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National Anti-Predatory Lending Standard
 Issue
Legislative proposals are under consideration to curb unscrupulous lending practices.
Position Statement
ABA supports the development of national anti-predatory lending standards to educate consumers and protect them from unscrupulous lending practices while ensuring customer access to affordable credit. Any anti-predatory legislation should also create uniformity, apply to all lenders, and ensure consistency among state-based mortgage lending initiatives.
Explanation
ABA is committed to ensuring that all Americans have fair and equitable access to credit, and that consumers have the necessary skills to make wise credit and other financial decisions. ABA also supports the development of a bipartisan federal legislative response that would establish national uniform standards to combat predatory lending practices, while avoiding a patchwork of state and local legislative responses that could disrupt the critical national marketplace for real estate credit and other forms of credit.
ABA believes that there are several policies that are critical to achieving these goals. First, it is critical that any new predatory lending law does not alter the current regulatory structure by making federally chartered institutions subject to state regulation. Any new predatory lending standard should create a level playing field for institutions to compete, without placing new restrictions on federally chartered institutions.
One of the greatest concerns for ABA and its members is the effort to place into federal law a suitability standard for mortgage lenders. Only consumers can determine whether or not a mortgage is suitable for them. Banks are able to determine specific factors related to the underwriting of a loan, such as a consumer's ability to repay a loan. Due to the wide variety of loan types and repayment options, banks are not able to make a "suitability" determination on behalf of a borrower. That can only be done by the consumers themselves.
We also believe that the rate and fee triggers for any uniform predatory lending law must not be set too low. It is important that a predatory lending law be tailored to focus on the areas of the market where abuse is likely to take place while not being written overly broadly so as to limit the availability of credit for credit-worthy borrowers.
ABA also advocates limiting assignee liability for loans. The secondary market is now the principal source of capital for mortgage lending. The current system of unlimited assignee liability for high-cost loans acts as a usury cap for higher risk borrowers, because it scares capital away from loans subject to assignee liability. Without liquidity, the market for subprime mortgages will dry up, depriving many credit-worthy borrowers of needed financing.
In addition to lenders, there are other important participants in the mortgage market, such as mortgage brokers and appraisers, who influence whether borrowers receive loans that they can realistically afford. The laws regulating brokers and appraisers lack uniformity. Strong, uniform regulation of mortgage brokers and appraisers is needed to protect both borrowers and lenders.
ABA strongly supports vigorous enforcement of existing standards with respect to all lenders, including those not subject to banking regulation. The joint report by the Federal Reserve Board and the Department of Housing and Urban Development issued in 1998 stated, "Abusive mortgage loans are not generally a problem among financial institutions that are subject to regular examination by federal and state banking agencies."
Policy makers should distinguish between "subprime lending" programs and "predatory lending" practices. These terms are often mistakenly used interchangeably. Responsible subprime lending provides needed mortgage financing to credit worthy individuals with credit blemishes or other risk factors, though at somewhat higher rates or under stricter terms than are available to borrowers with lower borrowing risks. The rise of subprime lending has given many previously underserved borrowers access to credit. Policy makers should not impose new laws and regulations that inaccurately label subprime loans as "predatory" or that stigmatize legitimate loan terms.
Action in the 110th Congress
On November 15, 2007, the House of Representatives passed H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007, by a vote of 291-127. This legislation, sponsored by Representatives Brad Miller (D-NC), Mel Watt (D-NC), and Financial Services Chairman Barney Frank (D-MA), seeks to address abusive lending practices by requiring licensing of mortgage brokers at the state level (and at the Federal level if the states do not act), and the registration of bank employees originating loans. The legislation also creates distinctions between prime loans and non-prime loans. Non-prime loans under the bill would be subject to greater scrutiny, as well as increased penalties and levels of liability. The legislation reduces the triggers for "high cost" loans and provides new liability for securitizers of loans. The bill does include a limited level of preemption for secondary market participants, but it does not include broad federal preemption. Although the House-passed version of the bill is less adverse to the banking industry than when first introduced, ABA does not support the legislation and will continue to seek improvements in the bill conforming with our policy positions. Senate action on legislation remains unclear, but ABA will continue to work with legislators to seek further improvements in the event that there is additional legislative activity.
Contact for further information: Joe Pigg (202) 663-5480.
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