Case Overview, Predatory Lending

 

           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.

           Although it 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."

           Both Congress 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?"

           Congress failed 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.