This document provides background information and summarizes the debate over regulation of predatory lending. The links to the left will lead you to public documents that we have found.
During the prosperous
and heady days of the 1990's, finance and investment instruments multiplied
rapidly as financial institutions developed new ways of expanding their lines
of business. Mortgage lending was no exception. Unfortunately, along with
new types of mortgages and home financing came consumer abuses. The basic
government regulatory mechanism for home lending is the Real Estate Settlement
Procedures Act (RESPA). Congress passed RESPA in 1974 in an effort to prevent
lenders from taking advantage of consumers, who often find the mortgage process
complex and confusing. RESPA requires lenders to disclose costs to borrowers
at various points in the settlement process. RESPA was also aimed at "redlining."
Lenders commonly refused to provide loans to buyers purchasing homes in neighborhoods
those lenders felt were too poor or decrepit to warrant an investment. Disproportionately,
these redlined neighborhoods were those with high percentages of minorities.
certainly had a positive effect, RESPA is now a creaky regulatory mechanism
that has failed to keep up with the changing mortgage market. Both Congress
and the Department of Housing and Urban Development (HUD) have received an
increasing number of complaints regarding predatory lending. Most of the disputed
practices take place in the so-called "subprime" market. This refers
to borrowers who have less assets and are higher risks in comparison to those
with the strongest balance sheets or credit history. Said one consumer advocate,
"Lenders target poor, black, and older neighborhoods. They make cold
calls from marketing lists. They identify areas that have little or no bank
presence." He added, "They go granny hunting. Older people are good
targets because they have a lot of equity. Many of these people own their
own home outright, but are convinced to refinance."
and HUD have considered changes to RESPA. The Senate Banking Committee held
hearings in the 107th Congress and HUD published a notice of intended rulemaking.
It is a difficult issue, though, as it splits the housing finance industry.
Different parts of the industry see the issue differently. Those companies
who make money from the various fees charged to borrowers want to limit any
new regulatory actions by government. Title insurers, for example, have strongly
resisted revisions to RESPA. An official from a banking trade group was more
open to a revision, but was cautious as to what needed to be done: "We
recognize that there's a problem, but there is no common definition of what
is predatory and what is not. What's a bad loan? What's a predatory loan?"
to pass any legislation and although HUD had promised new regulations to take
effect on January 1, 2003, the regulations were put off. HUD indicated that
it was still serious about the new rules and said it expected to finalize
them later in the year.