# O **NEWS RELEASE**

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| ## Comptroller of the Currency      | ##### NR 2000- 42              |
|                                     |                                |
| Administrator of National Banks     |                                |
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FOR IMMEDIATE RELEASE Contact: Robert Garsson

Date: June 5, 2000 (202) 874-5770

Remarks by

Julie L. Williams

First Senior Deputy Comptroller and Chief Counsel

Office of the Comptroller of the Currency

Before the

Robert Morris Associates/Consumer Bankers Association

5^th^ Annual Consumer Risk Management Conference

Chicago, Illinois

June 5, 2000

It is always an honor to have the opportunity to speak at a conference
sponsored by Robert Morris Associates or by the Consumer Bankers
Association \-- this afternoon is a real doubleheader in that regard.
Also, I could hardly think of a more appropriate forum than a "Consumer
Risk Management" conference, sponsored by RMA and CBA, to talk about
today's hottest consumer lending *and* credit quality topic \--
predatory lending.

Concerns about predatory lending are attracting a great deal of
attention in Washington and at the state and local level. Less than two
weeks ago, the House Banking Committee held a day-long hearing on
predatory lending, with testimony from *nine* regulatory agencies,
scores of representatives from community and consumer organizations and
the financial industry. There are at least five bills now pending in
Congress to deal with predatory lending. In addition to expanding the
coverage and provisions of the Home Ownership and Equity Protection Act
("HOEPA"), some of these bills would also impose restrictions on home
mortgages generally, regardless of the rate.

Predatory lending also is the focus of attention at the state and local
level. For example, North Carolina has enacted an anti-predatory lending
law that is based on the high cost loan concept in HOEPA. In fact, it
appears that the North Carolina law served as a model for some of the
bills pending in Congress. To give you a flavor of additional state
activity, Utah and West Virginia have recently enacted laws designed to
address abusive practices in mortgage lending. The states of California
and Massachusetts are considering high cost mortgage legislation, and
the New York Banking Department has published its second regulatory
proposal to address the issue. Finally, there is activity at the local
level, such as here in Chicago, where the city is considering an
ordinance that would bar what it would call "predatory lenders" and
affiliates of such companies from doing business with the city,
including being a depository of city funds.

What I'll do this afternoon is discuss the concept of predatory lending,
including the difficulty we face in trying to define and measure this
activity, and describe the Federal government's efforts in this area.
But I also want to underscore the significance of the role *your
institutions* need to play. This is an issue of major significance for
the banking industry \-- not only to help stop unacceptable practices by
a few bad actors, but also to affirm the banking industry's leadership
role in promoting responsible lending to all segments of customers. To
paraphrase a recent observation by Congressman John LaFalce, the
industry should ensure that it is mainstreaming new consumers and new
entrepreneurs \-- not questionable practices \-- into our banking
system.

Let me begin by defining terms \-- or perhaps I should say, by not
exactly defining terms. "Predatory lending" often is used to refer to
practices that share one or more of the following characteristics:

-   Loans made in reliance on the value of the borrower's home, without
    a proper evaluation of the borrower's ability to repay without
    resort to foreclosure on the collateral, with the possible or even
    intended result of foreclosure or the need to refinance under
    duress;

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-   Pricing terms that far exceed the true risk and cost of making the
    loan;

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-   Targeting persons that are less financially sophisticated or
    otherwise vulnerable to abusive practices, or have less access to
    mainstream lenders, such as the elderly and persons living in
    low-income areas;

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-   Practices that are fraudulent, coercive, unfair or deceptive, or
    otherwise illegal;

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-   Loan terms and structures that make it difficult for borrowers to
    reduce their indebtedness;

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-   "Packing" into the loan unearned, or otherwise unwarranted fees or
    services, which may include prepaid single premium credit life
    insurance; and

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-   Loan "flipping," that is, frequent refinancing with fees which strip
    equity from a borrower.

While we may all be able to agree that the individual lending practices
that I listed are abusive, devising a general definition to the term
"predatory lending" that avoids being either over-inclusive or
under-inclusive is challenging.

"Subprime" lending illustrates the problem. As you all know, we have
seen tremendous advances over the last several years in credit
availability. With the increase in the availability of mortgage credit
has come greater opportunities for home ownership and the accumulation
of wealth \-- two longstanding objectives of social and economic policy
in the United States. Not surprisingly, improved access to credit can
mean higher loan prices for subprime borrowers whose credit profiles
present greater risks. While higher loan prices do not necessarily
indicate abuses, testimony at the recent Congressional hearing stated
that most predatory lending practices occur in the subprime market. And
some observers have broadly \-- and inaccurately \-- characterized all
subprime loans as predatory loans.

It does not follow that the improved access to credit by subprime
borrowers generally involves predatory lending practices. There are a
great many responsible subprime lenders who make credit available at
rates that reflect the costs and risks of such lending without engaging
in abusive lending practices, and these lenders frequently provide
access to credit for borrowers whose options might otherwise be limited.

We do need to recognize, however, that some of the characteristics that
cause a borrower to be a "subprime" credit, are also characteristics
that may make that customer vulnerable to predatory lending practices.
But when does "subprime" lending become "predatory" lending? The key is
often what occurs at "ground level," in the interactions between lenders
and their customers.

If you will permit me to borrow a notion from the Discovery Channel to
illustrate, you could say that a classic "predator" traps the unwary and
preys on the weak. Put in the lending context, a predatory lender
ensnares vulnerable customers with loan products designed to prey on
their weakness, to bleed them financially, and in some cases, strip them
of their most precious possessions. Loan features such as high rates,
collateral requirements, payment structure, fees and services included,
frequency of refinancing, and inadequate and misleading disclosures are
simply means that can be tailored to that end.

Certain loan features may be indicators of higher risk of predatory
lending patterns, HOEPA-covered loans are an example, but not all loans
with such features will necessarily be predatory. This makes the extent
of predatory lending occurring very difficult to quantify, but like
pornography, you know it when you see it. Drawing on anecdotal evidence,
some studies have concluded that predatory practices persist to a
sufficient degree as to warrant legislative or regulatory action. For
example, the 1998 Joint Report to Congress of the Federal Reserve Board
and HUD proposing reforms to the Truth in Lending Act and RESPA stated
that "\[a\]busive practices continue to exist in some segments of the
home-equity lending market, demonstrating the need for additional
protections."

> When confronting this issue, two observations made at the recent
> Congressional hearing bear repeating. First, predatory lending often
> involves the abuse of credit terms that otherwise can be of value to
> many consumers. Second, these abuses seem to be occurring mostly in
> the unregulated sector of the market by lending institutions that do
> not undergo periodic compliance examinations \-- and thus additional
> governmental resources may be needed in order to track down \-- and
> shut down \-- the breeding ground of predatory loans.

These considerations, and the "you know it when you see it" nature of
some predatory lending illustrates the difficulty faced by legislators
who want to target abuses without affecting otherwise legitimate
practices or affecting access to credit. The current challenge is to
define predatory lending in such a way that distinguishes it from
responsible subprime lending, and that draws the line between predatory
and legitimate lending practices so that abuses can be addressed without
impairing access to credit.

Without a doubt, government has a role in addressing predatory lending
but, I hasten to add, by no means does it have the only role. Even if
predatory activity is not being conducted to any significant degree by
banks, the mere existence of some practices that have such potentially
disastrous effects on homeowners and that could pose serious risks to
the banking industry warrants the attention of the bank supervisory
agencies. For these reasons, the OCC is taking a number of steps in this
area. We plan to use our supervisory powers \-- through our safety and
soundness, fair lending, and consumer compliance examinations; our
licensing and chartering process; and individual enforcement actions to
address any potential predatory lending concerns that might arise in
national banks and their subsidiaries.

For example, one common characteristic of predatory lending raises clear
safety and soundness concerns. In our view, a mortgage loan for which
there is no reasonable expectation of repayment without recourse to
collateral is presumptively an unsafe and unsound loan, and making or
purchasing such loans on a regular basis is inconsistent with safe and
sound banking practices. To help address this concern, the OCC will
issue guidance that directs our examiners to carefully review lending
policies to ensure that they would not permit loans to be made or
purchased for which there is no reasonable expectation of repayment
without resort to the collateral. Loans fitting this profile will be
adversely classified and further accrual of interest may be disallowed.

The OCC also intends to use its supervisory process to address the
adverse fair lending implications of predatory lending. Areas where this
can be manifested include selective marketing, customer targeting, and
steering practices. We will be issuing additional guidance emphasizing
that abusive lending practices increase the risks of unlawful
discrimination. Depending on such risks, examiners may adjust the scope
and focus of fair lending examinations.

The OCC also will continue to use its chartering and licensing authority
to ensure that subprime lending by national banks or their subsidiaries
will be conducted responsibly, and with appropriate consumer
protections, in accordance with the applicable legal criteria. We will
not approve proposals that are inconsistent with these principles.

Through our participation in an interagency working group \-- which
includes representatives from the bank and thrift regulatory agencies,
the Departments of Justice and Housing and Urban Development, and the
Federal Trade Commission \-- we are working to learn more about
predatory lending issues and to formulate possible responses. Also on an
interagency basis, we plan to address the CRA implications of predatory
loans that might be originated or purchased by depository institutions.
For example, it simply defies logic for equity-stripping loans to be
viewed as helping to meet the credit needs of the bank's community for
CRA purposes.

> Finally, the other banking and thrift agencies have announced separate
> actions that they may take to address the risks of predatory lending
> within their regulated institutions. One agency has proposed the
> issuance of "effective practices" guidance to banks on how to
> underwrite or purchase loans that do not contain predatory terms.

The two principal government-sponsored housing enterprises \-- Fannie
Mae and Freddie Mac \-- have announced their own initiatives to help
ensure that their participation in the secondary mortgage markets does
not lend support to predatory lending practices. Among other things,
these institutions will require full-file reporting of borrower payment
histories; will not purchase loans involving single-premium credit
insurance; will require limitations on prepayment penalties to ensure
that such provisions are not being employed in an abusive manner; and
will not purchase loans that are priced so high as to qualify as
"high-cost home loans" under HOEPA.

As I mentioned earlier, there are several bills pending in Congress to
address predatory lending. Many provisions of these bills would fill
gaps in the current legal framework and address many of the consumer
abuses that exist. For example, they would attack "equity stripping" by
strengthening the principle \-- in HOEPA and in our safety and soundness
supervision \-- that home-secured loans should not be made without an
individual determination that the borrower can reasonably be expected to
repay the loan without resort to the collateral. They would also provide
for "full file reporting" and ensure that responsible subprime borrowers
can establish a credit history and have the opportunity to make the
transition to lower-cost prime loans. The bills would address problems
associated with loan "flipping" by further restricting the availability
of balloon payments in HOEPA loans, by prohibiting the financing of fees
in HOEPA loans that are refinanced with the same creditor, and by
covering more loan brokers. Finally, they would address the "packing" of
loans with fees for credit life insurance in which single premium
payments are prepaid.

Federal, state, and local response to the concerns about predatory
lending represent a two-edged sword for the banking industry. On the one
hand, the industry should have no fear of standards designed to curb
abusive lending practices. On the other hand, given the difficulty of
legislating a precise definition of each potential characteristic of a
"predatory" loan, the industry should be concerned that federal, state
or local efforts could "overslide the base," and impose restrictions far
beyond what is necessary to address consumer abuses that exist. For
example, at some point, lowering the interest rate and fee thresholds
for coverage under the new restrictions could deter responsible subprime
lenders from entering the market. And, blanket bans on particular credit
terms and loan structures \-- such as pre-payment penalties and balloon
payments \-- could limit product choice and adversely affect a
consumer's ability to negotiate other concessions, such as a lower
interest rate or down payment.

Given these concerns and risks, what should the banking industry do?
Because predatory lending is hard to define precisely, and practices or
loan features that may be abusive in some instances may be neutral, or
even beneficial, in others, the industry should be very interested in
avoiding a situation in which a regulatory or legislative response takes
the form of a blunt instrument. In this regard, the industry could learn
some valuable lessons from recent experience with another issue.

A little over two years ago, I spoke at a conference of the Consumer
Bankers Association on an issue that ultimately played a major role in
the debate over the financial modernization legislation. Part of my
message was to issue a call to action by the industry. In that speech, I
said:

> "Failure by the banking industry to demonstrate leadership \... risks
> a \... backlash that could fuel legislative reactions at the federal
> and state levels \.... \[I\]t is emphatically in the interests of the
> financial services industry \... to take the lead in demonstrating
> that self-regulation can and will work, and that public concerns \...
> can be addressed without requiring more draconian, externally-imposed
> solutions to the problem.
>
> The banking industry today has a rare opportunity to step up to the
> plate and become a leader\...."

As you might have guessed, that speech was about privacy. There are some
parallels between the two issues that I urge you not to ignore.

For example, like privacy, there is a lot of emotional momentum on the
predatory lending issue. Public interest organizations, regulatory
agencies, and members of Congress all have voiced their concerns and
announced proposals to address the issue. And, just as it was impossible
to be "against" privacy, it is equally impossible *not to be against*
predatory lending.

Both issues also raise significant reputation risk concerns for the
banking industry. Both have an emotional content such that a set of bad
facts has the potential to propel a legislative response. Do regulated
depository institutions run the risk, for example, of being tarred with
practices engaged in by a relatively few institutions, rarely involving
insured depository institutions? Banks should be concerned when local
governments threaten to withdraw city deposits unless they can certify
that neither they nor their affiliates are "predatory lenders."

Despite the fact that banks generally are engaged in responsible lending
practices, legislative proposals already show the potential to
"overslide the base" by imposing complete bans on loan terms such as
prepayment penalties and balloon payment provisions in all mortgage
transactions \-- not just "high cost" loans. Interest rate caps have
even been threatened by some.

This leads me to close by offering several suggestions, based on recent
experience with the privacy issue:

-   *First,* *do you know what your company is doing?* And I mean your
    whole company \-- not just the bank. Are you satisfied that your
    company is not engaging in conduct that could sully the good name of
    your bank? If you don't know, *find out.*

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-   *Second,* *has your company reviewed its lines of business to
    evaluate where there may be a higher risk of questionable lending
    practices?* Does your company engage in any type of subprime
    lending? Is it conducted in the bank or in a separate entity? Are
    there risk management systems and controls in place to ensure that
    is it conducted responsibly, and without the kinds of abuses I have
    described? How do you audit that area? Have you considered
    appointing a special ombudsman for your subprime consumer lending
    business to focus on the unique concerns and risks that may arise
    there?

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-   *Third, has your company evaluated how it uses third parties, such
    as loan brokers?* Do you "know your brokers" and their practices? Do
    you have safeguards in place to ensure that the brokers' fees,
    referrals, and other business practices do not raise fair lending,
    RESPA, or other legal risks? Do you require brokers to adhere to
    standards set by your company? Do you check to see whether they do?
    Most companies have sophisticated quality control and data integrity
    processes in place to protect their business operations. Do you have
    comparable systems in place to ensure the integrity of loans you
    obtain from brokers or buy in the secondary market?

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-   *Fourth and finally, what have you done to show leadership?* Compete
    to offer the best products \-- ones that are both profitable and
    fill a credit need responsibly, on terms that are fair to consumers.
    Consider partnering with community-based organizations as a means of
    enhancing borrower financial literacy as well as developing new
    customers. Work to push the bad actors out of the business. Publicly
    embrace responsible lending standards \-- whether they are developed
    by others, such as the Fannie Mae and Freddie Mac standards, by your
    company, or by an industry group. Government agencies should not
    have to write guidance for effective practices by depository
    institutions on how to avoid acquiring loans or securities backed by
    loans that have predatory features. You should be doing that
    yourselves.

In fact, this subject would seem to be fertile ground for an industry
initiative under the auspices of the CBA and/or RMA. The industry can
and should take the opportunity to lead in addressing the predatory
lending issue. Given where we are in this debate, the opportunity exists
now for the industry to distinguish itself and to demonstrate what it is
doing well.

You in this room, and the institutions you represent, have a challenge.
How would your answer the four questions I have asked?

.

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  The OCC charters, regulates and examines approximately 2,400 national
  banks and 58 federal branches of foreign banks in the U.S., accounting
  for more than 57 percent of the nation's banking assets. Its mission is
  to ensure a safe and sound and competitive national banking system that
  supports the citizens, communities and economy of the United States.
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