Section 5 of the FTC Act which prohibits unfair and deceptive practices, the agency alleged that the company violated three credit laws enforced by the Commission: the Truth in Lending Act, the Fair Debt Collection Practices Act, and the Equal Credit Opportunity Act.
Bernstein told the Committee, "In addition to its casework and ongoing investigations, the Commission is sharing its knowledge and experience with other enforcement agencies and with consumers." At the hearing, she introduced the agency's newest consumer education brochure, "Home Equity Loans: Borrowers Beware." The free brochure is available from the FTC and also posted on the agency's web site. It explains home equity loans and offers tips for identifying and avoiding home equity fraud, including equity stripping, packing, and flipping.
The Commission vote to approve the testimony was 5-0.
Copies of the Commission's testimony, the Capital City Mortgage Corporation complaint, 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, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-FTC-HELP (202-382-4357); 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. P964807)
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