a

GAO

United States General Accounting Office

Report to the Chairman and Ranking 

Minority Member, Special Committee on 

Aging, U.S. Senate

January 2004 CONSUMER 

PROTECTION

Federal and State 

Agencies Face 

Challenges in 

Combating Predatory 

Lending

GAO-04-280
www.gao.gov/cgi-bin/getrpt?GAO-04-280.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact David G. Wood 

at 202-512-8678 or woodd@gao.gov. 

Highlights of GAO-04-280, a report to the 

Chairman and Ranking Minority Member, 

Special Committee on Aging, U.S. Senate 

January 2004

CONSUMER PROTECTION

Federal and State Agencies Face 

Challenges in Combating Predatory 

Lending 

While only one federal law—the Home Ownership and Equity Protection 

Act—is specifically designed to combat predatory lending, federal agencies 

have taken actions, sometimes jointly, under various federal consumer 

protection laws. The Federal Trade Commission (FTC) has played the most 

prominent enforcement role, filing 19 complaints and reaching multimillion 

dollar settlements. The Departments of Justice and Housing and Urban 

Development have also entered into predatory lending-related settlements, 

using laws such as the Fair Housing Act and the Real Estate Settlement 

Procedures Act. Federal banking regulators, including the Federal Reserve 

Board, report little evidence of predatory lending by the institutions they 

supervise. However, the nonbank subsidiaries of financial and bank holding 

companies—financial institutions which account for a significant portion of 

subprime mortgages—are subject to less federal supervision. While FTC is 

the primary federal enforcer of consumer protection laws for these entities, 

it is a law enforcement agency that conducts targeted investigations. In 

contrast, the Board is well equipped to routinely monitor and examine these 

entities and, thus, potentially deter predatory lending activities, but has not 

done so because its authority in this regard is less clear. 

As of January 2004, 25 states, as well as several localities, had passed laws to 

address predatory lending, often by restricting the terms or provisions of 

certain high-cost loans; however, federal banking regulators have preempted 

some state laws for the institutions they supervise. Also, some states have 

strengthened their regulation and licensing of mortgage lenders and brokers. 

The secondary market—where mortgage loans and mortgage-backed 

securities are bought and sold—benefits borrowers by expanding credit, but 

may facilitate predatory lending by allowing unscrupulous lenders to quickly 

sell off loans with predatory terms. In part to avoid certain risks, secondary 

market participants perform varying degrees of “due diligence” to screen out 

loans with predatory terms, but may be unable to identify all such loans. 

GAO’s review of literature and interviews with consumer and federal 

officials suggest that consumer education, mortgage counseling, and loan 

disclosure requirements are useful, but may be of limited effectiveness in 

reducing predatory lending. A variety of factors limit their effectiveness, 

including the complexity of mortgage transactions, difficulties in reaching 

target audiences, and counselors’ inability to review loan documents. 

While there are no comprehensive data, federal, state, and consumer 

advocacy officials report that the elderly have disproportionately been 

victims of predatory lending. According to these officials and relevant 

studies, older consumers may be targeted by predatory lenders because, 

among other things, they are more likely to have substantial home equity and 

may have physical or cognitive impairments that make them more 

vulnerable to an unscrupulous mortgage lender or broker. 

While there is no universally 

accepted definition, the term 

“predatory lending” is used to 

characterize a range of practices, 

including deception, fraud, or 

manipulation, that a mortgage 

broker or lender may use to make a 

loan with terms that are 

disadvantageous to the borrower. 

No comprehensive data are 

available on the extent of these 

practices, but they appear most 

likely to occur among subprime 

mortgages—those made to 

borrowers with impaired credit or 

limited incomes. GAO was asked 

to examine actions taken by federal 

agencies and states to combat 

predatory lending; the roles played 

by the secondary market and by 

consumer education, mortgage 

counseling, and loan disclosure 

requirements; and the impact of 

predatory lending on the elderly. 

GAO suggests that Congress 

consider providing the Federal 

Reserve Board with the authority 

to routinely monitor and, as 

necessary, examine nonbank 

mortgage lending subsidiaries of 

financial and bank holding 

companies to ensure compliance 

with federal consumer protection 

laws applicable to predatory 

lending. Congress should also 

consider giving the Board specific 

authority to initiate enforcement 

actions under those laws against 

these nonbank mortgage lending 

subsidiaries. 
Page i GAO-04-280 Predatory Lending

Contents

Transmittal Letter 1

Executive Summary 3

Purpose 3

Background 3

Results in Brief 4

Principal Findings 7

Matters for Congressional Consideration 15

Agency Comments and Our Evaluation 16

Chapter 1

Introduction

18

The Nature and Attributes of Predatory Lending 18

Emergence of Subprime Mortgage Market 21

The Extent of Predatory Lending Is Unknown 23

Emergence of Predatory Lending As Policy Issue 25

Objectives, Scope, and Methodology 26

Chapter 2

Federal Agencies Have 

Taken Steps to Address 

Predatory Lending, but 

Face Challenges

30

Federal Agencies Use a Variety of Laws to Address Predatory 

Lending Practices 30

Federal Agencies Have Taken Some Enforcement Actions, but 

Banking Regulators Have Focused on Guidance and Regulatory 

Changes 36

Jurisdictional Issues Related to Nonbank Subsidiaries Challenge 

Efforts to Combat Predatory Lending 49

Conclusions 54

Matters for Congressional Consideration 55

Agency Comments and Our Evaluation 55

Chapter 3

States Have Enacted 

and Enforced Laws to 

Address Predatory 

Lending, but Some 

Laws Have Been 

Preempted

58

States and Localities Have Addressed Predatory Lending through 

Legislation, Regulation, and Enforcement Actions 58

Activities in North Carolina and Ohio Illustrate State Approaches to 

Predatory Lending 63

Regulators Have Determined That Federal Law Preempts Some 

State Predatory Lending Laws, but Views on Preemption Differ 

68
Contents

Page ii GAO-04-280 Predatory Lending

Chapter 4

The Secondary Market 

May Play a Role in 

Both Facilitating and 

Combating Predatory 

Lending

72

The Development of a Secondary Market for Subprime Loans Can 

Benefit Consumers 72

The Secondary Market for Subprime Loans Can Facilitate Predatory 

Lending 76

Due Diligence Can Help Purchasers Avoid Predatory Loans, but 

Efforts Vary among Secondary Market Participants 77

Assignee Liability May Help Deter Predatory Lending but Can Also 

Have Negative Unintended Consequences 82

Chapter 5

The Usefulness of 

Consumer Education, 

Counseling, and 

Disclosures in 

Deterring Predatory 

Lending May Be 

Limited

88

Many Consumer Education and Mortgage Counseling Efforts Exist, 

but Several Factors Limit Their Potential to Deter Predatory 

Lending 88

Disclosures, Even If Improved, May Be of Limited Use in Deterring 

Predatory Lending 96

Chapter 6

Elderly Consumers 

May Be Targeted for 

Predatory Lending

99

A Number of Factors Make Elderly Consumers Targets of Predatory 

Lenders 99

Some Education and Enforcement Efforts Focus on Elderly 

Consumers 102

Appendixes

Appendix I: FTC Enforcement Actions Related to Predatory Lending 106

Appendix II: Comments from the Board of Governors of the Federal 

Reserve System 108

Appendix III: Comments from the Department of Justice 111

Appendix IV: Comments from the Department of Housing and Urban 

Development 114

Appendix V: Comments from the National Credit Union 

Administration 118
Contents

Page iii GAO-04-280 Predatory Lending

Appendix VI: GAO Contacts and Staff Acknowledgments 120

GAO Contacts 120

Staff Acknowledgments 120

Table Table 1: Preemption Determinations Issued by OCC, OTS, and 

NCUA Related to Predatory Mortgage Lending Laws 69

Figures Figure 1: Federal Laws and Statutes Used to Address Lending 

Practices Generally Considered to be Predatory 31

Figure 2: Structure and Federal Oversight of Mortgage Lenders 50

Figure 3: States and Localities That Have Enacted Predatory 

Lending Laws 59

Figure 4: Steps in the Securitization of Residential Mortgages 74

Abbreviations

CRA Community Reinvestment Act 

DOJ Department of Justice

ECOA Equal Credit Opportunity Act

FDIC Federal Deposit Insurance Corporation

FHA Federal Housing Administration

FTC Federal Trade Commission

GAO General Accounting Office

GSE government-sponsored enterprise

HMDA Home Mortgage Disclosure Act

HOEPA Home Ownership and Equity Protection Act

HUD Department of Housing and Urban Development

NCUA National Credit Union Administration 

OCC Office of the Comptroller of the Currency 

OTS Office of Thrift Supervision

RESPA Real Estate Settlement Procedures Act

TILA Truth in Lending Act

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Page 1 GAO-04-280 Predatory Lending

United States General Accounting Office

Washington, D.C. 20548

A

January 30, 2004 TransmtLailetr

The Honorable Larry E. Craig

Chairman

The Honorable John Breaux

Ranking Minority Member

Special Committee on Aging

United States Senate

This report responds to your request that we evaluate issues related to 

predatory home mortgage lending. As you requested, this report reviews 

(1) federal laws related to predatory lending and federal agencies’ efforts to 

enforce them, (2) actions taken by states to address predatory lending, (3) 

the secondary market’s role in facilitating or inhibiting predatory lending, 

(4) how consumer education, mortgage counseling, and loan disclosures 

may deter predatory lending, and (5) the relationship between predatory 

lending activities and elderly consumers. This report includes a Matter for 

Congressional Consideration.

As agreed with your office, we plan no further distribution of this report 

until 30 days from its issuance date unless you publicly release its contents 

sooner. We will then send copies of this report to the Chairman and 

Ranking Minority Member of the Senate Committee on Banking, Housing, 

and Urban Affairs; the Chairman and Ranking Minority Member of the 

House Committee on Financial Services; the Secretary of the Department 

of Housing and Urban Development; the Secretary of the Department of the 

Treasury; the Chairman of the Federal Trade Commission; the Chairman of 

the Board of Governors of the Federal Reserve System; the Chairman of the 

Federal Deposit Insurance Corporation; the Comptroller of the Currency; 

the Director of the Office of Thrift Supervision; the Chairman of the 

National Credit Union Administration; and other interested parties. Copies 

will also be made available to others upon request. In addition, this report 

will be available at no charge on the GAO Web site at http://www.gao.gov.
Page 2 GAO-04-280 Predatory Lending

This report was prepared under the direction of Harry Medina, Assistant 

Director. Please contact Mr. Medina at (415) 904-2000 or me at (202) 512-

8678 if you or your staff have any questions about this report. Major 

contributors to this report are listed in appendix VI.

David G. Wood

Director, Financial Markets

 and Community Investment
Page 3 GAO-04-280 Predatory Lending

Executive Summary

Purpose Each year, millions of American consumers take out mortgage loans 

through mortgage brokers or lenders to purchase homes or refinance 

existing mortgage loans. While the majority of these transactions are 

legitimate and ultimately benefit borrowers, some have been found to be 

“predatory”—that is, to contain terms and conditions that ultimately harm 

borrowers. Loans with these features, often targeted at the elderly, 

minorities, and low-income homeowners, can strip borrowers of home 

equity built up over decades and cause them to lose their homes.

The Chair and Ranking Minority Member of the Senate Special Committee 

on Aging asked GAO to examine the efforts under way to combat predatory 

lending. GAO reviewed (1) federal laws related to predatory lending and 

federal agencies’ efforts to enforce them, (2) actions taken by states to 

address predatory lending, (3) the secondary market’s role in facilitating or 

inhibiting predatory lending, (4) how consumer education, mortgage 

counseling, and loan disclosures may deter predatory lending, and (5) the 

relationship between predatory lending activities and elderly consumers. 

The scope of this work was limited to home mortgage lending and did not 

include other forms of consumer loans. To address these objectives, GAO 

reviewed data and interviewed officials from federal, state, and local 

agencies and from industry and consumer advocacy groups; examined 

federal, state, and local laws; and reviewed relevant literature. At GAO’s 

request, federal agencies identified enforcement or other actions they have 

taken to address predatory lending. GAO also obtained data from publicly 

available databases; the data were analyzed and found to be sufficiently 

reliable for this report. Chapter 1 provides the details of the scope and 

methodology of this report. The work was conducted between January 

2003 and January 2004 in accordance with generally accepted government 

auditing standards.

Background While there is no uniformly accepted definition of predatory lending, a 

number of practices are widely acknowledged to be predatory. These 

include, among other things, charging excessive fees and interest rates, 

lending without regard to borrowers’ ability to repay, refinancing 

borrowers’ loans repeatedly over a short period of time without any 

economic gain for the borrower, and committing outright fraud or 

deception—for example, falsifying documents or intentionally
Executive Summary

Page 4 GAO-04-280 Predatory Lending

misinforming borrowers about the terms of a loan.1 These types of 

practices offer lenders that originate predatory loans potentially high 

returns even if borrowers default, since many of these loans require 

excessive up-front fees. No comprehensive data are available on the 

incidence of these practices, but banking regulators, consumer advocates, 

and industry participants generally agree that predatory loans are most 

likely to occur in the market for “subprime” loans. The subprime market 

serves borrowers who have limited incomes or poor or no credit histories, 

in contrast with the prime market, which encompasses traditional lenders 

and borrowers with credit histories that put them at low risk of default. 

Originators of subprime loans most often are mortgage and consumer 

finance companies but can also be banks, thrifts, and other institutions.

Serious data limitations make the extent of predatory lending difficult to 

determine. However, there have been a number of major settlements 

resulting from government enforcement actions or private party lawsuits in 

the last 5 years that have accused lenders of abusive practices affecting 

large numbers of borrowers. For example, in October 2002, Household 

International, a large home mortgage lender, agreed to pay up to $484 

million to homeowners to settle states’ allegations that it used unfair and 

deceptive lending practices to make mortgage loans with excessive interest 

and fees. In addition, the rate of foreclosures of subprime loans has 

increased substantially since 1990, far exceeding the rate of increase for 

subprime originations. Some consumer groups and industry observers 

have attributed this development, at least in part, to an increase in abusive 

lending, particularly of loans made without regard to borrowers’ ability to 

repay. Additionally, groups such as legal services agencies have reported 

seeing an ever-greater number of consumers, particularly the elderly and 

minorities, who are in danger of losing their homes as a result of predatory 

lending practices.

Results in Brief Federal agencies have addressed predatory lending under a variety of 

federal laws, including the Home Ownership and Equity Protection Act 

(HOEPA), which was an amendment to the Truth in Lending Act (TILA) 

designed specifically to combat predatory lending, and other consumer 

protection laws such as the Federal Trade Commission Act (FTC Act), TILA 

generally, and the Real Estate Settlement Procedures Act (RESPA). The 

1

Throughout this report, the terms “predatory lending” and “abusive lending” are used to 

refer to such practices.
Executive Summary

Page 5 GAO-04-280 Predatory Lending

Federal Trade Commission (FTC) has played a prominent role because it is 

responsible for implementing and enforcing certain federal laws among 

lending institutions that are not supervised by federal banking regulators. 

As of December 2003, FTC reported that it had taken 19 enforcement 

actions against mortgage lenders and brokers for predatory practices, 

including some actions that have resulted in multimillion dollar 

settlements. The Department of Housing and Urban Development’s (HUD) 

enforcement activities related to abusive lending have focused on criminal 

fraud in its Federal Housing Administration (FHA) loan insurance program. 

The federal banking regulators—the Federal Deposit Insurance 

Corporation (FDIC), Board of Governors of the Federal Reserve System 

(the Board), Office of the Comptroller of the Currency (OCC), Office of 

Thrift Supervision (OTS), and National Credit Union Administration 

(NCUA)—report little evidence of predatory lending by the depository 

institutions that they supervise. However, concerns exist about nonbank 

mortgage lending companies that are owned by financial or bank holding 

companies, which have been involved in several notable enforcement 

actions involving allegations of abusive lending practices. While FTC has 

clear authority to conduct investigations and enforce consumer protection 

laws among these nonbank mortgage lending companies, as a law 

enforcement agency its role is to investigate possible violations rather than 

to act as a supervisory agency with routine monitoring and examination 

responsibilities. The Board may be better equipped to monitor and 

examine these subsidiaries’ compliance with federal consumer protection 

laws and thus to deter predatory lending, but it does not have clear 

authority to do so.

According to a database that tracks state and local legislation, 25 states, 

11 localities, and the District of Columbia have passed their own laws 

addressing predatory lending.2

 While these laws vary, most of them 

restrict the terms or provisions of mortgage loans originated within their 

jurisdictions. In addition, some states have strengthened the regulation and 

licensing of mortgage lenders and brokers, and state law enforcement 

agencies and banking regulators have taken a number of enforcement 

actions under state consumer protection and banking laws. Some federal 

regulators have asserted that federal law preempts some state predatory 

2

Information relating to state and local laws and their provisions is from a database 

maintained by Butera & Andrews, a Washington, D.C., law firm that tracks predatory lending 

legislation, and is current as of January 9, 2004. These laws only include state and local laws 

that placed actual restrictions on lending. For example, they do not include local 

ordinances that consisted solely of a resolution that condemned predatory lending.
Executive Summary

Page 6 GAO-04-280 Predatory Lending

lending laws for the institutions they regulate, stating that federally 

chartered lending institutions should be required to comply with a single 

uniform set of national regulations. Many state officials and consumer 

advocates, however, maintain that federal preemption interferes with the 

states’ ability to protect consumers. 

The secondary market for mortgage loans—which allows lenders and 

investors to sell and buy mortgages and mortgage-backed securities—

provides lenders with an additional source of liquidity and may benefit 

borrowers by increasing access to credit and lowering interest rates. But 

the secondary market may also inadvertently serve to facilitate predatory 

lending, both by providing a source of funds for unscrupulous originators 

to quickly sell off loans with predatory terms and by reducing incentives for 

these originators to ensure that borrowers can repay their loans. 

Secondary market participants may use varying degrees of “due 

diligence”—a review and appraisal of legal and financial information—to 

avoid purchasing loans with abusive terms. Fannie Mae and Freddie Mac—

which are relatively recent entrants in the subprime market—have due 

diligence processes that are designed, in part, to avoid purchasing loans 

that may have been harmful to consumers. Other firms may use due 

diligence not necessarily to avoid loans that may have harmed consumers 

but to avoid loans that are not in compliance with applicable law or that 

present undue financial or reputation risks. Some states have passed laws 

making secondary market buyers liable for violations by loan originators, 

although such laws may have the unintended consequence of reducing the 

availability of legitimate credit to consumers.

A number of federal, state, nonprofit, and industry-sponsored organizations 

offer consumer education initiatives designed to deter predatory lending 

by, among other things, providing information about predatory practices 

and working to improve consumers’ overall financial literacy. GAO’s 

review of literature and interviews with consumer and federal officials 

suggest that while tools such as consumer education, mortgage counseling, 

and disclosures are useful, they may be of limited effectiveness in reducing 

predatory lending. For instance, consumer education is hampered by the 

complexity of mortgage transactions and the difficulty of reaching the 

target audience. Similarly, unreceptive consumers and counselors’ lack of 

access to relevant loan documents can hamper the effectiveness of 

mortgage counseling efforts, while the sheer volume of mortgage 

originations each year makes providing universal counseling difficult. And 

while efforts are under way to improve the federally required disclosures 

associated with mortgage loans, the complexity of mortgage transactions 
Executive Summary

Page 7 GAO-04-280 Predatory Lending

also hinders these efforts, especially given the lack of financial 

sophistication among many borrowers who are targeted by predatory 

lenders.

While there are no comprehensive data, government officials and 

consumer advocacy organizations have reported that elderly consumers 

have been disproportionately targeted and victimized by predatory lenders. 

According to these officials and organizations, elderly consumers appear to 

be favored targets for several reasons—for example, because they may 

have substantial equity in their homes or live on limited incomes that make 

them susceptible to offers for quick access to cash. Further, some seniors 

have cognitive or physical impairments such as poor eyesight, hearing, or 

mobility that may limit their ability to access competitive sources of credit. 

Most consumer financial education efforts seek to serve the general 

consumer population, but a few education initiatives have focused 

specifically on predatory lending and the elderly. Most legal assistance 

related to predatory lending aims at assisting the general population of 

consumers, although some is focused on elderly consumers in particular.

Principal Findings

Federal Agencies Have 

Taken Enforcement and 

Other Actions to Address 

Predatory Lending, but Face 

Challenges

Federal agencies and regulators have used a number of federal laws to 

combat predatory lending practices. Among the most frequently used 

laws—HOEPA, the FTC Act, TILA, and RESPA—only HOEPA was 

specifically designed to address predatory lending. Enacted in 1994, 

HOEPA places restrictions on certain high-cost loans, including limits on 

prepayment penalties and balloon payments and prohibitions against 

negative amortization. However, HOEPA covers only loans that exceed 

certain rate or fee triggers, and although comprehensive data are lacking, it 

appears that HOEPA covers only a limited portion of all subprime loans. 

The FTC Act, enacted in 1914 and amended on numerous occasions, 

authorizes FTC to prohibit and take action against unfair or deceptive acts 

or practices in or affecting commerce. TILA and RESPA are designed in 

part to provide consumers with accurate information about the cost of 

credit. 

Other federal laws that have been used to address predatory lending 

practices include criminal fraud statutes that prohibit certain types of fraud 

sometimes used in abusive lending schemes, such as forgery and false 
Executive Summary

Page 8 GAO-04-280 Predatory Lending

statements. Also, the Fair Housing Act and Equal Credit Opportunity Act—

which prohibit discrimination in housing-related transactions and the 

extension of credit, respectively—have been used in cases against abusive 

lenders that have targeted certain protected groups.

Using these or other authorities, federal agencies have taken a number of 

enforcement actions and other steps, such as issuing guidance and revising 

regulations.

• Among federal agencies, FTC has a prominent role in combating 

predatory lending because of its responsibilities in implementing and 

enforcing certain federal laws among lending institutions that are not 

depository institutions supervised by federal banking regulators. FTC 

has reported that it has filed 19 complaints—17 since 1998—alleging 

deceptive or other illegal practices by mortgage lenders or brokers and 

that some actions have resulted in multimillion dollar settlements. For 

example, in 2002 FTC settled a complaint against a lender charged with 

engaging in systematic and widespread deceptive and abusive lending 

practices. According to FTC staff, close to 1 million borrowers will 

receive about $240 million in restitution under the settlement. 

• DOJ, which is responsible for enforcing certain federal civil rights laws, 

has filed an enforcement action on behalf of the FTC and identified two 

additional enforcement actions it has taken that are related to predatory 

mortgage lending practices. The statutes DOJ enforces only address 

predatory lending practices when they are alleged to be discriminatory. 

• HUD has undertaken enforcement activities related to abusive lending 

that primarily focus on reducing losses to the FHA insurance fund, most 

notably violations of criminal fraud statutes and FHA regulations 

through “property flipping” schemes, which in some cases can harm 

borrowers by leaving them with mortgage loans that may far exceed the 

value of their homes.3

 HUD has also taken three enforcement actions in 

abusive mortgage lending cases for violations of RESPA’s prohibitions 

on certain types of fees. 

3

HUD’s FHA mortgage insurance program makes loans more readily available for low- and 

moderate-income families by providing mortgage insurance to purchase or refinance a 

home. Lending institutions such as mortgage companies and banks fund the loans.
Executive Summary

Page 9 GAO-04-280 Predatory Lending

• Federal banking regulators have stated that their monitoring and 

examination activities have uncovered little evidence of predatory 

lending in federally regulated depository institutions. Four of the five 

federal banking regulators reported taking no formal enforcement 

actions involving predatory mortgage lending against the institutions 

they regulate, while the fifth—OCC—reported that it has taken one 

formal enforcement action against a bank engaged in abusive mortgage 

lending. Regulators noted that they have taken informal enforcement 

actions to address questionable practices raised during the examination 

process and required their institutions to take corrective action. 

• The banking regulators have also issued guidance to the institutions 

they supervise on avoiding direct or indirect involvement in predatory 

lending. In addition, the Board has made changes to its regulations 

implementing HOEPA that, among other things, increase the number of 

loans HOEPA covers. The Board also made changes to its regulations 

implementing the Home Mortgage Disclosure Act that make it easier to 

analyze potential patterns of predatory lending. 

Federal agencies and banking regulators have coordinated their efforts to 

address predatory lending on certain occasions through participation in 

interagency working groups and through joint enforcement actions. For 

example, FTC, DOJ, and HUD coordinated to take an enforcement action 

against Delta Funding Corporation, with each agency investigating and 

bringing actions for violations of the laws within its jurisdiction. 

Issues related to federal oversight and regulation of certain nonbank 

mortgage lenders may challenge efforts to combat predatory lending. 

Nonbank mortgage lending companies owned by financial or bank holding 

companies (nonbank mortgage lending subsidiaries), such as finance and 

mortgage companies, account for an estimated 24 percent of subprime loan 

orginations, according to HUD, and some have been the target of notable 

federal and state enforcement actions involving allegations of abusive 

lending.4

 FTC is the primary federal enforcer of consumer protection laws 

for these nonbank subsidiaries, but it is a law enforcement rather than 

supervisory agency. Thus, FTC’s mission and resource allocations are 

focused on conducting investigations in response to consumer complaints 

and other information rather than on routine monitoring and examination 

4

These nonbank subsidiaries are owned by the financial holding companies or bank holding 

companies and are not the direct operating subsidiaries of the bank itself.
Executive Summary

Page 10 GAO-04-280 Predatory Lending

responsibilities. In contrast, the Board conducts periodic examinations of 

financial and bank holding companies and, under the Bank Holding 

Company Act, is authorized to monitor and examine the subsidiaries of a 

bank holding company under certain circumstances. However, this 

authority does not clearly extend to routine examinations of nonbank 

subsidiaries of these holding companies with regard to laws pertinent to 

predatory lending. In addition, the Board does not have specific authority 

under pertinent federal consumer protection laws to institute an 

enforcement action against a nonbank subsidiary of a financial or bank 

holding company. Granting the Board concurrent enforcement authority 

with the FTC for these nonbank subsidiaries of holding companies could 

help deter some predatory lending.

Many States Have Passed 

Laws Addressing Predatory 

Lending, but Federal 

Agencies Have Preempted 

Some Statutes

In response to concerns about the growth of predatory lending and the 

limitations of existing laws, 25 states, the District of Columbia, and 11 

localities have passed their own laws addressing predatory lending 

practices, according to a database that tracks such laws. Most of these 

laws regulate and restrict the terms and characteristics of high-cost loans—

that is, loans that exceed certain rate or fee thresholds. While some state 

statutes follow the thresholds for covered loans established in HOEPA, 

many set lower thresholds in order to cover more loans than the federal 

statute. The statutes vary, but they generally cover a variety of predatory 

practices, such as balloon payments and prepayment penalties, and some 

include restrictions on such things as mandatory arbitration clauses that 

can restrict borrowers’ ability to obtain legal redress through the courts. 

Some states have also increased the regulation of and licensing 

requirements for mortgage lenders and brokers, in part to address 

concerns that some unscrupulous lenders and brokers have been 

responsible for lending abuses and that these entities have not been 

adequately regulated. For example, some states have increased the 

educational requirements that lenders and brokers must meet in order to 

obtain a license. In recent years, state law enforcement agencies and 

banking regulators have also taken a number of actions against mortgage 

lenders involving predatory lending. For example, an official from 

Washington State’s Department of Financial Institutions reported that the 

department had taken several enforcement actions to address predatory 

lending, including one that resulted in a lender being ordered to return 

more than $700,000 to 120 Washington borrowers for allegedly deceiving 

them and charging prohibited fees.
Executive Summary

Page 11 GAO-04-280 Predatory Lending

Three federal banking regulators—NCUA, OCC, and OTS—have issued 

opinions stating that federal laws preempt some state predatory lending 

laws for the institutions that they regulate. The regulators note that such 

preemption creates a more uniform regulatory framework, relieves lending 

institutions of the burden of complying with a hodgepodge of state and 

federal laws, and avoids state laws that may restrict legitimate lending 

activities. State officials and consumer advocates that oppose preemption 

argue that federal laws do not effectively protect consumers against 

predatory lending practices and that federal regulators do not devote 

sufficient resources toward enforcement of consumer protection laws for 

the institutions they oversee.

The Secondary Market May 

Benefit Consumers but Can 

Also Facilitate Predatory 

Lending

In 2002, an estimated 63 percent of subprime loans, worth $134 billion, 

were securitized and sold on the secondary market.5

 The existence of a 

secondary market for subprime loans has benefited consumers by 

increasing the sources of funds available to subprime lenders, potentially 

lowering interest rates and origination costs for subprime loans. However, 

the secondary market may also inadvertently facilitate predatory lending 

by providing a source of funds for unscrupulous originators, allowing them 

to quickly sell off loans with predatory terms. Further, originators of 

subprime mortgage loans generally make their profits from high origination 

fees, and the existence of a secondary market may reduce the incentive for 

these lenders to ensure that borrowers can repay. 

Purchasers of mortgage loans undertake a process of due diligence 

designed to avoid legal, financial, and reputational risk. Prior to the sale, 

purchasers typically review electronic data containing information on the 

loans, such as the loan amount, interest rate, and credit score of the 

borrower. Purchasers also often physically review a sample of individual 

loans, including such items as the loan application and settlement forms. 

However, the degree of due diligence purchasers undertake varies. Fannie 

Mae and Freddie Mac—which are estimated to account for a relatively 

small portion of the secondary market for subprime loans—told us that 

they undertake a series of measures aimed at avoiding the purchase of 

5

Originators of mortgage loans—which can include banks, other depository institutions, and 

mortgage lenders that are not depository institutions—may keep the loans or sell them on 

the secondary market. Secondary market purchasers may then hold the loans or pool 

together a group of loans and issue a security that is backed by a pool of mortgages (a 

“mortgage-backed security”).
Executive Summary

Page 12 GAO-04-280 Predatory Lending

loans with abusive characteristics that may have harmed borrowers. In 

contrast, according to some market participants, the due diligence of other 

secondary market purchasers of residential mortgages may be more 

narrowly focused on the creditworthiness of the loans and on their 

compliance with federal, state, and local laws. However, even the most 

stringent efforts cannot uncover some predatory loans. For example, due 

diligence by secondary market purchasers may be unable to uncover fraud 

that occurred during the loan underwriting or approval process, some 

excessive or unwarranted fees, or loan flipping. 

Under some state and local legislation, purchasers of mortgages or 

mortgage-backed securities on the secondary market may be liable for 

violations committed by the originating lenders—referred to as “assignee 

liability” provisions. HOEPA contains such a provision for loans above 

certain thresholds, as do the antipredatory lending laws in at least eight 

states and the District of Columbia, according to a database that tracks 

state predatory lending laws. Assignee liability is intended to discourage 

secondary market participants from purchasing loans that may have 

predatory features and to provide an additional source of redress for 

victims of abusive lenders. However, according to some secondary market 

participants, assignee liability can also discourage legitimate lending 

activity. Secondary market purchasers that are unwilling to assume the 

potential risks associated with assignee liability provisions have stopped 

purchasing, or announced their intention to stop purchasing, mortgages 

originated in areas covered by such provisions. Credit rating agencies—

whose decisions influence securitizers’ ability to sell the securities—have 

asserted that assignee liability provisions can make it difficult for them to 

measure the risk associated with pools of loans. Assignee liability 

provisions of the Georgia Fair Lending Act were blamed for causing several 

participants in the mortgage lending industry to withdraw from the market, 

and the provisions were subsequently repealed.

The Usefulness of 

Consumer Education, 

Counseling, and Disclosures 

in Deterring Predatory 

Lending May Be Limited

In response to widespread concern about low levels of financial literacy 

among consumers, federal agencies have conducted and funded financial 

education for consumers as a means of improving consumers’ financial 

literacy and, in some cases, raising consumers’ awareness of predatory 

lending practices. For example, FDIC sponsors a financial literacy 

program, MoneySmart, which is designed for low- and moderate-income 

individuals with little banking experience. Other federal agencies, 

including the Board, FTC, HUD, and OTS, engage in activities such as 

distributing educational literature, working with community groups, and 
Executive Summary

Page 13 GAO-04-280 Predatory Lending

providing institutions they regulate with guidance on encouraging financial 

literacy. Federal agencies have also taken some actions to coordinate their 

efforts to educate consumers about predatory lending. For example, in 

October 2003, the Interagency Task Force on Fair Lending, which consists 

of 10 federal agencies, published a brochure that alerts consumers to the 

potential pitfalls of home equity loans, particularly high-cost loans. A 

number of states, nonprofits, and trade organizations also conduct 

consumer financial education activities, which sometimes focus 

specifically on raising awareness about predatory lending. 

While representatives of the mortgage lending industry and consumer 

groups have noted that financial education may make some consumers less 

susceptible to abusive lending practices, GAO’s review of literature and 

interviews with consumer and federal officials suggest that consumer 

education by itself has limits as a tool for deterring predatory lending. 

First, mortgage loans are complex financial transactions, and many 

different factors—including the interest rate, fees, provisions of the loan, 

and situation of the borrower—determine whether a loan is in a borrower’s 

best interests. Even an excellent campaign of consumer education is 

unlikely to provide less sophisticated consumers with enough information 

to properly assess whether a loan contains abusive terms. Second, 

predatory lenders and brokers tend to use aggressive marketing tactics that 

are designed to confuse consumers. Broad-based campaigns to make 

consumers aware of predatory lending may not be sufficient to prevent 

many consumers—particularly those who may be uneducated or 

unsophisticated in financial matters—from succumbing to such tactics. 

Finally, the consumers who are often the targets of predatory lenders are 

also some of the hardest to reach with educational information. 

Prepurchase mortgage counseling—which can offer a “third party” review 

of a prospective mortgage loan—may help borrowers avoid predatory 

loans, in part by alerting consumers to predatory loan terms and practices. 

HUD supports a network of approximately 1,700 HUD-approved counseling 

agencies across the country and in some cases provides funding for their 

activities. While beneficial, the role of mortgage counseling in preventing 

predatory lending is likely to be limited. Borrowers do not always attend 

such counseling, and when they do, counselors may not have access to all 

of the loan documents needed to review the full final terms and provisions 

before closing. In addition, counseling may be ineffective against lenders 

and brokers engaging in fraudulent practices, such as falsifying 

applications or loan documents, that cannot be detected during a 

prepurchase review of mortgage loan documents. 
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Page 14 GAO-04-280 Predatory Lending

Finally, disclosures made during the mortgage loan process, while 

important, may be of limited usefulness in reducing the incidence of 

predatory lending practices. TILA and RESPA have requirements covering 

the content, form, and timing of the information that must be disclosed to 

borrowers. However, industry and consumer advocacy groups have 

publicly expressed dissatisfaction with the current disclosure system. 

HUD issued proposed rules in July 2002 intended to streamline the 

disclosure process and make disclosures more understandable and timely, 

and debate over the proposed rules has been contentious. Although 

improving loan disclosures would undoubtedly have benefits, once again 

the inherent complexity of loan transactions may limit any impact on the 

incidence of predatory lending practices. Moreover, even a relatively clear 

and transparent system of disclosures may be of limited use to borrowers 

who lack sophistication about financial matters, are not highly educated, or 

suffer physical or mental infirmities. Finally, as with mortgage counseling, 

revised disclosure requirements would not necessarily help protect 

consumers against lenders and brokers that engage in outright fraud or that 

mislead borrowers about the terms of loans in the disclosure documents 

themselves.

Predatory Lenders May 

Target Elderly Consumers

Consistent observational and anecdotal evidence, along with some limited 

data, indicates that, for a variety of reasons, elderly homeowners are 

disproportionately the targets of predatory lending. Abusive lenders tend 

to target homeowners who have substantial equity in their homes, as many 

older homeowners do. In addition, some brokers and lenders aggressively 

market home equity loans as a source of cash, particularly for older 

homeowners who may have limited incomes but require funds for major 

home repairs or medical expenses. Moreover, diseases and physical 

impairments associated with aging—such as declining vision, hearing, or 

mobility—can restrict elderly consumers’ ability to access financial 

information and compare credit terms. Some older persons may also have 

diminished cognitive capacity, which can impair their ability to 

comprehend and make informed judgments on financial issues. Finally, 

several advocacy groups have noted that some elderly people lack social 

and family support systems, potentially increasing their susceptibility to 

unscrupulous lenders who may market loans by making home visits or 

offering other personal contact.

Because the elderly may be more susceptible to predatory lending, 

government agencies and consumer advocacy organizations have focused 

some of their education efforts on this population. For example, the 
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Page 15 GAO-04-280 Predatory Lending

Justice Department offers on its Web site the guide “Financial Crimes 

Against the Elderly,” which includes references to predatory lending. The 

Department of Health and Human Services’ Administration on Aging 

provides grants to state and nonprofit agencies for programs aimed at 

preventing elder abuse, including predatory lending practices targeting 

older consumers. The AARP, which represents Americans age 50 and over, 

sponsors a number of financial education efforts, including a borrower’s kit 

that contains tips for avoiding predatory lending.

Consumer protection and fair lending laws that have been used to address 

predatory lending do not generally have provisions specific to elderly 

persons, although the Equal Credit Opportunity Act does prohibit unlawful 

discrimination on the basis of age in connection with any aspect of a credit 

transaction. Federal and state enforcement actions and private classaction lawsuits involving predatory lending generally seek to provide 

redress to large groups of consumers. Little comprehensive data exist on 

the age of consumers involved in these actions, but a few cases have 

involved allegations of predatory lending targeting elderly borrowers. For 

example, FTC, six states, AARP, and private plaintiffs settled a case with 

First Alliance Mortgage Company in March 2002 for more than $60 million. 

An estimated 28 percent of the 8,712 borrowers represented in the classaction suit were elderly. The company was accused of using 

misrepresentation and unfair and deceptive practices to lure senior citizens 

and those with poor credit histories into entering into abusive loans. In 

addition, some nonprofit groups—such as the AARP Foundation Litigation, 

the National Consumer Law Center, and South Brooklyn Legal Services’ 

Foreclosure Prevention Project—provide legal services that focus, in part, 

on helping elderly victims of predatory lending.

Matters for 

Congressional 

Consideration

To enable greater oversight of and potentially deter predatory lending from 

occurring at certain nonbank lenders, Congress should consider making 

appropriate statutory changes to grant the Board of Governors of the 

Federal Reserve System the authority to routinely monitor and, as 

necessary, examine the nonbank mortgage lending subsidiaries of financial 

and bank holding companies for compliance with federal consumer 

protection laws applicable to predatory lending practices. Also, Congress 

should consider giving the Board specific authority to initiate enforcement 

actions under those laws against these nonbank mortgage lending 

subsidiaries. 
Executive Summary

Page 16 GAO-04-280 Predatory Lending

Agency Comments and 

Our Evaluation

GAO provided a draft of this report to the Board, DOJ, FDIC, FTC, HUD, 

NCUA, OCC, OTS, and the Department of the Treasury for review and 

comment. The agencies provided technical comments that have been 

incorporated where appropriate. In addition, the Board, DOJ, FDIC, FTC, 

HUD, and NCUA provided general comments, which are discussed in 

greater detail at the end of chapter 2. The written comments of the Board, 

DOJ, HUD, and NCUA are printed in appendixes II through V. 

The Board commented that, while the existing structure has not been a 

barrier to Federal Reserve oversight, the approach recommended in our 

Matter for Congressional Consideration would likely be beneficial by 

catching some abusive practices that might not be caught otherwise. The 

Board also noted that the approach would pose tradeoffs, such as different 

supervisory schemes being applied to nonbank mortgage lenders based on 

whether or not they are part of a holding company, and additional costs. 

Because nonbank mortgage lenders that are part of a financial or bank 

holding company currently can be examined by the Board in some 

circumstances, they are already subject to a different supervisory scheme 

than other such lenders. We agree that the costs to the lenders and the 

Board would increase to the extent the Board exercised any additional 

authority to monitor and examine nonbank lenders, and believe that 

Congress should consider both the potential costs and benefits of clarifying 

the Board’s authorities.

The FTC expressed concern that our report could give the impression that 

we are suggesting that Congress consider giving the Board sole 

jurisdiction—rather than concurrent jurisdiction with FTC—over nonbank 

subsidiaries of holding companies. Our report did not intend to suggest 

that the Congress make any change that would necessarily affect FTC’s 

existing authority for these entities, and we modified the report to clarify 

this point. 

DOJ commented that the report will be helpful in assessing the 

department’s role in the federal government’s efforts to develop strategies 

to combat predatory lending. DOJ disagreed with our inclusion in the 

report of “property or loan flips,” which it said was a traditional fraud 

scheme but not a type of predatory lending. As we noted in our report, 

there is no precise definition of predatory lending. We incorporated a 

discussion of property flipping—quick resales of recently sold FHA 

properties—because HUD officials characterize some of these schemes as 

involving predatory practices that can harm borrowers. We included loan 
Executive Summary

Page 17 GAO-04-280 Predatory Lending

flipping—the rapid and repeated refinancing of a loan without benefit to 

the borrower—in our report because this is widely characterized in the 

literature and by federal, state, and nonprofit agency officials as a 

predatory lending practice. 

FDIC noted that our Matter for Congressional Consideration focuses on 

nonbank subsidiaries of holding companies even though these entities 

comprise, according to HUD, only about 20 percent of all subprime lenders. 

We recognize that our Matter does not address all subprime lenders or 

other institutions that may be engaging in predatory lending, but believe it 

represents a potential step in addressing predatory lending among a 

significant segment of mortgage lenders. NCUA said that the report 

provides a useful discussion of the issues and the agency concurs with our 

Matter for Congressional Consideration. HUD, in its comment letter, 

described a variety of actions it has taken that it characterized as 

combating predatory lending, particularly with regard to FHA-insured 

loans.
Page 18 GAO-04-280 Predatory Lending

Chapter 1

Introduction Chapte1r

In recent years, abuses in home mortgage lending—commonly referred to 

as “predatory lending”—have increasingly garnered the attention and 

concern of policymakers, consumer advocates, and participants in the 

mortgage lending industry.1

 Once relatively rare, government enforcement 

actions and private party lawsuits against institutions accused of abusive 

home mortgage lending have increased dramatically in the last 10 years. In 

2002 alone, there were dozens of settlements resulting from accusations of 

abusive lending. In the largest of these, a major national mortgage lender 

agreed to pay up to $484 million to tens of thousands of affected 

consumers.

The Nature and 

Attributes of Predatory 

Lending

Predatory lending is an umbrella term that is generally used to describe 

cases in which a broker or originating lender takes unfair advantage of a 

borrower, often through deception, fraud, or manipulation, to make a loan 

that contains terms that are disadvantageous to the borrower. While there 

is no universally accepted definition, predatory lending is associated with 

the following loan characteristics and lending practices:

• Excessive fees. Abusive loans may include fees that greatly exceed the 

amounts justified by the costs of the services provided and the credit 

and interest rate risks involved. Lenders may add these fees to the loan 

amounts rather than requiring payment up front, so the borrowers may 

not know the exact amount of the fees they are paying.

• Excessive interest rates. Mortgage interest rates can legitimately vary 

based on the characteristics of borrowers (such as creditworthiness) 

and of the loans themselves. However, in some cases, lenders may 

charge interest rates that far exceed what would be justified by any riskbased pricing calculation, or lenders may “steer” a borrower with an 

excellent credit record to a higher-rate loan intended for borrowers with 

poor credit histories.

• Single-premium credit insurance. Credit insurance is a loan product 

that repays the lender should the borrower die or become disabled. In 

the case of single- premium credit insurance, the full premium is paid all 

at once—by being added to the amount financed in the loan—rather 

than on a monthly basis. Because adding the full premium to the 

1

Throughout this report, the terms predatory lending and abusive lending are used 

interchangeably.
Chapter 1

Introduction

Page 19 GAO-04-280 Predatory Lending

amount of the loan unnecessarily raises the amount of interest 

borrowers pay, single-premium credit insurance is generally considered 

inherently abusive.

• Lending without regard to ability to repay. Loans may be made 

without regard to a borrower’s ability to repay the loan. In these cases, 

the loan is approved based on the value of the asset (the home) that is 

used as collateral. In particularly egregious cases, monthly loan 

payments have equaled or exceeded the borrower’s total monthly 

income. Such lending can quickly lead to foreclosure of the property. 

• Loan flipping. Mortgage originators may refinance borrowers’ loans 

repeatedly in a short period of time without any economic gain for the 

borrower. With each successive refinancing, these originators charge 

high fees that “strip” borrowers’ equity in their homes. 

• Fraud and deception. Predatory lenders may perpetrate outright fraud 

through actions such as inflating property appraisals and doctoring loan 

applications and settlement documents. Lenders may also deceive 

borrowers by using “bait and switch” tactics that mislead borrowers 

about the terms of their loan. Unscrupulous lenders may fail to disclose 

items as required by law or in other ways may take advantage of 

borrowers’ lack of financial sophistication. 

• Prepayment penalties. Penalties for prepaying a loan are not 

necessarily abusive, but predatory lenders may use them to trap 

borrowers in high-cost loans.

• Balloon payments. Loans with balloon payments are structured so that 

monthly payments are lower but one large payment (the balloon 

payment) is due when the loan matures. Predatory loans may contain a 

balloon payment that the borrower is unlikely to be able to afford, 

resulting in foreclosure or refinancing with additional high costs and 

fees. Sometimes, lenders market a low monthly payment without 

adequate disclosure of the balloon payment.

Predatory lending is difficult to define partly because certain loan 

attributes may or may not be abusive, depending on the overall context of 

the loan and the borrower. For example, although prepayment penalties 

can be abusive in the context of some loans, in the context of other loans 

they can benefit borrowers by reducing the overall cost of loans by 

reducing the lender’s prepayment risk. 
Chapter 1

Introduction

Page 20 GAO-04-280 Predatory Lending

According to federal and industry officials, most predatory mortgage 

lending involves home equity loans or loan refinancings rather than loans 

for home purchases. Homeowners may be lured into entering refinance 

loans through aggressive solicitations by mortgage brokers or lenders that 

promise “savings” from debt consolidation or the ability to “cash out” a 

portion of a borrower’s home equity. Predatory lending schemes may also 

involve home improvement contractors that work in conjunction with a 

lender. The contractor may offer to arrange financing for necessary repairs 

or improvements, and then perform shoddy work or fail to complete the 

job, while leaving the borrower holding a high-cost loan. Abuses in loan 

servicing have also increasingly become a concern. Abusive mortgage 

lenders or servicing agents may charge improper late fees, require 

unjustified homeowner’s insurance, or not properly credit payments. In 

November 2003, the Federal Trade Commission (FTC) and the Department 

of Housing and Urban Development (HUD) reached a settlement with a 

large national mortgage servicer, Fairbanks Capital, after the company was 

accused of unfair, deceptive, and illegal practices in the servicing of 

mortgage loans. The settlement will provide $40 million to reimburse 

consumers.

Originating lenders or brokers that engage in abusive practices can make 

high profits through the excessive points and fees that they charge, 

particularly when borrowers make their payments regularly. Even when a 

loan enters foreclosure, the originator of a predatory loan may still make a 

profit due to the high up-front fees it has already collected. Moreover, a 

lender that sells a loan in the secondary market shortly after origination no 

longer necessarily faces financial risk from foreclosure.2

 Similarly, a 

mortgage broker that collects fees up front is not affected by foreclosure of 

the loan. 

According to HUD and community groups, predatory lending not only 

harms individual borrowers but also can weaken communities and 

neighborhoods by causing widespread foreclosures, which reduce property 

values. Predatory lending also serves to harm the reputation of honest and 

legitimate lenders, casting them in the same suspicious light as those 

making unfair loans and thus increasing their reluctance to extend credit to 

the traditionally underserved communities that are often targeted by 

abusive lenders.

2

As discussed in chapter 4, the secondary market is where existing mortgage loans and 

mortgage-backed securities are sold and purchased.
Chapter 1

Introduction

Page 21 GAO-04-280 Predatory Lending

Emergence of 

Subprime Mortgage 

Market

The market for mortgage loans has evolved considerably over the past 20 

years. Among the changes has been the emergence of a market for 

subprime mortgage loans. Most mortgage lending takes place in what is 

known as the prime market, which encompasses traditional lenders and 

borrowers with credit histories that put them at low risk of default. In 

contrast, the subprime market serves borrowers who have poor or no 

credit histories or limited incomes, and thus cannot meet the credit 

standards for obtaining loans in the prime market.3 It is widely accepted 

that the overwhelming majority of predatory lending occurs in the 

subprime market, which has grown dramatically in recent years. Subprime 

mortgage originations grew from $34 billion in 1994 to more than $213 

billion in 2002 and in 2002 represented 8.6 percent of all mortgage 

originations, according to data reported by the trade publication Inside 

B&C Lending. Several factors account for the growth of the subprime 

market, including changes in tax law that increased the tax advantages of 

home equity loans, rapidly increasing home prices that have provided many 

consumers with substantial home equity, entry into the subprime market by 

companies that had previously made only prime loans, and the expansion 

of credit scoring and automated underwriting, which has made it easier for 

lenders to price the risks associated with making loans to credit-impaired 

borrowers.

Originating lenders charge higher interest rates and fees for subprime loans 

than they do for prime loans to compensate for increased risks and for 

higher servicing and origination costs. In many cases, increased risks and 

costs justify the additional cost of the loan to the borrower, but in some 

cases they may not. Because subprime loans involve a greater variety and 

complexity of risks, they are not the uniformly priced commodities that 

prime loans generally are. This lack of uniformity makes comparing the 

costs of subprime loans difficult, which can increase borrowers’ 

vulnerability to abuse. 

However, subprime lending is not inherently abusive, and certainly all 

subprime loans are not predatory. Although some advocacy groups claim 

that subprime lending involves abusive practices in a majority of cases, 

most analysts believe that only a relatively small portion of subprime loans 

3

There is no uniform definition across the lending industry for what characterizes a loan as 

subprime. Subprime loans are generally given to borrowers with credit scores that are 

below a certain threshold, but that threshold can vary according to the policies of the 

individual lender. 
Chapter 1

Introduction

Page 22 GAO-04-280 Predatory Lending

contain features that may be considered abusive. In addition, according to 

officials at HUD and the Department of the Treasury, the emergence of a 

subprime mortgage market has enabled a whole class of credit-impaired 

borrowers to buy homes or access the equity in their homes. At the same 

time, however, federal officials and consumer advocates have expressed 

concerns that the overall growth in subprime lending and home equity 

lending in general has been accompanied by a corresponding increase in 

predatory lending. For example, lenders and brokers may use aggressive 

sales and marketing tactics to convince consumers who need cash to enter 

into a home equity loan with highly disadvantageous terms.

Originators of subprime loans are most often mortgage and consumer 

finance companies, but can also be banks, thrifts, and other institutions. 

Some originators focus primarily on making subprime loans, while others 

offer a variety of prime and subprime loans. According to HUD, 178 

lenders concentrated primarily on subprime mortgage lending in 2001. 

Fifty-nine percent of these lenders were independent mortgage companies 

(mortgage bankers and finance companies), 20 percent were nonbank 

subsidiaries of financial or bank holding companies, and the remainder 

were other types of financial institutions. Only 10 percent were federally 

regulated banks and thrifts.4

About half of all mortgage loans are made through mortgage brokers that 

serve as intermediaries between the borrower and the originating lender. 

According to government and industry officials, while the great majority of 

mortgage brokers are honest, some play a significant role in perpetrating 

predatory lending. A broker can be paid for his services from up-front fees 

directly charged to the borrower and/or through fees paid indirectly by the 

borrower through the lender in what is referred to as a “yield spread 

premium.”5

 Some consumer advocates argue that compensating brokers 

this way gives brokers an incentive to push loans with higher interest rates 

and fees. Brokers respond that yield spread premiums in fact allow them 

to reduce the direct up-front fees they charge consumers. 

4

HUD annually identifies a list of lenders that specialize in either subprime or manufactured 

home lending. HUD occasionally updates data related to past years. The information 

provided here was based on data available as of November 7, 2003.

5

A “yield spread premium” is a payment a mortgage broker receives from a lender based on 

the difference between the actual interest rate on the loan and the rate the lender would 

have accepted on the loan given the risks and costs involved. The higher the actual loan rate 

compared with the acceptable loan rate, the higher the yield spread premium. 
Chapter 1

Introduction

Page 23 GAO-04-280 Predatory Lending

The Extent of 

Predatory Lending Is 

Unknown

Currently no comprehensive and reliable data are available on the extent of 

predatory lending nationwide, for several reasons. First, the lack of a 

standard definition of what constitutes predatory lending makes it 

inherently difficult to measure. Second, any comprehensive data collection 

on predatory lending would require access to a representative sample of 

loans and to information that can only be extracted manually from the 

physical loan files. Given that such records are not only widely dispersed 

but also generally proprietary, to date comprehensive data have not been 

collected.6

 Nevertheless, policymakers, advocates, and some lending 

industry representatives have expressed concerns in recent years that 

predatory lending is a significant problem. Although the extent of 

predatory lending cannot be easily quantified, several indicators suggest 

that it may be prevalent. Primary among these indicators are legal 

settlements, foreclosure patterns, and anecdotal evidence.

In the past 5 years, there have been a number of major settlements 

resulting from government enforcement actions and private party lawsuits 

accusing lenders of abusive lending practices affecting large numbers of 

borrowers. Among the largest of these settlements have been the 

following:

• In October 2002, the lender Household International agreed to pay up to 

$484 million to homeowners across the nation to settle allegations by 

states that it used unfair and deceptive lending practices to make 

mortgage loans with excessive interest and charges. 

• In September 2002, Citigroup agreed to pay up to $240 million to resolve 

charges by FTC and private parties that Associates First Capital 

Corporation and Associates Corporation of North America (The 

6

One of the few studies that sought to quantify the extent of predatory lending was 

“Quantifying the Economic Cost of Predatory Lending,” E. Stein, Coalition for Responsible 

Lending, July 25, 2001 (revised Oct. 30, 2001). We were not able to verify the reliability of 

the study’s data, which were based on several sources. Other empirical data appears in a 

study by Freddie Mac on its automated underwriting system, “Automated Underwriting: 

Making Mortgage Lending Simpler and Fairer for America’s Families,” September 1996. The 

company evaluated a sample of 15,000 subprime mortgage loans originated by four financial 

institutions and provided preliminary estimates that between 10 and 35 percent of the 

borrowers who received these loans could have qualified for a loan in the prime market. 

Some consumer advocates have said these data suggest that some borrowers may be 

“steered” to high-cost loans even though they qualify for conventional loans with better 

terms. A Freddie Mac official told us that the data are insufficient to necessarily draw that 

conclusion.
Chapter 1

Introduction

Page 24 GAO-04-280 Predatory Lending

Associates) engaged in systematic and widespread deceptive and 

abusive lending practices.7

 According to FTC staff, under the settlement 

close to 1 million borrowers will receive compensation for loans that 

misrepresented insurance products and that contained other abusive 

terms.

• In response to allegations of deceptive marketing and abusive lending, 

First Alliance Mortgage Company entered into a settlement in March 

2002 with FTC, six states, and private parties to compensate nearly 

18,000 borrowers more than $60 million dollars.

Further, between January 1998 and September 1999, the foreclosure rate 

for subprime loans was more than 10 times the foreclosure rate for prime 

loans.8

 While it would be expected that loans made to less creditworthy 

borrowers would result in some increased rate of foreclosure, the 

magnitude of this difference has led many analysts to suggest that it is at 

least partly the result of abusive lending, particularly of loans made without 

regard to the borrower’s ability to repay. Moreover, the rate of foreclosures 

of subprime mortgage loans has increased substantially since 1990, far 

exceeding the rate of increase for subprime originations. A study 

conducted for HUD noted that while the increased rate in subprime 

foreclosures could be the result of abusive lending, it could also be the 

result of other factors, such as an increase in subprime loans that are made 

to the least creditworthy borrowers.9

 

In the early 1990s, anecdotal evidence began to emerge suggesting that 

predatory lending was on the rise. Legal services agencies throughout the 

country reported an increase in clients who were facing foreclosure as a 

result of mortgage loans that included abusive terms and conditions. These 

agencies noted that for the first time they were seeing large numbers of 

7

Citigroup acquired Associates First Capital Corporation and Associates Corporation of 

North America in November 2000 and merged The Associates’ consumer finance operations 

into its subsidiary, CitiFinancial Credit Company.

8

See HUD-Treasury Task Force on Predatory Lending, Curbing Predatory Home Mortgage 

Lending: A Joint Report (June 2000), 34-35. The report noted that from January 1998 

through September 1999, foreclosure rates averaged 0.2 percent for prime mortgage loans 

and 2.6 percent for subprime mortgage loans.

9

Harold L. Bunce, Debbie Gruenstein, Christopher E. Herbert, and Randall M. Scheessele, 

“Subprime Foreclosures: The Smoking Gun of Predatory Lending?” Paper presented at the 

U.S. Department of Housing and Urban Development conference “Housing Policy in the 

New Millennium,” Crystal City, VA, October 2000.
Chapter 1

Introduction

Page 25 GAO-04-280 Predatory Lending

consumers, particularly elderly and minority borrowers, who were facing 

the loss of homes they had lived in for many years because of a high-cost 

refinancing. Similar observations were also reported extensively at forums 

on predatory lending sponsored by HUD and the Department of the 

Treasury in five cities during 2000, at hearings held in four cities during 

2000 by the Board of Governors of the Federal Reserve System (the Board), 

and at congressional hearings on the issue in 1998, 2001, 2002, and 2003.10

Federal officials and consumer advocates maintain that predatory lenders 

often target certain populations, including the elderly and some lowincome and minority communities. Some advocates say that in many 

cases, predatory lenders target communities that are underserved by 

legitimate institutions, such as banks and thrifts, leaving borrowers with 

limited credit options. According to government officials and legal aid 

organizations, predatory lending appears to be more prevalent in urban 

areas than in rural areas, possibly because of the concentration of certain 

target groups in urban areas and because the aggressive marketing tactics 

of many predatory lenders may be more efficient in denser 

neighborhoods.11

Emergence of 

Predatory Lending As 

Policy Issue

The federal government began addressing predatory home mortgage 

lending as a significant policy issue in the early 1990s. In 1994, the Congress 

passed the Home Ownership and Equity Protection Act (HOEPA), an 

amendment to the Truth in Lending Act that set certain restrictions on 

“high-cost” loans in order to protect consumers.12 In 1998, as part of an 

10Hearing on “Equity Predators: Stripping, Flipping and Packing Their Way to Profits,” 

Special Committee on Aging, U.S. Senate, March 16, 1998. Hearing on “Predatory Mortgage 

Lending: The Problem, Impact and Responses,” Committee on Banking, Housing, and Urban 

Affairs, U.S. Senate, July 26 and 27, 2001. Hearing on “Predatory Mortgage Lending 

Practices: Abusive Uses of Yield Spread Premiums,” Committee on Banking, Housing, and 

Urban Affairs, U.S. Senate, January 8, 2002. Hearing on “Protecting Homeowners: 

Preventing Abusive Lending While Preserving Access to Credit,” Subcommittees on 

Financial Institutions and Consumer Credit and Housing and Community Opportunity, 

Committee on Financial Services, House of Representatives, November 5, 2003.

11A Rural Housing Institute report found that predatory lending did not appear to have 

infiltrated rural counties in Iowa as much as urban counties. However, the institute also 

noted there have been reports of many cases of predatory lending in rural areas of the 

country overall, with comparably severe effects on rural victims. See Rural Voices, Vol. 7, 

No. 2, Spring 2002, 4-5.

12See Pub. L. 103-325 §§ 151-158, 108 Stat. 2190-2198.
Chapter 1

Introduction

Page 26 GAO-04-280 Predatory Lending

overall review of the statutory requirements for mortgage loans, HUD and 

the Board released a report recommending that additional actions be taken 

to protect consumers from abusive lending practices.13 HUD and the 

Department of the Treasury formed a task force in 2000 that produced the 

report Curbing Predatory Home Mortgage Lending, which made several 

dozen recommendations for addressing predatory lending.14, 15

As discussed in chapters 2 and 3, a variety of federal, state, and local laws 

have been used to take civil and criminal enforcement actions against 

institutions and individuals accused of abusive lending practices. Various 

federal agencies have responsibilities for enforcing laws related to 

predatory lending. In addition, some state or local enforcement 

authorities—including attorneys general, banking regulators, and district 

attorneys—have used state and local laws related to consumer protection 

and banking to address predatory lending practices. In addition, many 

private attorneys and advocacy groups have pursued private legal actions, 

including class actions, on behalf of borrowers who claim to have been 

victimized by abusive lending.

Objectives, Scope, and 

Methodology

Our objectives were to describe (1) federal laws related to predatory 

lending and federal agencies’ efforts to enforce them; (2) the actions taken 

by the states in addressing predatory lending; (3) the secondary market’s 

role in facilitating or inhibiting predatory lending; (4) how consumer 

education, mortgage counseling, and loan disclosures may deter predatory 

lending; and (5) the relationship between predatory lending activities and 

elderly consumers. The scope of this work was limited to home mortgage 

lending and did not include other forms of consumer loans.

To identify federal laws and enforcement activities related to predatory 

lending, we interviewed officials and reviewed documents from HUD, the 

13Board of Governors of the Federal Reserve System and Department of Housing and Urban 

Development, Joint Report to the Congress Concerning Reform to the Truth in Lending 

Act and the Real Estate Settlement Procedures Act, July 1998.

14HUD-Treasury Task Force on Predatory Lending, Curbing Predatory Home Mortgage 

Lending: A Joint Report, June 2000.

15During 2003, there were at least two bills introduced in Congress that addressed predatory 

or abusive lending practices—the Responsible Lending Act (H.R. 833, Feb. 13, 2003) and the 

Predatory Lending Consumer Protection Act of 2003 (S. 1928, Nov. 21, 2003).
Chapter 1

Introduction

Page 27 GAO-04-280 Predatory Lending

Department of Justice (DOJ), the Department of the Treasury, the Federal 

Deposit Insurance Corporation (FDIC), FTC, the Board, the National Credit 

Union Administration (NCUA), the Office of the Comptroller of the 

Currency (OCC), and the Office of Thrift Supervision (OTS). We asked 

each agency to provide us with the enforcement actions they have taken 

that—in their assessment—were related to predatory home mortgage 

lending. We compiled and reviewed data on these enforcement actions and 

other steps these agencies have taken to address abusive lending practices. 

We also reviewed and analyzed federal laws that have been used to combat 

these practices.

To identify actions taken by states and localities, we reviewed and analyzed 

a publicly available database maintained by the law firm of Butera & 

Andrews that tracks state and municipal antipredatory lending legislation. 

We reviewed information related to this database and conducted interviews 

with the person who maintains it. In order to identify gaps in the 

completeness or accuracy of data, we compared data elements from this 

database and from three similar databases maintained by Lotstein 

Buckman, the National Conference of State Legislatures, and the Mortgage 

Bankers Association of America. We determined that the data were 

sufficiently reliable for use in this report. We also interviewed officials 

representing a wide range of state and local government agencies, lending 

institutions, and advocacy groups in a number of states and municipalities. 

In order to illustrate approaches taken in certain states with regard to 

predatory lending, we collected and analyzed additional information from 

two states, North Carolina and Ohio. We chose these states to illustrate the 

differing characteristics of two states’ approaches to addressing predatory 

lending—particularly with regard to legislation restricting high-cost loans 

and tightening regulation of mortgage lenders and brokers. We also 

conducted meetings with the Conference of State Bank Supervisors and the 

National Association of Attorneys General that included representatives 

from several states. Additionally, we conducted interviews with OCC, OTS, 

and NCUA to understand their policies and processes on federal 

preemption of state antipredatory lending laws.

To describe the secondary market’s role, we interviewed officials and 

reviewed documents from the Bond Market Association, the Securities 

Industry Association, Fannie Mae, Freddie Mac, a due diligence contractor, 

and two credit rating agencies. We also spoke with officials representing 

federal and state agencies, and with representatives of the lending industry 

and consumer groups. In addition, we reviewed and analyzed several local 

and state laws containing assignee liability provisions. 
Chapter 1

Introduction

Page 28 GAO-04-280 Predatory Lending

To describe the role of consumer education, mortgage counseling, and 

disclosures in deterring predatory lending, we interviewed officials from 

entities that engage in consumer financial education, including several 

federal and state agencies, industry trade groups, and local nonprofit 

organizations such as the Long Island Housing Partnership, the Greater 

Cincinnati Mortgage Counseling Service, and the Foreclosure Prevention 

Project of South Brooklyn Legal Services. We also reviewed and analyzed 

the materials these entities produce. Additionally, we conducted a 

literature review of studies that have evaluated the effectiveness of 

consumer education and homeownership counseling. 

To describe the impact on older consumers, we conducted a literature 

review on predatory lending and the elderly and examined studies on 

financial exploitation of the elderly. We also examined certain enforcement 

activities and private party lawsuits in which elderly consumers may have 

been targeted by abusive lenders. We interviewed federal and state 

agencies that have addressed issues of financial abuse of the elderly, 

including the Department of Health and Human Services’ Administration 

on Aging and the National Institute on Aging, as well as nonprofit groups 

that have addressed this issue, including AARP (formerly known as the 

American Association of Retired Persons). 

In addressing all of the objectives, we met with a wide range of 

organizations that represent consumers, among them the National 

Community Reinvestment Coalition, the Coalition for Responsible Lending, 

the National Consumer Law Center, the Association of Community 

Organizations for Reform Now, and AARP. We also met with organizations 

representing various aspects of the mortgage lending industry, among them 

the American Financial Services Association, the Consumer Mortgage 

Coalition, the Coalition for Fair and Affordable Lending, America’s 

Community Bankers, the National Association of Mortgage Brokers, the 

Mortgage Bankers Association of America, and the National Home Equity 

Mortgage Association.

We provided a draft of this report to the Board, DOJ, FDIC, FTC, HUD, 

NCUA, OCC, OTS, and the Department of the Treasury for review and 

comment. The agencies provided technical comments that have been 

incorporated, as appropriate, as well as general comments that are 

discussed at the end of chapter 2. The written comments of the Board, 

DOJ, HUD, and NCUA are printed in appendixes II through V. We 

conducted our work between January 2003 and January 2004 in accordance 
Chapter 1

Introduction

Page 29 GAO-04-280 Predatory Lending

with generally accepted government auditing standards in Atlanta, Boston, 

New York, San Francisco, and Washington, D.C.
Page 30 GAO-04-280 Predatory Lending

Chapter 2

Federal Agencies Have Taken Steps to 

Address Predatory Lending, but Face 

Challenges Chapte2r

While HOEPA is the only federal law specifically designed to combat 

predatory mortgage lending, federal agencies, including federal banking 

regulators, have used a number of federal consumer protection and 

disclosure statutes to take actions against lenders that have allegedly 

engaged in abusive or predatory lending.1 These statutes have enabled 

agencies to file complaints on behalf of consumers over issues such as 

excessive interest rates and fees, deceptive lending practices, and fraud. 

FTC, DOJ, HUD, and federal banking regulators have taken steps to 

address predatory lending practices through enforcement and civil actions, 

guidance, and regulatory changes. In some cases, agencies have 

coordinated their efforts through joint enforcement actions and 

participation in interagency working groups or task forces. However, 

questions of jurisdiction regarding certain nonbank mortgage lenders may 

challenge efforts to combat predatory lending. While the Board has 

authority to examine many such nonbank mortgage lenders under certain 

circumstances, it lacks clear authority to enforce federal consumer 

protection laws against them.

Federal Agencies Use a 

Variety of Laws to 

Address Predatory 

Lending Practices

As shown in figure 1, Congress has passed numerous laws that can be used 

to protect consumers against abusive lending practices. Federal agencies 

have applied provisions of these laws to seek redress for consumers who 

have been victims of predatory lending. Among the most frequently used 

laws are TILA, HOEPA, the Real Estate Settlement Procedures Act 

(RESPA), and the FTC Act. 2

 Congress has also given certain federal 

agencies responsibility for writing regulations that implement these laws. 

For example, the Board writes Regulation Z, which implements TILA and 

HOEPA, and HUD writes Regulation X, which implements RESPA. Also, in 

some cases, DOJ has brought actions under criminal fraud statutes based 

on conduct that can constitute predatory lending. 

1

HOEPA amended various provisions of the Truth In Lending Act. In the context of this 

report, the term “federal banking regulators” refers to the Board, the federal supervisory 

agency for state-chartered banks that are members of the Federal Reserve System; OCC, 

which supervises national banks and their subsidiaries; FDIC, the federal regulator 

responsible for insured state-chartered banks that are not members of the Federal Reserve 

System; OTS, the primary federal supervisory agency for federally insured thrifts and their 

subsidiaries; and NCUA, which supervises federally insured credit unions.

2

TILA, as amended, is codified at 15 U.S.C. §§ 1601 – 1667f (2000 & Supp 2003). The 

pertinent consumer protection provisions of the FTC Act are contained in 15 U.S.C. §§ 41 – 

58 (2000). RESPA is codified at 12 U.S.C. §§ 2601 – 2617 (2000 & Supp 2003).
Chapter 2

Federal Agencies Have Taken Steps to 

Address Predatory Lending, but Face 

Challenges

Page 31 GAO-04-280 Predatory Lending

Figure 1: Federal Laws and Statutes Used to Address Lending Practices Generally Considered to be Predatory

a

HOEPA covers only a limited portion of all subprime loans.

TILA, which became law in 1968, was designed to provide consumers with 

accurate information about the cost of credit. Among other things, the act 

requires lenders to disclose information about the terms of loans—

including the amount being financed, the total finance charge, and 

information on the annual percentage rate—that can help borrowers 

understand the overall costs of their loans. TILA also provides borrowers 

with the right to cancel certain loans secured by a principal residence 

within 3 days of closing or 3 days of the time at which the final disclosure is 

made, whichever is later.3

 

Source: GAO.

Predatory

lending practice

Failure to disclose

actual loan costs

Prohibited fees

and payments

Lending without

regard to ability

to repay

Loan flipping

Fraud and deception

Prohibited

prepayment penalties

Prohibited

balloon payments

Governing federal statute Enforcing federal agencies

Title 18 of

U.S. Code FTC

Federal

banking

TILA HOEPA RESPA regulators HUD DOJ a FTC Act

3

See 15 U.S.C. § 1635.
Chapter 2

Federal Agencies Have Taken Steps to 

Address Predatory Lending, but Face 

Challenges

Page 32 GAO-04-280 Predatory Lending

In 1994, Congress enacted the HOEPA amendments to TILA in response to 

concerns about predatory lending. HOEPA covers certain types of loans 

made to refinance existing mortgages, as well as home equity loans, that 

satisfy specific criteria.4

 HOEPA covers only a limited portion of all 

subprime loans, although there is no comprehensive data on precisely what 

that portion is.5

 The law is designed to limit predatory practices for these 

so-called “high-cost” HOEPA loans in several ways. First, it places 

restrictions on loans that exceed certain rate or fee thresholds, which the 

Board can adjust within certain limits prescribed in the law. For these 

loans, the law restricts prepayment penalties, prohibits balloon payments 

for loans with terms of less than 5 years, prohibits negative amortization, 

and contains certain other restrictions on loan terms or payments.6

 

Second, HOEPA prohibits lenders from routinely making loans without 

regard to the borrower’s ability to repay. Third, the law requires lenders to 

include disclosures in addition to those required by TILA for consumer 

credit transactions to help borrowers understand the terms of the high-cost 

loan and the implications of failing to make required payments. Each 

federal banking regulator is charged with enforcing TILA and HOEPA with 

respect to the depository institutions it regulates, and FTC is primarily 

responsible for enforcing the statutes for most other financial institutions, 

including independent mortgage lenders and nonbank subsidiaries of 

holding companies. In enforcing TILA and HOEPA, FTC has required 

violators to compensate borrowers for statutory violations. Under certain 

4

HOEPA covers closed-end refinancing loans and home equity loans with either (i) an 

annual percentage rate that exceeds the rate for Treasury securities with comparable 

maturities by more than a specified amount, or (ii) points and fees that exceed the greater of 

8 percent of the loan amount or $400, which is adjusted annually for inflation. 15 U.S.C. § 

1602(aa)(1), (3); see 12 C.F.R. § 226.32 (2003). HOEPA does not apply to purchase money 

mortgages (i.e., loans to purchase or construct a residence), open-end credit (i.e., a line of 

credit), and reverse mortgages. See, e.g., 15 U.S.C. § 1639.

5

The Board has cited a study conducted for the American Financial Services Association 

that estimated that—using current triggers—HOEPA would have covered nearly 38 percent 

of subprime first mortgage loans originated by nine major national lenders from 1995-2000. 

See M. Staten and G. Elliehausen, “The Impact of The Federal Reserve Board’s Proposed 

Revisions to HOEPA on the Number and Characteristics of HOEPA Loans” (July 24, 2001). In 

the past, the Board has also cited estimates from data from OTS that, using the current 

triggers, HOEPA would cover roughly 5 percent of all subprime loans, but the Board noted 

to us that this estimate may be conservative. See 65 Fed. Reg. at 81441. 

6

Negative amortization occurs when loan payment amounts do not cover the interest 

accruing on a loan, resulting in an increasing outstanding principal balance over time. See 

15 U.S.C. § 1639(f).
Chapter 2

Federal Agencies Have Taken Steps to 

Address Predatory Lending, but Face 

Challenges

Page 33 GAO-04-280 Predatory Lending

circumstances, HOEPA provides for damages in addition to the actual 

damages a person sustains as a result of a creditor’s violation of the act.7

 

RESPA, passed in 1974, seeks to protect consumers from unnecessarily 

high charges in the settlement of residential mortgages by requiring lenders 

to disclose details of the costs of settling a loan and by prohibiting certain 

other costs.8

 Among its provisions is a prohibition against kickbacks—

payments made in exchange for referring a settlement service, such as 

lender payments to real estate agents for the referral of business. RESPA 

also prohibits unearned fees such as adding an additional charge to a third 

party fee when no or nominal services are performed. These practices can 

unjustly increase the costs of loans and the settlement process. HUD 

enforces RESPA, working closely with federal banking regulators and other 

federal agencies such as the FTC and the Department of Justice. HUD often 

brings joint enforcement actions with these agencies, using RESPA and the 

statutes enforced by the other federal agencies. In addition, the banking 

regulators may prohibit violations of RESPA in their own regulations.

The FTC Act, enacted in 1914 and amended on numerous occasions, 

provides the FTC with the authority to prohibit and take action against 

unfair or deceptive acts or practices in or affecting commerce. FTC has 

used the act to address predatory lending abuses when borrowers have 

been misled or deceived about their loan terms.9

Various criminal fraud statutes prohibit certain types of fraud sometimes 

used in abusive lending schemes, including forgery and false statements. 

DOJ and HUD have used these statutes to fight fraudulent schemes that 

have resulted in borrowers purchasing homes worth substantially less than 

their mortgage amounts or borrowers being unfairly stripped of the equity 

in their homes. HUD officials have described some of these fraudulent 

activities as constituting predatory lending.

7

See Pub. L. No. 103-325 § 153(a), 15 U.S.C. § 1640(a).

8

Among other things, RESPA requires the good faith disclosure of estimated settlement 

costs within 3 days after an application for a mortgage loan and, at or before settlement, a 

uniform settlement statement (HUD-1) that enumerates the final cost of the loan. 

9

Banking regulators are also authorized to enforce standards imposed pursuant to the FTC 

Act with respect to unfair or deceptive acts or practices by the institutions they supervise. 

See 12 U.S.C. § 57a(f). 
Chapter 2

Federal Agencies Have Taken Steps to 

Address Predatory Lending, but Face 

Challenges

Page 34 GAO-04-280 Predatory Lending

The following other federal laws have been used to a lesser extent to 

address abusive lending:

• The Fair Housing Act prohibits discrimination based on race, sex, and 

other factors in housing-related transactions, and the Equal Credit 

Opportunity Act (ECOA) prohibits discrimination against borrowers in 

the extension of credit. Federal agencies have used both laws in cases 

against lenders that have allegedly targeted certain protected groups 

with abusive loans. 

• The Home Mortgage Disclosure Act (HMDA) requires lenders to make 

publicly available certain data about mortgage loans. Federal agencies 

have used the data provided by HMDA to help identify possible 

discriminatory lending patterns, including those that involve abusive 

lending practices. 

• The Community Reinvestment Act (CRA) requires that banking 

regulators consider a depository institution’s efforts to meet the credit 

needs of its community—including low- and moderate-income 

neighborhoods—in examinations and when it applies for permission to 

take certain actions such as a merger or acquisition. An institution's fair 

lending record is taken into account in assessing CRA performance. 

CRA regulations state that abusive lending practices that violate certain 

federal laws will adversely affect an institution’s CRA performance.10 

• Also, federal banking regulators may rely on their supervisory and 

enforcement authorities under the laws they administer, as well as on 

the Federal Deposit Insurance Act, to enforce these consumer 

protections laws and ensure that an institution’s conduct with respect to 

compliance with consumer protection laws does not affect its safety and 

soundness or that of an affiliated institution. 

• Finally, FTC and the banking regulators can also use the Fair Debt 

Collection Practices Act and Fair Credit Reporting Act in enforcement 

10On January 20, 2004, FDIC announced approval of a joint interagency notice of proposed 

rulemaking regarding the Community Reinvestment Act. The proposed rule would amend 

the act’s regulations to expand and clarify the provision that an institution's Community 

Reinvestment Act evaluation is adversely affected when the institution has engaged in 

specified discriminatory, illegal, or abusive credit practices in connection with certain loans. 

FDIC said that the Board, OCC, and OTS were expected to announce their approval of the 

proposed rulemaking shortly.
Chapter 2

Federal Agencies Have Taken Steps to 

Address Predatory Lending, but Face 

Challenges

Page 35 GAO-04-280 Predatory Lending

actions related to predatory lending that involve violations of credit 

reporting and loan servicing provisions.

Although a number of federal laws have been used to protect borrowers 

from abusive lending or to provide them redress, not all potentially abusive 

practices are illegal under federal law. Enforcement officials and consumer 

advocates have stated that some lenders make loans that include abusive 

features but are designed to remain below the thresholds that would 

subject them to the restrictions of HOEPA. For loans not covered under 

HOEPA, certain lending practices many consider to be abusive are not, 

depending on the circumstances, necessarily a violation of any federal law. 

For example, it is not necessarily illegal to charge a borrower interest rates 

or fees that exceed what is justified by the actual risk of the mortgage loan. 

Nor is it per se illegal under federal law to “steer” a borrower with good 

credit who qualifies for a prime loan into a higher cost subprime loan.11 

Finally, with the exception of loans covered under HOEPA, there are no 

federal statutes that expressly prohibit making a loan that a borrower will 

likely be unable to repay.12

11Even in instances where charging high interest rates or fees or steering borrowers to 

subprime loans do not violate federal consumer protection statutes, imposing such rates 

and fees on a discriminatory basis against groups protected under the Fair Housing Act and 

ECOA could constitute violations of those laws.

12A pattern of making loans without regard to the ability of borrowers to repay can be 

considered a violation of the safety and soundness requirements imposed on federally 

insured depository institutions and could also reflect poorly on an institution’s compliance 

with the Community Reinvestment Act. See OCC Advisory Letter 2003-2 (Guidance for 

National Banks to Guard Against Predatory and Abusive Lending Practices), February 21, 

2003. For loans that are covered under HOEPA, making a loan without regard to a 

borrower’s ability to repay is not prohibited unless it can be demonstrated that an institution 

has engaged in a “pattern or practice” of doing so. OCC in its recent rulemaking prohibited 

national banks or their operating subsidiaries from making consumer loans based 

predominantly on the foreclosure or liquidation value of a borrower’s collateral. See 69 Fed. 

Reg. 1904 (Jan. 13, 2004).
Chapter 2

Federal Agencies Have Taken Steps to 

Address Predatory Lending, but Face 

Challenges

Page 36 GAO-04-280 Predatory Lending

Federal Agencies Have 

Taken Some 

Enforcement Actions, 

but Banking Regulators 

Have Focused on 

Guidance and 

Regulatory Changes

FTC, DOJ, and HUD have taken enforcement actions to address violations 

related to abusive lending.13 As of December 2003, FTC reported that the 

agency had taken 19 actions against mortgage lenders and brokers for 

predatory practices. DOJ has addressed predatory lending that is alleged 

to be discriminatory by enforcing fair lending laws in a limited number of 

cases. HUD’s efforts have generally focused on reducing losses to the 

Federal Housing Administration (FHA) insurance fund, including 

implementing a number of initiatives to monitor lenders for violations of 

FHA guidelines.14 HUD reported having taken a small number of actions to 

enforce RESPA and the Fair Housing Act in cases involving predatory 

lending.

Federal banking regulators stated that their monitoring and examination 

activities have revealed little evidence of predatory lending practices by 

federally regulated depository institutions. Accordingly, most banking 

regulators reported that they have taken no formal enforcement actions 

related to predatory mortgage lending abuses by the institutions they 

supervise. Regulators have addressed predatory lending primarily by 

issuing guidance to their institutions on guarding against direct or indirect 

involvement in predatory lending practices and by making certain changes 

to HOEPA and HMDA regulations. In addition, several federal agencies 

have coordinated certain efforts to pursue enforcement actions related to 

predatory lending and have shared information on their efforts to address 

fair lending and predatory lending. 

13Most enforcement actions discussed in this chapter were civil judicial actions brought and 

settled by FTC, DOJ, and HUD. 

14HUD’s FHA mortgage insurance program makes loans more readily available for low- and 

moderate-income families by providing mortgage insurance to purchase or refinance a 

home. Lending institutions such as mortgage companies and banks fund the loans.
Chapter 2

Federal Agencies Have Taken Steps to 

Address Predatory Lending, but Face 

Challenges

Page 37 GAO-04-280 Predatory Lending

FTC Has Played the 

Predominant Federal Role 

in Enforcement Actions 

Related to Predatory 

Lending

FTC is responsible for implementing and enforcing certain federal laws 

among lending institutions that are not supervised by federal banking 

regulators. FTC reported that between 1983 and 2003, it filed 19 complaints 

alleging deceptive or other illegal practices by mortgage lenders and 

brokers, 17 of them filed since 1998.15 For a list of these FTC enforcement 

actions, see appendix I. As of December 2003, FTC had reached 

settlements in all but one of the cases. In most of these settlements, 

companies have agreed to provide monetary redress to consumers and to 

halt certain practices in the future. In some cases, the settlements also 

imposed monetary penalties that the companies have paid to the 

government. Among the recent enforcement actions related to predatory 

lending that the FTC identified are the following:

• The Associates. In 2002, FTC settled a complaint against Associates 

First Capital Corporation and Associates Corporation of North America 

(collectively, The Associates), as well as their successor, Citigroup. The 

complaint alleged that the lender violated the FTC Act and other laws 

by, among other things, deceiving customers into refinancing debts into 

home loans with high interest rates and fees and purchasing high-cost 

credit insurance. The settlement, along with a related settlement with 

private parties, provides for up to $240 million in restitution to 

borrowers.16

• First Alliance. In 2002, FTC, along with several states and private 

plaintiffs, settled a complaint against First Alliance Mortgage Company 

alleging that it violated federal and state laws by misleading consumers 

about loan origination and other fees, interest rate increases, and 

monthly payment amounts on adjustable rate mortgage loans. The 

company agreed to compensate nearly 18,000 borrowers more than $60 

15FTC has also recently addressed abuses in the mortgage loan servicing industry. In 

November 2003, it announced settlements with Fairbanks Capital Holding Corp., its wholly 

owned subsidiary Fairbanks Capital Corp., and their founder and former CEO (collectively, 

Fairbanks) on charges that Fairbanks violated the FTC Act, RESPA, and other laws by 

failing to post consumers’ mortgage payments in a timely manner and charging consumers 

illegal late fees and other unauthorized fees. The settlement will provide $40 million in 

redress to consumers. The case was jointly filed with HUD. United States of America v. 

Fairbanks Capital Corp. et al., Civ. Action No. 03-12219-DPW (D. Mass.)(filed 11/12/03).

16Citigroup, Inc., acquired The Associates in a merger that was completed in November 2000. 

The FTC complaint named Citigroup and CitiFinancial Credit Company as successor 

defendants.
Chapter 2

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Address Predatory Lending, but Face 

Challenges

Page 38 GAO-04-280 Predatory Lending

million in consumer redress and to refrain from making 

misrepresentations about future offers of credit.

• Fleet Finance and Home Equity U.S.A. In 1999, Fleet Finance, Inc., and 

Home Equity U.S.A., Inc., settled an FTC complaint alleging violations of 

the FTC Act, TILA, and related regulations. These violations included 

failing to provide required disclosures about home equity loan costs and 

terms and failing to alert borrowers to their right to cancel their credit 

transactions. To settle, the company agreed to pay up to $1.3 million in 

redress and administrative costs and to refrain from violating TILA in 

the future. 

• Operation Home Inequity. In 1999, FTC conducted “Operation Home 

Inequity,” a law enforcement and consumer education campaign that 

sought to curb abusive practices in the subprime mortgage lending 

market. FTC reached settlements with seven subprime mortgage 

lenders that had been accused of violating a number of consumer 

protections laws, including the FTC Act, TILA, and HOEPA. Six 

companies were required to pay $572,000 in consumer redress, and all 

lenders were required to adhere to future lending restrictions. FTC staff 

told us that the operation was intended in large part to increase 

consumers’ awareness of predatory lending and to provide a deterrent 

effect by warning lenders that FTC is able and willing to take action 

against them.

FTC staff expressed their belief that the agency’s enforcement actions over 

the years have been successful in deterring other lenders from engaging in 

abusive practices. However, in a congressional hearing in 2000 FTC had 

requested statutory changes that would improve its ability to enforce 

HOEPA. For example, FTC recommended that Congress expand HOEPA to 

prohibit the financing of lump-sum credit insurance premiums in loans 

covered by HOEPA and to give FTC the power to impose civil penalties for 

HOEPA violations.17

17Prepared statement of the Federal Trade Commission before the House Committee on 

Banking and Financial Services on “Predatory Lending Practices in the Subprime Industry,” 

May 24, 2000. Since then, many mortgage lenders have said they are abandoning lump-sum 

credit insurance.
Chapter 2

Federal Agencies Have Taken Steps to 

Address Predatory Lending, but Face 

Challenges

Page 39 GAO-04-280 Predatory Lending

DOJ Has Enforced Fair 

Lending Laws in Connection 

with Predatory Lending

DOJ’s Housing and Civil Enforcement Section is responsible for enforcing 

certain federal civil rights laws, including the Fair Housing Act and ECOA. 

DOJ identified two enforcement actions it has taken related to predatory 

mortgage lending practices that it alleged were discriminatory. 18

• Delta Funding. In 2000, DOJ, in cooperation with FTC and HUD, 

brought charges against Delta Funding Corporation, accusing the 

consumer finance company of violations of the Fair Housing Act, 

HOEPA, ECOA, RESPA, and related federal regulations. 19 Delta 

allegedly approved and funded loans that carried substantially higher 

broker fees for African American females than for similarly situated 

white males. Delta was also accused of violating certain consumer 

protection laws by paying kickbacks and unearned fees to brokers to 

induce them to refer loan applicants to Delta and by systematically 

making HOEPA loans without regard to borrowers’ ability to repay. The 

settlement placed restrictions on the company’s future lending 

operations and victims were compensated from previously established 

monetary relief funds.20

• Long Beach Mortgage. In 1996 DOJ settled a complaint alleging 

violations of the Fair Housing Act and ECOA against Long Beach 

Mortgage Company.21 According to the complaint, the company’s loan 

officers and brokers charged African American, Hispanic, female, and 

18In addition to these cases, DOJ filed an amicus curiae brief in a private case, Hargraves v. 

Capital City Mortgage Corp., Civ. Action No. 98-1021 (JHG/AK) (D DC), in which the 

department contended that certain alleged predatory lending practices violated the Fair 

Housing Act and ECOA. The case involved a mortgage lender that allegedly engaged in a 

pattern or practice of deceiving African American borrowers about the terms of their loans 

and other information, such as the total amount due. In addition, DOJ filed a complaint in 

United States v. Action Loan, Civ. Action No. 3:00CV-511-H (W.D. KY), which resulted from 

enforcement efforts by the FTC and HUD and involved allegations of predatory mortgage 

lending. 

19United States v. Delta Funding Corp., Civ. Action No. CV 00 1872 (E.D. N.Y. 2000).

20Two monetary relief funds totaling over $12 million were set up under a previous 

remediation agreement involving Delta and the New York State Banking Department. 

21United States v. Long Beach Mortgage Company, Case No. 96-6159 (1996). Prior to 

December 1990, Long Beach Bank was a savings and loan association, chartered by the state 

of California. Between December 1990 and October 1994, Long Beach Mortgage Company 

operated under the name of Long Beach Bank as a federally chartered thrift institution. In 

1999, Washington Mutual, a federally chartered thrift, acquired Long Beach Mortgage 

Company and owns it at the holding company level. 
Chapter 2

Federal Agencies Have Taken Steps to 

Address Predatory Lending, but Face 

Challenges

Page 40 GAO-04-280 Predatory Lending

older borrowers higher loan rates than it charged other similarly 

situated borrowers. The company agreed to set up a $3 million fund to 

reimburse 1,200 consumers who had received Long Beach loans.22

Representatives from both FTC and DOJ have stated that their enforcement 

actions can be very resource intensive and can involve years of discovery 

and litigation. For example, FTC filed a complaint against Capitol City 

Mortgage Corporation in 1998 that is still in litigation more than 5 years 

later. FTC staff told us that because cases involving predatory lending can 

be so resource intensive, the agencies try to focus their limited resources 

on the cases that will have the most impact, such as those that may result in 

large settlements to consumers or that will have some deterrent value by 

gaining national exposure. Similarly, DOJ officials select certain 

discrimination cases, including those mentioned above, in part because of 

their broad impact.

HUD’s Enforcement 

Activities Focus on FHA 

Loans

HUD’s enforcement and regulatory activity with regard to abusive 

mortgage lending comes primarily through its management of the FHA 

single-family mortgage insurance programs, its rule-making and 

enforcement authority under RESPA, and its enforcement of the Fair 

Housing Act.

Most of HUD’s enforcement activities related to abusive lending have 

focused on reducing losses to the FHA insurance fund. Investigators from 

HUD’s Office of the Inspector General have worked with investigators from 

U.S. Attorneys’ Offices and the FBI in a joint law enforcement effort to 

target fraud in the FHA mortgage insurance program, which can result in 

defaults and thus in losses to the insurance fund.23 The fraudulent 

activities sometimes involve property flipping schemes, which can harm 

borrowers by leaving them with mortgage loans that may far exceed the

22DOJ has also taken enforcement actions to address other practices, such as credit repair 

schemes, that do not involve abusive lending but that nonetheless serve to illegally strip 

homeowners of their equity. 

23GAO has issued a number of reports on the FHA single-family insurance program, a highrisk program area. For example, see U.S. General Accounting Office, Major Management 

Challenges and Program Risks: Department of Housing and Urban Development,

GAO-03-103 (Washington, D.C.: January 2003).
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value of their homes.24 Under certain circumstances, such activity can 

involve predatory lending practices. To address these crimes, investigators 

have presented evidence of false statements and other criminal fraud and 

deception. In addition, representatives from HUD told us that they have 

processes in place to ensure that lenders adhere to agency guidelines and 

make loans that satisfy FHA requirements. The Office of Lender Activities 

and Program Compliance approves, recertifies, and monitors FHA lenders 

and works with them to ensure compliance. If necessary, the office refers 

violating lenders to HUD’s Mortgagee Review Board, which has the 

authority to take administrative actions such as withdrawing approval for a 

lender to make FHA-insured loans. HUD officials told us that the board has 

taken many administrative actions to address violations that could be 

indicative of predatory lending, such as charging excessive and 

unallowable fees, inflating appraisals, and falsifying documents showing 

income or employment. In an effort to address abusive property flipping 

schemes involving homes secured by FHA-insured loans, HUD issued a 

final rule in May 2003 that prohibits FHA insurance on properties resold 

less than 90 days after their previous sale.

HUD officials say that programs they have in place to improve the 

monitoring of FHA lenders also serve to deter predatory lending. For 

example, HUD’s Credit Watch Program routinely identifies those lenders 

with the highest early default and insurance claim rates and temporarily 

suspends the FHA loan origination approval agreements of the riskiest 

lenders, helping to ensure that lenders are not making loans that borrowers 

cannot repay. Also, the Neighborhood Watch program provides 

information to FHA participants about lenders and appraisers whose loans 

have high default and FHA insurance claim rates. HUD told us that it has 

also taken a series of actions to better ensure the integrity of appraisals 

used to finance FHA insured loans. As of December 2003, HUD was in the 

final stages of issuing a rule that would hold lenders accountable for 

appraisals associated with loans they make.

24In property flipping schemes, properties are purchased and quickly resold at grossly 

inflated values. In some cases the inflated value is established by an interim sale to a “straw 

buyer” and then flipped to an unsuspecting purchaser. In other cases, first-time buyers who 

have been turned down for home loans because of poor credit or low income are targeted by 

flippers who arrange loans well in excess of the real value of the property using fabricated 

employment and deposit records. These schemes often involve many players, including 

mortgage lenders, mortgage brokers, underwriters, and home-improvement workers. 

Almost all flipping schemes involve false appraisals. While HUD categorizes property 

flipping as a predatory lending practice, not all federal agencies concur with this 

categorization.
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HUD’s Office of RESPA and Interstate Land Sales is responsible for 

handling complaints, conducting investigations, and taking enforcement 

actions related to RESPA. HUD has taken several enforcement actions 

related to RESPA’s prohibition of kickbacks and referral fees, three of 

which related directly to abusive mortgage lending, as of December 2003.25 

Also, as discussed above, in November 2003 HUD and FTC jointly filed a 

case against and reached settlement with a mortgage loan servicing 

company charged with violations of the FTC Act, RESPA, and other laws.26 

HUD has also recently hired additional staff to enhance its RESPA 

enforcement efforts. Finally, in 2002, HUD issued a proposed rule designed 

to change the regulatory requirements of RESPA to simplify and potentially 

lower the costs of the home mortgage settlement process. According to 

HUD, as of December 2003, the final rule had been submitted to the Office 

of Management and Budget and was being reviewed. 

HUD’s Office of Fair Housing and Equal Opportunity is responsible for 

enforcing the Fair Housing Act. HUD identified one action—a letter of 

reprimand to a financial institution—related to enforcement of this act in a 

case involving predatory lending.

Federal Banking Regulators 

Have Issued Guidance and 

Made Regulatory Changes

According to federal banking regulators and state enforcement authorities, 

federally regulated depository institutions—banks, thrifts, and credit 

unions—have not typically engaged in predatory lending practices. Federal 

banking regulators have systems in place to track customer complaints and 

reported that they have received few complaints related to predatory 

lending by the institutions they supervise. The regulators conduct routine 

examinations of these institutions and have the authority, in cases of 

suspected predatory lending, to enforce a variety of fair lending and 

consumer protection laws. Banking regulators noted that the examination 

process, which involves routine on-site reviews of lenders’ activities, serves 

as a powerful deterrent to predatory lending by the institutions they 

examine.

25For example, a complaint filed jointly by HUD, FTC, and Illinois authorities against 

Mercantile Mortgage Company in 2002 alleged that for almost 3 years, a broker referred 

virtually every one of his loan customers to Mercantile in exchange for a fee as high as 10 

percent. The other two cases involving RESPA include Delta Funding (2000) and Action 

Loan Company (2000). 

26United States of America v. Fairbanks Capital Corp., 03-12219-DPW (D. MA, filed Nov. 12, 

2003).
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Officials of OTS, FDIC, the Board, and NCUA said that they had taken no 

formal enforcement actions related to predatory mortgage lending against 

the institutions they regulate. 27 Officials at OCC said they have taken one 

formal enforcement action related to predatory mortgage lending to 

address fee packing, equity stripping, and making loans without regard to a 

borrower’s ability to pay. In November 2003, the agency announced an 

enforcement action against Loan Star Capital Bank seeking to reimburse 30 

or more borrowers for more than $100,000 in abusive fees and closing costs 

that violated the FTC Act, HOEPA, TILA, and RESPA.28 The bank also was 

required to conduct a comprehensive review of its entire mortgage 

portfolio and to provide restitution to any additional borrowers who may 

have been harmed.

While most federal banking regulators stated that they have taken no 

formal enforcement actions, representatives from some said they had 

taken informal enforcement actions to address some questionable 

practices among their institutions. For example, OTS has examined 

institutions that may have charged inappropriate fees or violated HOEPA 

and resolved the problems by requiring corrective action as part of the 

examination process. In addition, most of the banking regulators have 

taken formal enforcement actions, including issuing cease-and-desist 

orders, in response to activities that violated fair lending and consumer 

protection laws but were not necessarily deemed to constitute “predatory 

lending.”

Guidance Federal banking regulators have issued guidance to their institutions about 

both predatory lending and subprime lending in general. In February 2003, 

OCC issued two advisory letters related to predatory lending to the national 

banks and the operating subsidiaries it supervises. One letter provided 

specific guidelines for guarding against predatory lending practices during 

loan originations, and the other alerted institutions to the risk of indirectly

27Banking regulators have broad enforcement powers and can take formal actions (cease 

and desist orders, civil money penalties, removal orders, and suspension orders, among 

others) or informal enforcement actions (such as memoranda of understanding and board 

resolutions). Not all informal actions are publicly disclosed.

28Matter of Clear Lake National Bank, AA-EC03-25 (OCC Nov. 7, 2003). The lender that 

made the loans, Clear Lake National Bank of San Antonio, Texas, merged with another bank 

in April 2003 to become Lone Star Capital Bank, N.A. OCC brought the action under the 

enforcement authority provided by Section 8 of the Federal Deposit Insurance Act, 12 U.S.C. 

1818. 
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engaging in predatory lending through brokered or purchased loans.29 The 

advisory letters described loan attributes that are often considered 

predatory and established standards for policies and procedures for 

monitoring loan transactions to avoid making, brokering, or purchasing 

loans with such attributes. For example, the first letter stated that banks 

should establish underwriting policies and procedures to determine that 

borrowers have the capacity to repay their loans. The advisory letter also 

stated OCC’s position that predatory lending will also affect a national 

bank’s CRA rating. The advisories have also clarified ways in which 

predatory practices can create legal, safety and soundness, and reputation 

risks for national banks. For example, they laid out ways in which the 

origination or purchase of predatory loans may constitute violations of 

TILA, RESPA, HOEPA, the FTC Act, and fair lending laws. In addition, in 

January 2004, OCC issued a rule adopting antipredatory lending standards 

that expressly prohibit national banks from making loans without regard to 

the borrower’s ability to repay and from engaging in unfair and deceptive 

practices under the FTC Act.30

In 1999 and 2001, the Board, FDIC, OCC, and OTS issued joint guidance to 

their institutions on subprime lending in general.31 The guidance 

highlighted the additional risks inherent in subprime lending and noted that 

institutions engaging in such lending need to be aware of the potential for 

predatory practices and be particularly careful to avoid violating fair 

lending and consumer protection laws and regulations. The NCUA issued 

similar guidance to insured credit unions in 1999.32 Federal banking

29OCC Advisory Letter 2003-2 (Guidance for National Banks to Guard Against Predatory and 

Abusive Lending Practices), February 21, 2003; and OCC Advisory Letter 2003-3 (Avoiding 

Predatory and Abusive Lending Practices in Brokered and Purchased Loans), February 21, 

2003.

3069 Fed. Reg. 1904 (Jan. 13, 2004).

31The Board, FDIC, OCC and OTS, Interagency Guidance on Subprime Lending, March 1, 

1999; and Expanded Guidance for Subprime Lending Programs, January 31, 2001. The 2001 

guidance applies to institutions with subprime lending programs with an aggregate credit 

exposure greater than or equal to 25 percent of Tier 1 capital.

32NCUA Letter to Credit Unions No. 99-CU-05, Risk Based Lending, June 1999.
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regulators have also previously issued guidance about abusive lending 

practices, unfair or deceptive acts or practices, and other issues related to 

predatory lending.33

Regulatory Changes The Board is responsible for issuing regulations that implement HOEPA 

and HMDA, two laws that play a role in addressing predatory lending. In 

December 2001, in response to concerns that HOEPA may not be 

adequately protecting consumers from abusive lending practices, the 

Board amended Regulation Z, which implements HOEPA, to 

• lower the interest rate “trigger” that determines whether loans are 

covered under HOEPA in order to bring more loans under the protection 

of the law,34

• require that fees paid for credit insurance and similar debt protection 

products be included when determining whether loans are subject to 

HOEPA,

• prohibit creditors that make HOEPA loans from refinancing the loan 

within one year of origination with another HOEPA loan, unless the 

refinancing is in the borrower’s interest, and

• clarify the prohibition against engaging in a “pattern or practice” of 

lending without regard to borrowers’ ability to repay.35

In February 2002, the Board also made changes to Regulation C, which 

implements HMDA. The changes, which went into effect in January 2004, 

require lenders to provide additional data that may facilitate analyses of 

lending patterns that may be predatory. For example

33See OCC Advisory Letter 2000-7 (abusive lending practices); OCC Advisory Letter 2000-10, 

OCC Advisory Letter 2000-11, OTS Chief Executive Officers Letter 131, OTS Chief Executive 

Officers Letter 132, and NCUA Letter 01-FCU-03 (title loans and payday lending); OCC 

Bulletin 2001-47 (third-party relationships); and OCC Advisory Letter 2002-3 and FDIC 

Financial Institution Letter 57-2002 (unfair or deceptive acts or practices).

34The Board adjusted the annual percentage rate (APR) trigger from 10 to 8 percentage 

points above the rate for Treasury securities with comparable maturities. The change 

applies only to first lien mortgages; the subordinate lien mortgage APR trigger remained at 

10 percent.

3566 Fed. Reg. 65604 (Dec. 20, 2001).
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• if the costs to the borrower of financing a loan exceed a certain 

threshold determined by the Board, the lender must report the cost of 

the loan;36

• if an application or loan involves a manufactured home, the lender is 

required to identify that fact, in part to help identify predatory practices 

involving these types of homes; and

• if a loan is subject to HOEPA, the lender is required to identify that fact 

in order to give policymakers more specific information about the 

number and characteristics of HOEPA loans.37

Because HOEPA expressly grants the Board broad authority to issue rules 

to regulate unfair or deceptive acts and practices, some consumer 

advocacy organizations have argued that the Board should use its authority 

to do more to curb predatory lending.38 For example, some consumer 

groups have called on the Board to use its rule-making authority to prohibit 

the financing of single-premium credit insurance—a product that is 

believed by many to be inherently predatory.39 Under the McCarran 

Ferguson Act,40 unless a federal statute is specifically related to the 

business of insurance, the federal law may not be construed to invalidate, 

impair, or supercede any state law enacted to regulate the business of 

insurance. Board officials say it is not clear the extent to which rules 

issued by the Board under HOEPA seeking to regulate the sale of singlepremium credit insurance would be consistent with that standard. The 

Board has previously recommended that it would be more appropriate for 

Congress to address this issue through changes in law. Some consumer 

groups also have argued that the Board should increase the loan data 

reporting requirements of HMDA to help detect abusive lending. The 

36More specifically, lenders are required to report the difference or spread between a loan’s 

annual percentage rate (a value reflecting both the interest rate and certain fees associated 

with a loan) and the yield on a Treasury security of comparable maturity, for loans where 

this spread exceeds certain thresholds set by the Board. See, generally, 67 Fed. Reg. 7222 

(Feb. 15, 2002) and 67 Fed. Reg. 43218 (June 27, 2002).

37Id.

38See 15 U.S.C. § 1639(l)(2).

39In its 2001 amendments to the HOEPA rules, the Board added single-premium credit 

insurance to HOEPA’s fee trigger.

40See 15 U.S.C. § 1012.
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Board has added certain loan pricing and other items to the HMDA 

reporting requirements, effective in January 2004, but did not add other 

data reporting requirements, such as the credit score of the applicant. 

Board officials said this is based on the belief that the need for additional 

loan data to ensure fair lending must be weighed against the costs and 

burdens to the lender of gathering and reporting the additional information.

Agencies Have Coordinated 

on Enforcement Actions 

and Participated in 

Interagency Groups

Federal agencies have worked together to investigate and pursue some 

cases involving predatory lending. For example, FTC, DOJ, and HUD 

coordinated to take enforcement action against Delta Funding 

Corporation, with each agency investigating and bringing actions for 

violations of the laws under its jurisdiction. DOJ conducted its 

enforcement action against Long Beach Mortgage Company in 

coordination with OTS, which investigated the initial complaint in 1993 

when the company was a thrift. Federal agencies have also coordinated 

with state authorities and private entities in enforcement actions. For 

example, in 2002, FTC joined six states, AARP, and private attorneys to 

settle a complaint against First Alliance Mortgage Company alleging that 

the company used deception and manipulation in its lending practices. 

Federal regulators have also coordinated their efforts to address fair 

lending and predatory lending through working groups. For example

• In the fall of 1999 the Interagency Fair Lending Task Force, which 

coordinates federal efforts to address discriminatory lending, 

established a working group to examine the laws related to predatory 

lending and determine how enforcement and consumer education could 

be strengthened.41 Because of differing views on how to define and 

combat predatory lending, the group was unable to agree on a federal 

interagency policy statement related to predatory lending in 2001. The 

Task Force then continued its efforts related to consumer education and 

published a brochure in 2003 to educate consumers about predatory 

lending practices. 

• The five banking regulators have conducted additional coordination 

activities through the Federal Financial Institutions Examination 

41The agencies that participated in the working group were OCC, OTS, FDIC, the Board, 

NCUA, DOJ, FTC, HUD, the Federal Housing Finance Board, and the Office of Federal 

Housing Enterprise Oversight.
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Council’s Task Force on Consumer Compliance.42 The task force 

coordinates policies and procedures for ensuring compliance with fair 

lending laws and the Community Reinvestment Act, both of which have 

been identified as tools that can be used to address predatory lending. 

The council publishes a document that responds to frequently asked 

questions about community reinvestment, including how examiners 

should consider illegal credit practices, which may be abusive, in 

determining an institution’s Community Reinvestment Act rating.

• In 2000, HUD and the Department of the Treasury created the National 

Task Force on Predatory Lending, which convened forums around the 

country to examine the issue and released a report later in the year.43 

The report made specific recommendations to Congress, federal 

agencies, and other stakeholders that were aimed at (1) improving 

consumer literacy and disclosure, (2) reducing harmful sales practices, 

(3) reducing abusive or deceptive loan terms and conditions, and 

(4) changing structural aspects of the lending market. 

Some of the recommendations made in the HUD-Treasury task force report 

have been implemented. For example, as recommended in the report, the 

Board has adopted changes to HOEPA regulations that have increased the 

number of loans covered and added additional restrictions. In addition, as 

the report recommended, FTC and some states have devoted more 

resources in the past few years to actively pursuing high-profile 

enforcement cases. As discussed in chapter 5, federal and state agencies 

have also worked to improve one of the areas highlighted in the report: 

public awareness about predatory lending issues. Other recommendations 

made in the report have not been implemented, however. For example, 

Congress has not enacted legislation to expand penalties for violations of 

TILA, HOEPA, and RESPA or to increase the damages available to 

borrowers harmed by such violations. HUD and the Department of the 

Treasury told us that they have not formally tracked the status of the 

recommendations made in the report, although HUD officials said they are 

42The Federal Financial Institutions Examination Council is a formal interagency body 

composed of representatives of each of the five federal banking regulators. The council was 

established in 1979 and is empowered to (1) prescribe uniform principles, standards, and 

report forms for the federal examination of financial institutions and (2) make 

recommendations to promote uniformity in the supervision of financial institutions.

43U.S. Department of the Treasury and U.S. Department of Housing and Urban Development, 

Curbing Predatory Home Mortgage Lending: A Joint Report, June 2000.
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informally monitoring the recommendations in the report that relate to 

their agency. Officials at both agencies also noted that the report and its 

recommendations were the product of a previous administration and may 

or may not reflect the views of the current administration.

In addition to participating in interagency groups, agencies share 

information related to fair lending violations under statutory requirements 

and formal agreements. For example, since 1992 HUD and the banking 

regulators have had a memorandum of understanding stating that HUD will 

refer allegations of fair lending violations to banking regulators and a 1994 

executive order requires that executive branch agencies notify HUD of 

complaints and violations of the Fair Housing Act. In addition, whenever 

the banking regulatory agencies or HUD have reason to believe that an 

institution has engaged in a “pattern or practice” of illegal discrimination, 

they are required to refer these cases to DOJ for possible civil action. 

Jurisdictional Issues 

Related to Nonbank 

Subsidiaries Challenge 

Efforts to Combat 

Predatory Lending

Jurisdictional issues related to the regulation of certain nonbank mortgage 

lenders may challenge efforts to combat predatory lending. Many federally 

and state-chartered banks and thrifts, as well as their subsidiaries, are part 

of larger financial holding companies or bank holding companies.44 These 

holding companies may also include nonbank financial companies, such as 

finance and mortgage companies, that are subsidiaries of the holding 

companies themselves. These holding company subsidiaries are frequently 

referred to as affiliates of the banks and thrifts because of their common 

ownership by the holding company. As shown in figure 2, the federal 

regulators of federally and state-chartered banks and thrifts also regulate 

the subsidiaries of those institutions. For example, as the primary 

regulator for national banks, OCC also examines operating subsidiaries of 

those banks. On the other hand, federal regulators generally do not 

perform routine examinations of independent mortgage lenders and 

affiliated nonbank subsidiaries of financial and bank holding companies 

engaged in mortgage lending. 

44A subsidiary of a bank, thrift, or credit union is controlled through partial or complete 

ownership by the institution. Federal laws and regulations set more specific requirements 

that dictate whether an institution is a subsidiary. For the purposes of this report, the term 

holding company refers to both (traditional) bank holding companies and bank holding 

companies that qualify as financial holding companies as defined by the Board.
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Figure 2: Structure and Federal Oversight of Mortgage Lenders

Note: The primary federal agency for enforcement of the various federal laws used to combat abusive 

or predatory lending activities is shown in parentheses.

a

FTC is responsible for enforcing federal laws for lenders that are not depository institutions but it is not 

a supervisory agency and does not conduct routine examinations.

Some disagreement exists between states and some federal banking 

regulators over states’ authority to regulate and supervise the operating 

subsidiaries of federally chartered depository institutions. For example, 

OCC issued an advisory letter in 2002 noting that federal law provides the 

agency with exclusive authority to supervise and examine operating 

subsidiaries of national banks and that the states have no authority to 

regulate or supervise these subsidiaries.45 Some representatives of state 

banking regulators expressed concerns to us about this because of the 

subsidiaries’ potential involvement in predatory lending practices. OCC 

Source: GAO.

Financial institutions and

their subsidiaries within

a holding company

A bank holding company or financial 

holding company can include 

national and state banks and thrifts, 

and their subsidiaries, all of which 

can engage in mortgage lending. In 

addition, such a holding company 

can have nonbank subsidiaries that 

engage in mortgage lending or other 

financial activities.

Independent mortgage lenders

Many mortgage lenders are not 

insured depository institutions, their 

subsidiaries, or the subsidiaries of 

bank or financial holding companies.

Insured depository 

institutions and their subsidiaries

National and state banks and thrifts, and their subsidiaries, that are not part of 

holding companies can engage in mortgage lending and would be subject to 

oversight by their primary federal banking regulator.

Holding company

(the Board)

Insured

savings and loan

association

(OTS)

State

nonmember

bank

(FDIC)

State

member bank

(the Board)

National bank

(OCC)

Bank subsidiary

(OCC)

Bank subsidiary

(the Board)

Bank subsidiary

(FDIC)

Nonbank

subsidiary

(FTC)a

Thrift subsidiary

(OTS)

Independent

mortgage lender

(FTC)a

45OCC Advisory Letter 2002-9 (Questions Concerning Applicability and Enforcement of State 

Laws: Contacts From State Officials, November 25, 2002.); see also 69 Fed. Reg. 1904 

(Jan. 13, 2004).
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has stated that the subsidiaries of the institutions it regulates do not play a 

large role in subprime lending and that little evidence exists to show that 

these subsidiaries are involved in predatory lending. But some state 

enforcement authorities and consumer advocates argue otherwise, citing 

some allegations of abuses at national bank subsidiaries. However, several 

state attorneys general have written that predatory lending abuses are 

“largely confined” to the subprime lending market and to non-depository 

institutions, not banks or direct bank subsidiaries.46 OCC officials stated 

that the agency has strong monitoring and enforcement systems in place 

and can and will respond vigorously to any abuses among institutions it 

supervises.47 For example, OCC officials pointed to an enforcement action 

taken in November 2003 that required restitution of more than $100,000 to 

be paid to 30 or more borrowers for fees and interest charged in a series of 

abusive loans involving small “tax-lien loans.”

A second issue relates to the monitoring and supervision of certain 

nonbank subsidiaries of holding companies. As noted previously, many 

federally and state-chartered banks and thrifts, as well as their subsidiaries, 

are part of larger financial or bank holding companies.48 These holding 

companies may also include nonbank subsidiaries, such as finance and 

mortgage companies, that are affiliates but not subsidiaries of the federally 

regulated bank or thrift. Although these affiliates engage in financial 

activities that may be subject to federal consumer protection and fair 

lending laws, unlike depository institutions they are not subject to routine 

supervisory examinations for compliance with those laws. While the Board 

has jurisdiction over these entities for purposes of the Bank Holding 

Company Act, it lacks authority to ensure and enforce their compliance 

46See Brief of Amicus Curiae State Attorneys General, National Home Equity Mortgage 

Ass’n v. OTS, Civil Action No. 02-2506 (GK) (D D.C.) (March 21, 2003) at 10-11. 

47Another jurisdictional issue is uncertainty as to whether the FTC shares jurisdiction with 

federal banking regulators over bank subsidiaries that are not themselves banks (operating 

subsidiaries). While OCC maintains it has exclusive regulatory jurisdiction over the 

operating subsidiaries of national banks, FTC argues that a provision of the Gramm-LeachBliley Act provides for the two agencies to share jurisdiction. See Pub. L. No. 106-102 § 

133(a). A federal district court has upheld FTC’s interpretation. (See Minnesota v. Fleet 

Mortg. Corp., 181 F. Supp. 2d 995 (D MN 2001)). We are not aware of any instance in which 

this matter has interfered with an FTC enforcement action.

48In addition to financial and bank holding companies, there are thrift holding companies, 

which can include thrifts and other financial institutions. Each thrift holding company is 

regulated and subject to examination by OTS. See 12 USC §1467a (b)(4).
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with federal consumer protection and fair lending laws in the same way 

that the federal regulators monitor their depository institutions.

One reason for the concern about these entities is that nonbank 

subsidiaries of holding companies conduct a significant amount of 

subprime mortgage lending. Of the total subprime loan originations made 

by the top 25 subprime lenders in the first 6 months of 2003, 24 percent 

were originated by nonbank subsidiaries of holding companies. In 

addition, of the 178 lenders on HUD’s 2001 subprime lender list, 20 percent 

were nonbank subsidiaries of holding companies. These types of 

subsidiaries have also been targets of some of the most notable federal and 

state enforcement actions involving abusive lending. For example, The 

Associates and Fleet Finance, which were both nonbank subsidiaries of 

bank holding companies, were defendants in two of the three largest cases 

involving subprime lending that FTC has brought.49

The Associates case illustrates an important aspect of the current federal 

regulatory oversight structure pertinent to predatory lending. The Board 

has authority under the Bank Holding Company Act to condition its 

approval of holding company acquisitions. The Board used this authority 

in connection with Citigroup’s acquisition of European American Bank 

because of concerns about the subprime lending activities of The 

Associates, which Citigroup had acquired and merged into its CitiFinancial 

subsidiary. As a condition of approving the acquisition of European 

American Bank, the Board directed that an examination of certain 

subprime lending subsidiaries of Citigroup be carried out to determine 

whether Citigroup was effectively implementing policies and procedures 

designed to ensure compliance with fair lending laws and prevent abusive 

lending practices. However, the Board does not have clear authority to 

conduct the same type of monitoring outside of the Bank Holding Company 

Act approval process. Although the Board has the authority to monitor and 

49Citigroup acquired The Associates in November 2000 and merged The Associates’ 

consumer finance operations into its subsidiary, CitiFinancial Credit Company, a nonbank 

subsidiary of the holding company. In 1999, Fleet Finance, Inc., and its successor company, 

Home Equity U.S.A., Inc., agreed to pay $1.3 million to settle an FTC complaint alleging 

deceptive disclosures and TILA violations in conjunction with Fleet Finance, Inc., loans. At 

the time of the settlement, Fleet Finance had become Home Equity U.S.A., Inc. Both Fleet 

Finance, Inc., and Home Equity U.S.A., Inc., were nonbank subsidiaries of bank holding 

companies. At the time of the settlement, the bank holding company was Fleet Financial 

Group, Inc., which has been renamed FleetBoston Financial Corporation. Home Equity 

U.S.A., Inc., continues to operate as a nonbank subsidiary of FleetBoston Financial 

Corporation, a bank holding company.
Chapter 2

Federal Agencies Have Taken Steps to 

Address Predatory Lending, but Face 

Challenges

Page 53 GAO-04-280 Predatory Lending

perform routine inspections or examinations of a bank holding company, 

this authority apparently does not extend to routine examinations of 

nonbank subsidiaries of bank holding companies with regard to 

compliance with consumer protection laws. The Bank Holding Company 

Act, as amended by the Gramm-Leach-Bliley Act, authorizes the Board to 

examine a nonbank subsidiary for specific purposes, including “to monitor 

compliance with the provisions of (the Bank Holding Company Act) or any 

other Federal law that the Board has specific jurisdiction to enforce against 

such company or subsidiary.” Federal consumer protection laws do not 

give the Board specific enforcement jurisdiction over nonbank 

subsidiaries. 

For this reason, FTC is the primary federal agency monitoring nonbank 

subsidiaries’ compliance with consumer protection laws. FTC is the 

primary federal enforcer of consumer protection laws for these nonbank 

subsidiaries, but it is a law enforcement rather than supervisory agency. 

Thus, FTC’s mission and resource allocations are focused on conducting 

investigations in response to consumer complaints and other information 

rather than on routine monitoring and examination responsibilities. 

Moreover, as discussed elsewhere in this report, states vary widely in the 

extent to which they regulate practices that can constitute predatory 

lending. 

The HUD-Treasury report on predatory lending argued that the Board 

should take more responsibility for monitoring nonbank subsidiaries of 

bank holding companies, in part to ensure that consumer protection laws 

are adequately enforced for these institutions. Similarly, in 1999, GAO 

recommended that the Board monitor the lending activities of nonbank 

mortgage lending subsidiaries of bank holding companies and consider 

examining these entities if patterns in lending performance, growth, or 

operating relationships with other holding company entities indicated the 

need to do so.50 In its written response to GAO’s recommendation, the 

Board said that while it has the general legal authority to examine these 

entities, it has neither the clear enforcement jurisdiction nor the legal 

responsibility for engaging in such activities, as Congress has directly 

charged FTC with primary responsibility over enforcement with regard to 

these entities.

50See U.S. General Accounting Office, Large Bank Mergers: Fair Lending Review Could be 

Enhanced With Better Coordination, GAO/GGD-00-16 (Washington, D.C.: Nov. 3, 1999), 20 

and 47.
Chapter 2

Federal Agencies Have Taken Steps to 

Address Predatory Lending, but Face 

Challenges

Page 54 GAO-04-280 Predatory Lending

Among federal agencies, the Board is uniquely situated to monitor the 

activities of the nonbank mortgage lending subsidiaries of financial and 

bank holding companies by virtue of its role as the regulator of holding 

companies and its corresponding access to data (such as internal operating 

procedures, loan level data, and current involvement in subprime lending) 

that are not readily available to the public. In addition, the Board has 

extensive experience monitoring and analyzing HMDA data. The recent 

changes in HMDA reporting requirements will increase the Board’s ability 

to effectively monitor nonbank mortgage lending subsidiaries of holding 

companies for lending abuses. 

In contrast to the specific limits on the Board’s examination authority, its 

authority to enforce the federal consumer protection laws against nonbank 

subsidiaries is somewhat less clear. The laws themselves specify the 

institutions subject to enforcement by the Board, but those institutions 

generally do not include nonbank subsidiaries. The Board has concluded 

that it must defer enforcement action at least where, as here, a statute 

specifically prescribes its enforcement jurisdiction to cover only certain 

entities and specifically grants enforcement authority for other entities to 

another agency. 

Conclusions Under a number of laws, federal agencies have taken action to protect 

consumers from abusive lending practices. While FTC has taken a number 

of significant enforcement actions to battle abuses in the industry, its 

resources are finite and, as a law enforcement agency, it does not routinely 

monitor or examine lenders, including the mortgage lending subsidiaries of 

financial and bank holding companies. 

Congress provided banking regulators with the authority to ensure 

compliance with consumer protection laws by the institutions they 

regulate, in part because it recognized the efficiencies of having banking 

regulators monitor for compliance with these laws while examining their 

institutions for safety and soundness. The Board is in a position to help 

ensure compliance with federal consumer protection laws by certain 

subsidiaries of financial and bank holding companies if it were clearly 

authorized to do so. While concerns about predatory lending extend well 

beyond the activities of the nonbank subsidiaries of holding companies, 

these entities represent a significant portion of the subprime mortgage 

market. Monitoring the mortgage lending activities of the nonbank 

subsidiaries would help the Board determine when it would be beneficial to 

conduct examinations of specific nonbank subsidiaries. The Board could 
Chapter 2

Federal Agencies Have Taken Steps to 

Address Predatory Lending, but Face 

Challenges

Page 55 GAO-04-280 Predatory Lending

then refer its findings to DOJ, HUD, or FTC or take its own enforcement 

action if a problem exists. Granting the Board concurrent enforcement 

authority—with the FTC—for these nonbank subsidiaries of holding 

companies would not diminish FTC’s authority under federal laws used to 

combat predatory lending. 

The significant amount of subprime lending among holding company 

subsidiaries, combined with recent large settlements in cases involving 

allegations against such subsidiaries, suggests a need for additional 

scrutiny and monitoring of these entities. The Board is in an optimal 

position to play a larger role in such monitoring but does not have clear 

legal authority and responsibility to do so for these entities with regard to 

monitoring compliance of consumer protection laws. 

Matters for 

Congressional 

Consideration

To enable greater oversight of and potentially deter predatory lending from 

occurring at certain nonbank lenders, Congress should consider making 

appropriate statutory changes to grant the Board of Governors of the 

Federal Reserve System the authority to routinely monitor and, as 

necessary, examine the nonbank mortgage lending subsidiaries of financial 

and bank holding companies for compliance with federal consumer 

protection laws applicable to predatory lending practices. Also, Congress 

should consider giving the Board specific authority to initiate enforcement 

actions under those laws against these nonbank mortgage lending 

subsidiaries.

Agency Comments and 

Our Evaluation

GAO provided a draft of this report to the Board, DOJ, FDIC, FTC, HUD, 

NCUA, OCC, OTS, and the Department of the Treasury for review and 

comment. The agencies provided technical comments that have been 

incorporated, as appropriate. In addition, the Board, DOJ, FDIC, FTC, 

HUD, and NCUA provided general comments, which are discussed below. 

The written comments of the Board, DOJ, HUD, and NCUA are printed in 

appendixes II through V. 

The Board commented that, while the existing structure has not been a 

barrier to Federal Reserve oversight, the approach recommended in our 

Matter for Congressional Consideration would likely be beneficial by 

catching some abusive practices that might not be caught otherwise. The 

Board also noted that the approach would pose tradeoffs, such as different 

supervisory schemes being applied to nonbank mortgage lenders based on 
Chapter 2

Federal Agencies Have Taken Steps to 

Address Predatory Lending, but Face 

Challenges

Page 56 GAO-04-280 Predatory Lending

whether or not they are part of a holding company. Because nonbank 

mortgage lenders that are part of a financial or bank holding company are 

already subject to being examined by the Board in some circumstances, 

they are already subject to a different supervisory scheme than other such 

lenders. For example, in its comments the Board noted that it may on 

occasion direct an examination of a nonbank lending subsidiary of a 

holding company when necessary in the context of applications that raise 

serious fair lending or compliance issues. Accordingly, we do not believe 

that clarifying jurisdiction as contemplated in the Matter would result in a 

significant departure from the current supervisory scheme for nonbank 

mortgage lenders. The Board also noted that that there could be some 

additional cost to the nonbank mortgage lending subsidiaries of financial or 

bank holding companies, as well as to the Board, if the Board were to 

exercise additional authority. We agree and believe that Congress should 

consider both the potential costs as well as the benefits of clarifying the 

Board’s authorities.

The FTC expressed concern that our report could give the impression that 

we are suggesting that Congress consider giving the Board sole 

jurisdiction—rather than concurrent jurisdiction with FTC—over nonbank 

subsidiaries of holding companies. Our report did not intend to suggest 

that the Congress make any change that would necessarily affect FTC’s 

existing authority for these entities and we modified our report to clarify 

this point. To illustrate the difference in regulatory and enforcement 

approaches, our draft report contrasted the Board’s routine examination 

authority with the FTC’s role as a law enforcement agency. In its 

comments, FTC noted that it uses a number of tools to monitor nonbank 

mortgage lenders, of which consumer complaints is only one. The agency 

also commented that a key difference between the FTC and the Board is 

that the Board has access to routine information to aid in its oversight as 

part of the supervisory process. Our report did not intend to suggest that 

the FTC’s actions are based solely on consumer complaints, and we revised 

the report to avoid this impression.

DOJ commented that the report will be helpful in assessing the 

department’s role in the federal government’s efforts to develop strategies 

to combat predatory lending. DOJ disagreed with our inclusion in the 

report of “property or loan flips,” which it characterized as a traditional 

fraud scheme rather than an example of predatory lending. As our report 

states, there is no precise definition of predatory lending. We included a 

discussion of efforts to combat “property flipping” because HUD officials 

told us that these schemes sometimes involve predatory practices that can 
Chapter 2

Federal Agencies Have Taken Steps to 

Address Predatory Lending, but Face 

Challenges

Page 57 GAO-04-280 Predatory Lending

harm borrowers. As we note in the report, while HUD categorizes property 

flipping as a predatory lending practice, not all federal agencies concur 

with this categorization. Distinct from property flipping is “loan flipping”—

the rapid and repeated refinancing of a loan without benefit to the 

borrower. This practice is widely noted in literature and by federal, state, 

industry, and nonprofit officials as constituting predatory lending. 

FDIC noted that our Matter for Congressional Consideration focuses on 

nonbank subsidiaries of financial and bank holding companies even though 

these entities comprise, according to HUD, only about 20 percent of all 

subprime lenders. We acknowledge that our Matter does not address all 

subprime lenders or institutions that may be engaging in predatory lending, 

but believe it represents a step in addressing predatory lending among a 

significant category of mortgage lenders. NCUA said that the report 

provides a useful discussion of the issues and that the agency concurs with 

our Matter for Congressional Consideration. HUD, in its comment letter, 

described a variety of actions it has taken that it characterized as 

combating predatory lending, particularly with regard to FHA-insured 

loans.
Page 58 GAO-04-280 Predatory Lending

Chapter 3

States Have Enacted and Enforced Laws to 

Address Predatory Lending, but Some Laws 

Have Been Preempted Chapte3r

In part because of concerns about the growth of predatory lending and the 

limitations of existing state and federal laws, 25 states, the District of 

Columbia, and 11 localities had passed their own laws addressing 

predatory lending practices as of January 9, 2004.1

 Most of the state laws 

restrict the terms or provisions of certain high-cost loans, while others 

apply to a broader range of loans. In addition, some states have taken 

measures to strengthen the regulation and licensing of mortgage lenders 

and brokers, and some have used existing state consumer protection and 

banking laws to take enforcement actions related to abusive lending. 

However, regulators of federally chartered financial institutions have 

issued opinions stating that federal laws may preempt some state predatory 

lending laws and that nationally chartered lending institutions should have 

to comply only with a single uniform set of national standards. Many state 

officials and consumer advocates have opposed federal preemption of state 

predatory lending laws on the grounds that it interferes with the states’ 

ability to protect consumers. 

States and Localities 

Have Addressed 

Predatory Lending 

through Legislation, 

Regulation, and 

Enforcement Actions

Since 1999, many states and localities have passed laws designed to 

address abusive mortgage lending by restricting the terms or provisions of 

certain loans. In addition, states have increased the registration or 

licensing requirements of mortgage brokers and mortgage lenders and have 

undertaken enforcement activities under existing consumer protection 

laws and regulations to combat abusive lending.

1

Except where citations to provisions of state laws are provided, all information relating to 

state and local laws and their provisions is from a database maintained by Butera & 

Andrews, a Washington, D.C., law firm that tracks predatory lending legislation. These laws 

include only state and local laws that place actual restrictions on lending and do not include, 

for example, local ordinances that consist solely of a resolution that condemned predatory 

lending. As noted in chapter 1, we took measures to verify the reliability of these data.
Chapter 3

States Have Enacted and Enforced Laws to 

Address Predatory Lending, but Some Laws 

Have Been Preempted

Page 59 GAO-04-280 Predatory Lending

A Growing Number of 

States and Localities Have 

Passed Laws to Address 

Abusive Lending

According to the database of state laws, as of January 9, 2004, 25 states and 

the District of Columbia had passed laws that were specifically designed to 

address abusive lending practices.2

 (See fig. 3.) These laws were motivated, 

at least in part, by growing evidence of abusive lending and by concerns 

that existing laws were not sufficient to protect consumers against abusive 

lending practices. 

Figure 3: States and Localities That Have Enacted Predatory Lending Laws

2

North Carolina enacted the first state law (N.C. Gen. Stat. 24-1-.1E[1999]) in 1999; it took 

effect on July 1, 2000. Nearly all the other state laws were enacted between 2001 and 2003. 

Montana

yoming

Kansas

Nebraska

South Dakota

North Dakota

isconsin

Missouri

Louisiana

Mississippi Alabama

Delaware

New Hampshire

ennessee

Iowa

Indiana

Rhode

Island

ermont

Washington

Oregon

Calif.

Idaho

Nevada

Utah

Arizona

Colorado

W

New

Mexico

Texas

Okla.

Minnesota

W

Illinois

Ark.

N.C.

Va.

Mich. N.Y.

Pa.

Maine

T

Kentucky

S.C.

N.J.

Ga.

Fla.

Ohio

Md.

Conn.

V

Localities:

 Oakland

 Los Angeles

D.C.

Localities:

 Atlanta

 Dekalb County

Localities:

 Chicago

 Cook

 County

Localities:

 New York

Localities:

 Cleveland

 Dayton

 Toledo

 Cleveland

 Heights

States and localities that have enacted predatory lending laws

Source: Butera & Andrews.

W.

Va.
Chapter 3

States Have Enacted and Enforced Laws to 

Address Predatory Lending, but Some Laws 

Have Been Preempted

Page 60 GAO-04-280 Predatory Lending

Based on our review of the database of state laws, the predatory lending 

statutes in 20 of the 25 states regulate and restrict the terms and 

characteristics of certain kinds of “high-cost” or “covered” mortgage loans 

that exceed certain interest rate or fee triggers.3

 Some state laws, such as 

those in Florida, Ohio, and Pennsylvania, use triggers that are identical to 

those in the federal HOEPA statute but add provisions or requirements, 

such as restrictions on refinancing a loan under certain conditions.4

 Other 

state laws, such as those of Georgia, New Jersey and North Carolina, use 

triggers that are lower than those in HOEPA and therefore cover more 

loans than the federal legislation.5

 Some states design their triggers to vary 

depending on the amount of the loan. For example, in New Mexico and 

North Carolina, covered loans greater than $20,000 are considered high 

cost if the points and fees on the loan exceed 5 percent of the total loan 

amount (North Carolina) or equal or exceed it (New Mexico). In these 

states, loans for less than $20,000 are considered high cost if the points and 

fees exceed either 8 percent of the total or $1,000.6

 In the remaining 5 

states, the predatory lending laws apply to most mortgage loans; there is no 

designation of loans as high cost. For example, West Virginia’s law in effect 

generally prohibits lenders from charging prepayment penalties on any 

loans and restricts points and fees to either 5 or 6 percent, depending on 

whether the loan includes a yield spread premium.7

 Michigan’s law 

prohibits the financing of single-premium credit insurance into loans.8

According to the database, common provisions in state laws are designed 

to address the following:

• Lending without regard to the ability to repay. Restrictions on the 

making of loans without regard to the borrower’s ability to repay the 

loan, sometimes referred to as asset-based lending.

3

Massachusetts has imposed similar restrictions on high-cost loans, but it was done through 

regulatory changes rather than legislation.

4

See, e.g., Fla. Stat. Ann. §§ 494.0079, 494.00791 (2003); Ohio Rev. Code Ann. §§ 1394; Ohio 

Rev. Code Ann. § 1349.25 (2003); 63 PA Stat. § 456.503 (2003).

5

See GA Code Ann. § 7-6A-2(2003); N.J. Stat. Ann. § 46:10B-24 (West 2003); N.C. Gen. Stat. § 

24-1.1E (2003).

6

N.C. Gen. Stat. § 24-1-1E; N.M. Stat. Ann § 58-21A-3 (2003).

7

W. VA. Code §§ 46A-3-110, 31-17-8 (2003).

8

See Mich. Comp. Laws § 445.1634 (2003).
Chapter 3

States Have Enacted and Enforced Laws to 

Address Predatory Lending, but Some Laws 

Have Been Preempted

Page 61 GAO-04-280 Predatory Lending

• Prepayment penalties. Limitations on the amount of a prepayment 

penalty, terms under which a penalty can be assessed, or both.

• Balloon payments. Prohibitions on loans with balloon payments or 

restrictions on their timing.

• Negative amortization. Prohibitions on loans where regularly 

scheduled payments do not cover the interest due. 

• Loan flipping. Restrictions or prohibitions on the repeated refinancing 

of certain loans within a short period of time if the refinancing will not 

benefit the borrower. 

• Credit counseling. Requirements that borrowers either receive or are 

notified of the availability of loan counseling.

• Arbitration clauses. Restrictions on mandatory arbitration clauses, 

which limit a borrower’s right to seek redress in court. Some laws 

prohibit mandatory arbitration clauses altogether, while others require 

compliance with certain standards, such as those set by a nationally 

recognized arbitration organization. 

• Assignee liability. Provisions that expressly hold purchasers or 

securitizers of loans liable for violations of the law committed by the 

originator, under certain conditions. (See ch. 4 for more information on 

assignee liability.)

In addition, according to the database we reviewed, 11 cities and counties 

have passed laws of their own designed to address predatory lending since 

2000.9

 Some local laws are similar to state laws in that they define highcost loans and restrict their provisions, such as in Los Angeles, California. 

Other localities, such as Oakland, California, have passed resolutions 

prohibiting lenders that engage in predatory lending practices from doing 

business with the locality. 

9

In some cases, these laws were enacted but pending litigation stayed enforcement.
Chapter 3

States Have Enacted and Enforced Laws to 

Address Predatory Lending, but Some Laws 

Have Been Preempted

Page 62 GAO-04-280 Predatory Lending

Some States Have Increased 

the Regulation of Lenders 

and Brokers and 

Undertaken Enforcement 

Activities to Combat 

Predatory Lending 

In general, states have regulated mortgage lenders and brokers, although to 

varying degrees. Some state officials told us that because of concerns that 

unscrupulous mortgage lenders and brokers were not adequately regulated 

and were responsible for lending abuses, some states have increased their 

regulation or licensing requirements of lenders and brokers. As part of 

their licensing requirements, states sometimes require that these 

companies establish a bond to help compensate victims of predatory 

lenders or brokers that go out of business, and some states also require that 

individuals working for or as mortgage lenders and brokers meet certain 

educational requirements. 

Some states have also reorganized their agencies’ operations to better 

address abuses by lenders and brokers. For example, an official with the 

Kansas Office of the State Banking Commissioner told us that in 1999 the 

Kansas legislature created the Division of Consumer and Mortgage 

Lending, which provides additional staff for examination and enforcement 

activities. Similarly, an official from the Idaho Department of Finance told 

us that the state created the Consumer Finance Bureau in 2000 to oversee 

and conduct routine examinations of mortgage brokers and mortgage 

lenders.

State law enforcement agencies and banking regulators have also taken a 

number of actions in recent years to enforce existing state consumer 

protection and banking laws in cases involving predatory lending. For 

example, an official from the Washington Department of Financial 

Institutions reported that it has taken several enforcement actions in recent 

years to address predatory lending. In one such action, a California 

mortgage company that allegedly deceived borrowers and made prohibited 

charges was ordered to return more than $700,000 to 120 Washington State 

borrowers. According to officials of the Conference of State Bank 

Supervisors, states reported that in addressing predatory lending they have 

usually relied on general state consumer protection laws in areas such as 

fair lending, licensing, and unfair and deceptive practices. In some states, 

consumer protection statutes do not apply to financial institutions, so state 

banking regulators, rather than the attorneys general, typically initiate 

enforcement activities. Because allegations of predatory practices often 

involve lending activities in multiple states, states have sometimes 

cooperated in investigating alleged abuses and negotiating settlements. 

For example, in 2002 a settlement of up to $484 million with Household 

Finance Corporation resulted from a joint investigation begun by the 

attorneys general and financial regulatory agencies of 19 states and the 
Chapter 3

States Have Enacted and Enforced Laws to 

Address Predatory Lending, but Some Laws 

Have Been Preempted

Page 63 GAO-04-280 Predatory Lending

District of Columbia. State agencies have also conducted investigations in 

conjunction with the federal government. 

Activities in North 

Carolina and Ohio 

Illustrate State 

Approaches to 

Predatory Lending

States have varied in their approaches to addressing predatory lending 

issues. We reviewed legislative and enforcement activities related to 

predatory lending in two states, North Carolina and Ohio, to illustrate two 

different approaches.

Impact of North Carolina’s 

Laws on High-Cost Loans 

and Licensing of Brokers 

and Originators Remains 

Uncertain

North Carolina has enacted two separate laws to address concerns about 

predatory lending. In 1999, the legislature passed a law that attempted to 

curb predatory lending by prohibiting specific lending practices and 

restricting the terms of high-cost loans.10 In 2001, North Carolina 

supplemented its predatory lending law by adopting legislation that 

required the licensing of mortgage professionals (mortgage lenders, 

brokers, and loan officers), defined a number of prohibited activities 

related to the making of residential mortgages, and enhanced the 

enforcement powers of the banking commissioner.11 

According to the North Carolina Commissioner of Banks, the North 

Carolina laws applicable to predatory lending were the product of a 

consensus of banks, mortgage bankers and brokers, nonprofit 

organizations, and other stakeholders and were intended to address 

lending abuses that were not prohibited by federal statutes and regulations. 

Among other things, the 1999 legislation, known as the North Carolina AntiPredatory Lending Law, imposes limitations specific to both “high-cost”

10N.C. Session Law 1999-332.

11N.C. Sessions Laws 2001-393 and 2001-399.
Chapter 3

States Have Enacted and Enforced Laws to 

Address Predatory Lending, but Some Laws 

Have Been Preempted

Page 64 GAO-04-280 Predatory Lending

loans and other “consumer home loans.”12 North Carolina’s predatory 

lending law did not restrict initial interest rates but instead focused on 

prohibiting specific lending practices and restricting the terms of high-cost 

loans. In conjunction with other North Carolina laws, the 1999 legislation 

contains four key features. First, it bans prepayment penalties for all home 

loans with a principal amount of $150,000 or less. Second, it prohibits loan 

flipping—refinancings of consumer home loans that do not provide a 

reasonable, net tangible benefit to the borrower. Third, it prohibits the 

financing of single-premium credit life insurance. Finally, it sets a number 

of restrictions on high-cost loans, including making loans without regard to 

borrowers’ ability to repay; financing points, fees, and any other charges 

payable to third parties; or setting up loans with balloon payments. 

Further, the law prohibits home improvement contract loans under which 

the proceeds go directly to the contractor, and requires that borrowers 

receive financial counseling prior to closing.

Although the North Carolina predatory lending law governs the practices of 

lenders and mortgage brokers, some groups questioned whether it 

provided for effective enforcement. Specifically, concerns were focused on 

the lack of state licensing and oversight of all segments of the mortgage 

lending profession, including mortgage brokers and bankers. Additionally, 

some critics asserted that the statute provided the state banking 

commissioner with limited and uncertain authority to enforce the 

predatory lending provisions. As a result, even before the predatory 

lending legislation passed, stakeholders worked on a measure to fill the 

gaps left by the state’s predatory lending law.

12The North Carolina predatory lending law defines a high-cost loan as a home loan of 

$300,000 or less that has one or more of the following characteristics: (1) points, fees 

(excluding certain amounts specified in the law), and other charges totaling more than 5 

percent of the borrowed amount if the loan is $20,000 or more, or the lesser of 8 percent of 

the amount borrowed or $1,000 if the loan is less than $20,000; (2) an interest rate that 

exceeds by more than 10 percent per annum the yield on comparable Treasury bills; or (3) a 

prepayment penalty that could be collected more than 30 months after closing or that is 

greater than 2 percent of the amount prepaid. According to the North Carolina 

Commissioner of Banks, the $300,000 cap is based on the presumption that those able to 

borrow $300,000 or more are able to adequately protect themselves. “Consumer home 

loans” are loans in which (i) the borrower is a natural person, (ii) the debt is incurred by the 

borrower primarily for personal, family, or household purposes, and (iii) the loan is secured 

by a mortgage or deed of trust upon real estate upon which there is located or there is to be 

located a structure or structures designed principally for occupancy of from one to four 

families which is or will be occupied by the borrower as the borrower’s principal dwelling.
Chapter 3

States Have Enacted and Enforced Laws to 

Address Predatory Lending, but Some Laws 

Have Been Preempted

Page 65 GAO-04-280 Predatory Lending

North Carolina’s second statute, the Mortgage Lending Act, was signed into 

law on August 29, 2001. Prior to the act, some mortgage banking firms and 

all mortgage brokerages domiciled in the state had been required to 

register with the state’s banking regulator, but individual loan originators 

were not. The Mortgage Lending Act imposed licensing requirements on all 

mortgage bankers and brokers, including individuals who originate loans, 

and added continuing education and testing requirements for mortgage 

loan officers. The provisions of the act mean that individuals as well as 

firms are now subject to regulatory discipline. According to the North 

Carolina Commissioner of Banks, the act has been effective in reducing the 

number of abusive brokers and individual loan originators. The 

commissioner noted that a large number of applications for licenses have 

been denied because the applicants did not meet basic requirements or did 

not pass the required background check. 

Studies on the impact of North Carolina’s Anti-Predatory Lending Law have 

offered conflicting conclusions. For example, one study found an overall 

decline in subprime mortgages and concluded that any reductions in 

predatory lending had been attained at the expense of many legitimate 

loans.13 Some have pointed to this evidence as suggesting that the law has 

reduced legitimate credit to those who most need it. Another study found a 

reduction in subprime originations but attributed the decline to a reduction 

in loans with abusive or predatory terms.14 Consumer advocates and state 

officials have cited this study as evidence that the law has worked as 

intended. 

Our review of the five studies available on the impact of the North Carolina 

predatory lending law suggested that data limitations and the lack of an 

accepted definition of predatory lending make determining the law’s 

impact difficult. For example, information about borrowers’ risk profiles, 

the pricing and production costs of the loans, and the lenders’ and 

borrowers’ behaviors was not available to the study researchers. In 

addition, the extent to which any potential reductions in predatory loans 

13Elliehausen and Staten, Regulation of Subprime Mortgage Products: An Analysis of 

North Carolina’s Predatory Lending Law, Georgetown University School of Business 

(November 2002).

14Quercia, Stegman, and Davis, The Impact of North Carolina’s Anti-Predatory Lending 

Law: A Descriptive Assessment, Center for Community Capitalism, The Frank Hawkins 

Kenan Institute of Private Enterprise, University of North Carolina at Chapel Hill (June 25, 

2003).
Chapter 3

States Have Enacted and Enforced Laws to 

Address Predatory Lending, but Some Laws 

Have Been Preempted

Page 66 GAO-04-280 Predatory Lending

can be attributed to the Mortgage Lending Act as opposed to the AntiPredatory Lending Law is unclear. Additional experience with the North 

Carolina laws may be needed in order to properly assess them.

Ohio Has Preempted Local 

Laws and Taken Action to 

Regulate Mortgage Brokers

In February 2002, the Ohio legislature enacted a law with the purpose of 

bringing Ohio law into conformance with HOEPA.15 Among other things, 

the legislation preempted certain local predatory lending ordinances. The 

law was passed in response to an ordinance enacted in the city of Dayton, 

which was designed to fight predatory lending by regulating mortgage 

loans originated in that city. Proponents of the state law argued that 

regulating lenders is a state rather than municipal function and that lending 

rules should be uniform throughout the state. Some advocates argued that 

the state law prevents cities from protecting their citizens from abusive 

lending practices.

The Ohio law imposes certain restrictions on high-cost loans as defined by 

HOEPA. These include additional restrictions on credit life or disability 

insurance beyond those imposed by HOEPA. The law also prohibits the 

replacement or consolidation of a zero- interest rate or other low-rate loan 

made by a governmental or nonprofit lender with a high-cost loan within 

the first 10 years of the low-rate loan unless the current holder of the loan 

consents in writing to the refinancing.16 Because the purpose of this law 

was to bring Ohio’s law into conformance with HOEPA, the law applies 

only to loans that qualify as mortgage loans subject to HOEPA. Thus, like 

predatory lending laws in some other states, the Ohio law applies to 

relatively few loans.

In May 2002, the Ohio legislature passed another piece of legislation, 

designed in part to address abusive lending—the Ohio Mortgage Broker 

Act—that imposed requirements on the state’s mortgage brokers and loan 

officers.17 Among other things, this law required state examination, 

education, and licensing of loan officers, and prohibited brokers from 

engaging in certain deceptive or fraudulent practices. It also required that 

15See Ohio Rev. Code. Ann. § 1349.32 (2003).

16Ohio Rev. Code Ann. § 1349.27 (2002).

17See Ohio. Rev. Code Ann. §§ 1322.01 – 1322.12 (2003). 
Chapter 3

States Have Enacted and Enforced Laws to 

Address Predatory Lending, but Some Laws 

Have Been Preempted

Page 67 GAO-04-280 Predatory Lending

mortgage brokers and loan officers receive continuing education and take 

prelicensing competency tests.

In the act adopting HOEPA standards, the Ohio legislature also established 

a Predatory Lending Study Committee, which was charged with 

investigating the impact of predatory lending practices on the citizens and 

communities of Ohio.18 The study committee consisted of 15 members, 

including representatives from state agencies, consumer groups, and the 

lending industry. The act required the committee to submit a report to the 

governor and legislators by the end of June 2003. The committee reached 

consensus on two major issues. First, it recommended that all appraisers 

in the state be licensed and subject to criminal background checks, and 

second, it recommended increased enforcement of the Ohio Mortgage 

Broker Act. The Division of Financial Institutions, which is responsible for 

enforcing the Ohio Mortgage Broker Act, has hired additional staff to 

ensure compliance with the law. The report and recommendations have 

been forwarded to the governor and the committee suggested that the Ohio 

General Assembly consider all recommendations.

Other local ordinances have been passed in Ohio to address predatory 

lending. One of these ordinances, passed in November 2002 by the Toledo 

City Council to regulate mortgage lending practices, was challenged, and 

its enforcement stayed, because of the state HOEPA law passed in 

February 2002.19 One provision of that ordinance prohibited making an 

abusive loan by “taking advantage of a borrower’s physical or mental 

infirmities, ignorance or inability to understand the terms of the loan.” This 

provision drew criticism from the mortgage industry, which said the 

language was vague and difficult to comply with. For example, one 

secondary market participant noted that it would be nearly impossible to 

assess borrowers’ mental capabilities for loans they did not originate in the 

first place. Violating the law was made a criminal offense, and convicted 

offenders could not receive city contracts or conduct other business with 

the city. 

182002 Ohio Laws HB 386 § 5.

19Ordinance No. 271-03. As of November 17, 2003, the City of Toledo was temporarily 

enjoined from enforcing application, enforcement, or other effectuation of this ordinance as 

a result of a lawsuit asserting that the ordinance is preempted by the Home Ownership and 

Equity Protection Act of Ohio. AFSA v. City of Toledo, Ohio, No. C10200301547 (Lucas 

County). 
Chapter 3

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Address Predatory Lending, but Some Laws 

Have Been Preempted

Page 68 GAO-04-280 Predatory Lending

Regulators Have 

Determined That 

Federal Law Preempts 

Some State Predatory 

Lending Laws, but 

Views on Preemption 

Differ

Significant debate has taken place as to the advantages and disadvantages 

of state and local predatory lending laws. In several cases, regulators of 

federally supervised financial institutions have determined that federal 

laws preempt state predatory lending laws for the institutions they 

regulate. In making these determinations, two regulators—OCC and 

OTS—have cited federal law that provides for uniform regulation of 

federally chartered institutions and have noted the potential harm that 

state predatory lending laws can have on legitimate lending. 

Representatives of the lending industry and some researchers agree with 

the federal banking regulators, arguing that restrictive state predatory 

lending laws may ultimately hurt many borrowers by reducing the supply of 

lenders willing to make subprime loans, creating undue legal risks for 

legitimate lenders, and increasing the costs of underwriting mortgage 

loans. Moreover, industry representatives have said that most predatory 

lending practices are already illegal under federal and state civil and 

criminal laws and that these laws should simply be more stringently 

enforced. In contrast, many state officials and consumer advocates are 

opposed to federal preemption of state predatory lending laws. They 

maintain that federal laws related to predatory lending are insufficient, and 

thus preemption interferes with their ability to protect consumers in their 

states, particularly from any potential abuses by the subsidiaries of 

federally chartered institutions. 

OCC, OTS, and NCUA Have 

Determined That Federal 

Law Preempts Some State 

Predatory Lending Laws

Because both the federal and state governments have roles in chartering 

and regulating financial institutions, questions can arise as to whether a 

federal statute preempts particular state laws.20 Affected parties may seek 

guidance from federal agencies requesting their views on whether a 

particular federal statute preempts a particular state law; in these 

instances, the agency may issue an advisory opinion or order on the issue. 

Because the courts are ultimately responsible for resolving conflicts 

between federal and state laws, these advisory opinions and orders are 

subject to court challenge and review. As of November 2003, one or more 

federal regulators had determined that federal laws preempted the 

predatory mortgage lending laws of the District of Columbia and five 

20See U.S. General Accounting Office, Role of the Office of Thrift Supervision and Office of 

the Comptroller of the Currency in the Preemption of State Law, GAO/GGD/OGC-00-51R

(Washington, D.C.: Feb. 7, 2000) for additional information on federal preemption of state 

banking laws.
Chapter 3

States Have Enacted and Enforced Laws to 

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Have Been Preempted

Page 69 GAO-04-280 Predatory Lending

states—Georgia, New Jersey, New Mexico, New York, and North Carolina. 

(See table 1.) 

Table 1: Preemption Determinations Issued by OCC, OTS, and NCUA Related to 

Predatory Mortgage Lending Laws 

Source: GAO.

Preemption of state law is rooted in the U.S. Constitution’s Supremacy 

Clause, which provides for the supremacy of federal law. Over the years, 

the courts have developed a substantial body of precedent that has guided 

the analysis of whether any particular federal law or regulation overrides or 

preempts state law. The courts’ analysis of whether federal law preempts 

state law has fundamentally centered on whether Congress intended for 

the federal law or regulation to override state law, either from the face of 

the statute itself (express preemption) or from the structure and purpose of 

the statute (implied preemption.) In their preemption opinions, OCC, OTS, 

and NCUA have cited a variety of legislation and legal precedents. Since 

1996, OTS has had regulations in place that describe its preemption of state 

lending laws.21 In January 2004, OCC issued a rule amending its regulations 

in a similar manner, clarifying what types of state laws federal law 

preempts in the context of national bank lending.22 OCC stated that it 

issued the rule in response to the number and significance of the questions 

that have arisen with respect to the preemption of state laws and to reduce 

uncertainty for national banks that operate in multiple states. In its 

rulemaking, OCC stated that it was seeking to provide more comprehensive 

standards regarding the applicability of state laws to lending, deposit 

taking, and other authorized activities of national banks. The regulations 

OCC OTS NCUA

Georgia (2003) Georgia (2003) Georgia (2002)

New York (2003) New York (2000)

New Mexico (2003) North Carolina (2002)

New Jersey (2003) District of Columbia (2003)

212 C.F.R § 560.2(a).

2269 Fed. Reg. 1904 (Jan. 13, 2004).
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Page 70 GAO-04-280 Predatory Lending

list examples of the types of state statutes that are preempted (such as laws 

regulating credit terms, interest rates, and disclosure requirements) and 

examples of the types of state laws that would not be preempted (such as 

laws pertaining to zoning, debt collection, and taxation). When OCC first 

proposed these rules, one news article stated that it “triggered a flood of 

letters and strong reactions from all corners of the predatory lending 

debate.” States and consumer groups were critical of the proposal. In 

contrast, the Mortgage Bankers Association of America and some large 

national banking companies wrote comment letters in support of OCC’s 

proposed rules. 

Views Differ on the 

Implications of Federal 

Preemption of State 

Predatory Lending Laws

Federal banking regulators point out that preemption of states’ 

antipredatory lending laws applies only to institutions chartered by the 

agency issuing the preemption order. For example, OTS’s preemption 

opinion served to preempt New Jersey’s predatory lending statute for 

federally chartered thrifts but did not affect the statute’s applicability to 

independent mortgage companies, national banks, and state-chartered 

banks and thrifts. In preempting the New Jersey Home Ownership Security 

Act of 2002, OTS’s Chief Counsel noted that requiring federally chartered 

thrifts to comply with a hodgepodge of conflicting and overlapping state 

lending requirements would undermine Congress’s intent that federal 

savings institutions operate under a single set of uniform laws and 

regulations that would facilitate efficiency and effectiveness.23 Federal 

banking regulators have said that they have found little to no evidence of 

predatory lending by the institutions they regulate, pointing out that 

federally supervised institutions are highly regulated and subject to 

comprehensive supervision.24 They have also noted that they have issued 

guidance and taken numerous other steps to ensure that their institutions 

do not engage in predatory lending. Further, OCC has stated that state 

predatory lending laws, rather than reducing predatory lending among 

federally supervised institutions, can actually restrict and inhibit legitimate 

lending activity. The lending industry has generally supported preemption. 

For example, the Mortgage Bankers Association of America has argued 

23Office of Thrift Supervision, P-2003-5, Preemption of New Jersey Predatory Lending Act 

(July 22, 2003).

24Several state law enforcement authorities have also said that predatory lending generally 

occurs outside of banks and direct bank subsidiaries. See Brief of Amicus Curiae State 

Attorneys General, National Home Equity Mortgage Ass'n v. OTS, Civil Action No. 02-2506 

(GK) (D D.C.) (March 21, 2003) at 10-11.
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Have Been Preempted

Page 71 GAO-04-280 Predatory Lending

that uniformity in lending regulations is central to an efficient and effective 

credit market. 

In contrast, many state officials and consumer advocates have opposed 

federal preemption of state predatory lending laws, for several reasons. 

First, they contend that state predatory lending laws are necessary to 

address gaps in relevant federal consumer protection laws. For example, 

one state official said that the predatory lending legislation adopted by his 

state was more focused and effective than the provisions of the Federal 

Trade Commission Act. In addition, opponents of preemption claim that 

federal regulators may not devote the necessary resources or have the 

willingness to enforce federal consumer protection laws relevant to 

predatory lending by federally chartered institutions and their subsidiaries. 

In response to OCC’s and OTS’s statements that there is no evidence of 

predatory lending among subsidiaries of federally regulated depository 

institutions, opponents of preemption noted that there are several cases in 

which allegations of abusive lending practices involving some of these 

subsidiaries have been raised.25

25 For example, see Comments on OCC Working Paper, Center for Responsible Lending, 

7-10, October 6, 2003, 

http://www.predatorylending.org/pdfs/CRLCommentsonOCCWorkingPaper.pdf.
Page 72 GAO-04-280 Predatory Lending

Chapter 4

The Secondary Market May Play a Role in 

Both Facilitating and Combating Predatory 

Lending Chapte4r

By providing lenders with an additional source of liquidity, the secondary 

market can benefit borrowers by increasing the availability of credit and, in 

general, lowering interest rates. While a secondary market for prime 

mortgage loans has existed for decades, a relatively recent secondary 

market for subprime loans now offers these potential benefits to subprime 

borrowers as well. However, the secondary market may also serve to 

facilitate predatory lending, as it can provide a source of funds for 

unscrupulous originators that quickly sell off loans with predatory terms. 

Secondary market participants may use varying degrees of due diligence to 

avoid purchasing loans with abusive terms. In addition, some states have 

enacted legislation with assignee liability—potentially holding purchasers 

liable for violations of abusive lending laws that occurred in the loan 

origination. However, extending liability to secondary market purchasers 

may cause lenders and other secondary market participants, such as credit 

rating agencies, to withdraw from the market, as occurred in Georgia.

The Development of a 

Secondary Market for 

Subprime Loans Can 

Benefit Consumers

Originators of mortgage loans—which can include banks, other depository 

institutions, and mortgage lenders that are not depository institutions—

may keep the loans or sell them in the secondary market. Secondary 

market purchasers may then hold the loans in their own portfolio or may 

pool together a group of loans and issue a mortgage-backed security that is 

backed by a pool of such loans. The securitization of mortgage loans 

became common during the 1980s and, by the 1990s, had become a major 

source of funding in the prime mortgage market. According to the Office of 

Federal Housing Enterprise Oversight, by the end of 2002 more than 58 

percent of outstanding U.S. single-family residential mortgage debt was 

financed through securitization. Two government-sponsored enterprises—

Fannie Mae and Freddie Mac—represented nearly 40 percent of the 

amount securitized.1

The securitization of subprime mortgage loans did not become common 

until the mid-1990s. The development of a secondary market for these 

loans has been an important factor in the growth of subprime lending, 

expanding subprime lenders’ access to funds and thus increasing the 

availability of subprime credit. The trade journal Inside B&C Lending 

estimated that in 2002 approximately 63 percent of new subprime 

1

A government-sponsored enterprise (GSE) is a congressionally chartered, publicly owned 

corporation established and accorded favored regulatory treatment to increase access to 

the capital market for specific economic sectors, including housing. 
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Page 73 GAO-04-280 Predatory Lending

mortgages, representing $134 billion, were securitized. The originators of 

subprime loans are often nonbank mortgage and finance companies. As 

secondary market participants—such as the Wall Street investment firms 

that have been the major underwriters for subprime securities—have 

grown more willing to purchase these instruments, subprime originators 

have gained access to an important source of liquidity that has allowed 

them to make more subprime loans. 

As shown in figure 4, the process of securitization starts with borrowers 

obtaining mortgages either directly from a lender or through a broker. The 

lender then creates a pool—a separate legal entity that purchases the 

mortgages and issues securities based on them. The lender hires a credit 

rating agency, which has no direct financial interest in the deal, to confirm 

the value of the securities based on the expected return and risks of the 

underlying mortgages. At the same time, the lender hires an underwriter to 

sell the securities to investors. The value of the securities is based 

exclusively on the mortgages themselves and is separate from the financial 

condition of the original lender. Finally, a servicer is hired to collect 

mortgage payments from the borrowers and disburse interest and principal 

payments to the investors. The process described above is for 

securitizations performed via private conduits—that is, without the 

participation of government-sponsored enterprises.
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Lending

Page 74 GAO-04-280 Predatory Lending

Figure 4: Steps in the Securitization of Residential Mortgages

Note: This chart represents the process for fully private securitizations and not for governmentsponsored enterprises.

Freddie Mac and Fannie Mae are relatively recent entrants into the 

subprime market; Freddie Mac began purchasing subprime loans in 1997 

and Fannie Mae in 1999. Both companies have moved slowly and have 

limited their purchases to the segment of the subprime market with the 

most creditworthy of subprime loans. At present, the companies are 

believed to represent a relatively small portion of the overall secondary 

market for subprime loans. The exact portion they represent is not clear, 

but a study conducted for HUD estimated that the companies purchased

Borrower takes out loan

and makes mortgage payments

Lender creates a legally independent

entity (a "pool") and sells loans to the pool

Servicer collects 

payments and

disburses interest

and principal

Pool issues securities and 

sells them to underwriter

Securities underwriter underwrites securities, 

sets initial price, and sells them to investors

Credit rating agency

rates securities

Lender provides funds to borrower

in exchange for mortgage note

Investors purchase

securities and receive

interest and principal

Mortgage broker brings

borrower and lender together

Mortgage payments

Cash

disbursements

Source: GAO.
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Page 75 GAO-04-280 Predatory Lending

about 14 percent of the subprime loans originated in 2002.2 Both Fannie 

Mae and Freddie Mac have stated publicly that they plan on expanding 

their role in the subprime market in the future. In part, this may be a result 

of the affordable housing goals that HUD set for the GSEs in October 2000, 

which increased the goals for loans made to low- and moderate-income 

borrowers.3

 HUD recommended that the GSEs consider enhancing their 

roles in the subprime market—which often serves low- and moderateincome borrowers—to help standardize mortgage terms in that market and 

potentially reduce interest rates for subprime borrowers. While the GSEs 

are currently believed to represent a small portion of the secondary market 

for subprime lending, some market observers believe their share will grow. 

The growth of the secondary market for subprime loans has potentially 

benefited some consumers. By providing subprime lenders with a new 

source of liquidity, these lenders face lower funding costs and reduced 

interest rate risk, in part because the supply of lenders willing to make 

loans to borrowers with impaired credit has increased. Many analysts say 

that, as a result, mortgage loans are now available to a whole new 

population of consumers and interest rates on subprime loans made by 

reputable lenders have fallen. In addition, increased securitization of 

subprime lending may lead to more uniform underwriting of subprime 

loans, which could further reduce origination costs and interest rates to 

consumers.

2

K. Temkin, J. Johnson, D. Levy, “Subprime Markets, the Role of GSEs, and Risk-Based 

Pricing,” prepared by The Urban Institute for the U.S. Department of Housing and Urban 

Development, March 2002. Other estimates of the GSEs’ share of securitization of the 

subprime market have varied, in part because—as noted earlier—there is no consistent 

industry definition of what constitutes subprime. 

3

The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 requires 

Fannie Mae and Freddie Mac to meet annual percent-of-business housing goals established 

by HUD for three categories: low- and moderate-income, underserved, and special 

affordable. HUD set the following goals for 2001 through 2003: low- and moderate-income—

50 percent of the total number of units financed; underserved—31 percent of the total 

number of units financed; and special affordable—20 percent of the total number of units 

financed.
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Page 76 GAO-04-280 Predatory Lending

The Secondary Market 

for Subprime Loans 

Can Facilitate 

Predatory Lending

While the development of a secondary market for subprime loans may have 

benefits for borrowers, it can also provide a source of funds for 

unscrupulous originators that quickly sell off loans with predatory terms. 

The secondary market can complicate efforts to eliminate predatory 

lending by separating ownership of a loan from its originator. This 

separation can undermine incentives to reduce risk in lending and create 

incentives that may increase the attractiveness of making loans with 

predatory terms. As noted earlier, some originators of subprime mortgage 

loans make their profits from high origination fees. The existence of a 

market that allows originating lenders to quickly resell subprime loans may 

reduce the incentive these lenders have to ensure that borrowers can repay. 

Further, lenders often market their products through brokers that do not 

bear the risks associated with default, as brokers are compensated in upfront fees for the loans they help originate. Some lenders and state officials 

told us that unscrupulous brokers sometimes deceive originating lenders 

regarding borrowers’ ability to repay. Even if deceived, lenders who 

originate the loans and then sell them in the secondary market ultimately 

may not bear the risk of a loan default. Taken together, these 

circumstances can undermine efforts to combat predatory lending 

practices.

Market forces provide some incentives to deter secondary market 

purchasers from purchasing predatory loans because these loans create 

both credit and reputation risk.4

 However, predatory loans do not in all 

cases create unusual financial risks or losses for secondary market 

purchasers. For example, in most states loan purchasers are generally not 

liable for damages that may have resulted from the origination of abusive 

loans that they purchased, mitigating much of the legal risk of buying loans 

that may have violated laws addressing predatory lending. Moreover, loans 

with predatory features may carry very high interest rates and have barriers 

to prepayment, which may more than compensate for the increased credit 

risks associated with subprime loans.

However, investors’ insistence on the use of credit enhancements in the 

securitization process may offset or mitigate the incentives to engage in 

predatory lending of originators who sell loans to the secondary market. 

4

Reputation risk is the current and prospective impact on a company’s earnings and capital 

arising from negative public opinion from other market participants. This risk may expose a 

misbehaving originator or lender to litigation, financial loss, and a decline in its customer 

base if its behavior injures its customers or clients.
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Credit enhancements, which refer to a variety of approaches used to 

reduce the credit risk of an obligation, are common in securitization 

transactions, in part because of concerns that originators may try to pass 

on lower-quality loans. Because the price investors will pay for securities is 

based on risk as well as return, sellers use the enhancements to lower the 

risk and thus raise the price of securities. For example, the securities may 

be overcollateralized by ensuring that the value of the collateral backing 

the securities—in the case of mortgage backed securities, the face value of 

the loans—exceeds the value of the securities being offered for sale. The 

difference provides a “cushion” or reserve against possible credit losses 

and permits a higher loss rate on the total mortgage pool without 

endangering payments to the owners of the securities. Securitizers can 

also include recourse provisions in their loan purchases that require sellers 

to take back loans in the event of borrower default. As a result of these 

factors, the degree to which originators of loans sold in the secondary 

market—including loans with abusive terms—are insulated from credit 

risks associated with those loans varies, and the profits from selling the 

loans may vary with the costs of credit enhancement. 

Due Diligence Can 

Help Purchasers Avoid 

Predatory Loans, but 

Efforts Vary among 

Secondary Market 

Participants

Secondary market purchasers of residential mortgage loans undertake a 

process of due diligence designed to minimize legal, financial, and 

reputation risk associated with the purchase of those loans. Due diligence 

can play an important role in avoiding the purchase of abusive loans, but 

cannot necessarily identify all potentially abusive loans. Officials of Fannie 

Mae and Freddie Mac—which, as noted previously, are relatively recent 

entrants in the subprime market—are also concerned about risks but say 

that their due diligence processes are also designed to avoid purchasing 

loans that may have been harmful to consumers. Other firms’ due diligence 

is not necessarily specifically intended to avoid loans that may have 

harmed consumers but rather to avoid purchasing loans that are not in 

compliance with applicable law or that present undue financial or 

reputation risks.5

5

OCC has issued guidelines stating that national banks are expected to undertake 

appropriate due diligence to avoid purchasing predatory loans. See OCC Advisory Letter 

2003-3 (Avoiding Predatory and Abusive Lending Practices in Brokered and Purchased 

Loans), February 21, 2003.
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Page 78 GAO-04-280 Predatory Lending

Due Diligence May Deter 

the Purchase of Some 

Predatory Loans but Has 

Limitations

Loans purchased in the secondary market are usually not purchased 

individually but rather as a pool of many loans. Purchasers or securitizers 

of residential mortgage loans try to ensure that the loans in a particular 

pool are creditworthy and in compliance with law. Purchasers perform a 

general background and financial review of the institutions from which 

they purchase loans. In addition, secondary market purchasers of loans 

nearly always conduct due diligence, or a review and appraisal of 

confidential legal and financial information related to the loans themselves. 

Before or after the sale, purchasers may review electronic data containing 

information on the loans, such as the loan amount, interest rate, and 

borrower’s credit score. Purchasers also may physically review a sample of 

individual loans, including items such as the loan applications and 

settlement forms. 

Some industry representatives and federal agencies say that appropriate 

due diligence can play an important role in deterring predatory lending. 

Participants in the secondary market have an interest in not purchasing 

loans that may be considered predatory because such loans can create 

unwarranted legal, financial, and reputation risk. For example, if such 

loans violate relevant municipal, state, or federal laws, purchasing them 

could, in some cases, expose the buyers to legal risks such as lawsuits, 

fines, and penalties. Moreover, predatory loans may be more likely to go 

into default, increasing financial risk without a commensurate increase in 

expected returns. In addition, many industry officials told us that 

reputation risk is a major reason why they want to avoid purchasing 

predatory loans. Firms involved in the securitization process do not want 

to be associated with predatory lending activity that could affect their 

relationships with other firms, community groups, and government 

agencies.

Due diligence reviews for residential mortgage loans are designed to 

determine the financial characteristics of the loans and to ensure 

compliance with applicable federal, state, and municipal laws, including 

those designed to prohibit predatory lending. The reviews also can be 

designed to detect loans that have potentially abusive terms but are not 

necessarily violating any law. For example, an electronic review of loan 

data can flag characteristics such as interest rates that appear excessive 

but are nonetheless legal. A loan-level file review, in which a purchaser 

reviews the physical loan origination documents, offers access to more 

information and can highlight items such as points and fees and the 

borrower’s capacity to repay. While nearly all purchasers of loans use due 
Chapter 4

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Page 79 GAO-04-280 Predatory Lending

diligence to check for legal compliance, purchasers set their own 

guidelines for what other loan characteristics meet their standards.

While due diligence in the secondary market is important, the role that it 

can play in deterring predatory lending by performing due diligence is 

limited. For one thing, more than one-third of all new subprime loans are 

not securitized in the first place but are held in the portfolio of the 

originating lender and thus do not face securitizers’ due diligence reviews. 

In addition, even the most thorough due diligence will not necessarily catch 

all abusive loans or abusive lending practices. For example:

• Due diligence may not detect fraud in the underwriting or approving of a 

mortgage. For instance, if a mortgage broker includes false information 

in a loan application to ensure that a borrower meets an originator’s 

income requirements, the process of due diligence may not detect it.6

 

• The data tapes used for loan reviews do not include point and fee 

information.7

 Thus, securitizers typically cannot detect excessive or 

unwarranted fees prior to purchasing a loan without a loan-level review.

• Loan flipping (repeated refinancings) can be difficult to detect because 

loan files do not necessarily include information on previous 

refinancings.

Fannie Mae and Freddie 

Mac Appear to Perform 

Extensive Due Diligence to 

Avoid Buying Loans with 

Abusive Terms

Fannie Mae and Freddie Mac have relatively strict criteria for the loans 

they purchase, particularly subprime loans. As noted, both companies limit 

their purchases to the most creditworthy subprime loans. In April 2000, 

Fannie Mae issued guidelines to sellers of subprime loans that set criteria 

designed to help the GSE avoid purchasing loans with abusive features. 

For example, the guidelines state that Fannie Mae’s approved lenders may 

not “steer” a borrower who qualifies for a standard loan to a higher cost 

6

Some securitizers have begun to use fraud detection software as part of their due diligence 

of residential mortgage loans. Such software analyzes specific data fields within a loan file 

and looks for characteristics and inconsistencies that may signal fraud in the appraisal, loan 

application, or loan itself. In some cases, a fraud review can also be incorporated as part of 

the regular due diligence process. 

7

A prepurchase financial due diligence review may not look at point and fee data because 

the risks and returns to the loan purchaser depend not on payments that were made at 

origination but rather on future payments by the homeowner. However, a review of points 

and fees is often done during a subsequent loan-level file review.
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product, may not make loans without regard to the borrower’s ability to 

repay, and may not in most instances charge more than 5 percent of the 

loan amount in points and fees. Freddie Mac issued similar guidelines to its 

sellers and servicers in December 2000. Further, both companies, like 

other secondary market purchasers, rely on a system of representations 

and warranties, under which sellers contractually agree to buy back loans 

they sell that turn out not to meet the terms of the contract. 

Fannie Mae and Freddie Mac officials told us that they undertake a series 

of measures aimed at avoiding the purchase of loans with predatory 

characteristics. Approved sellers and servicers undergo a background 

check and operational review and assessment that seeks, in part, to 

determine whether lenders are able to comply with their guidelines. Fannie 

Mae and Freddie Mac also require that special steps, such as additional due 

diligence measures, be taken in purchasing subprime loans. For example, 

Fannie Mae requires that subprime loans be originated using the company’s 

automated desktop underwriting system, which helps ensure that 

borrowers are not being steered to a more expensive loan than they qualify 

for.8

 Fannie Mae officials say that the automated desktop underwriting 

system also facilitates traditional lenders that serve subprime borrowers.

In addition, both companies said that they undertake extensive and costly 

due diligence that goes well beyond simple legal compliance and is aimed 

at avoiding loans that may potentially be considered abusive or detrimental 

to the borrower. Both companies use an outside contractor to conduct 

their loan-level due diligence reviews on subprime loans. The contractor 

has a standard “script” that reviews a large number of data elements related 

to legal compliance and creditworthiness. However, the contractor told us 

that Fannie Mae and Freddie Mac add elements to the script to make the 

review more stringent with regard to identifying potentially abusive 

practices. For example, Freddie Mac requires the contractor to check 

whether the lender has gathered evidence of a borrower’s income 

information directly or relied on self-verification, which can raise 

uncertainty about a borrower’s capacity to repay. In addition, the 

8

Fannie Mae and Freddie Mac officials note that their antipredatory lending policies and 

compliance measures are only one element in their efforts to fight predatory lending. For 

example, both companies also have special programs that provide appropriately priced 

loans to credit-impaired borrowers and other consumers who tend to be targeted by 

predatory lenders; support homebuyer education and counseling for at-risk individuals; and 

have special loan programs designed for borrowers who have been targeted or victimized by 

predatory lenders.
Chapter 4

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contractor told us that Fannie Mae and Freddie Mac are more likely than 

other firms to reject or require a repurchase if evidence exists that the loan 

may involve a predatory practice—even if the loan is otherwise legally 

compliant.

Other Purchasers Vary in 

the Extent of Their Due 

Diligence

According to industry representatives, all purchasers of mortgage loans 

undertake a process of due diligence, but the process can vary in its degree 

of stringency and comprehensiveness. For example, while most firms 

typically pull a sample of loans for a loan-level file review, companies may 

review anywhere between a few percent and 100 percent of the loans. In 

addition, companies vary in terms of the data elements they choose to 

review. Some firms review prior loans made to the borrower in an effort to 

detect loan flipping, while others do not. Further, some companies may be 

more willing than others to purchase loans that are considered 

questionable in terms of legal compliance, creditworthiness, or other 

factors. 

As noted earlier, loans that have harmed consumers and that may be 

deemed “predatory” by some observers are not necessarily against the law, 

nor do they necessarily increase the risk of the loan.9

 Industry officials told 

us that while securities firms are concerned with the reputation risk that 

may come with purchasing abusive loans, the primary function of their due 

diligence is to ensure compliance with the law and to protect investors by 

ensuring that loans are creditworthy.10

9

One example would be steering borrowers to higher-cost loans than is justified by their 

credit histories. This practice is often considered abusive but is not per se a violation of 

federal law, nor does it necessarily increase credit risk to the lender.

10Reputation risk can also be an issue for sellers of loans to the secondary market. Regularly 

selling loans that later create risks and costs for secondary market purchasers may close off 

the seller’s access to the secondary market.
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Assignee Liability May 

Help Deter Predatory 

Lending but Can Also 

Have Negative 

Unintended 

Consequences

Some states have enacted predatory lending laws that have assignee 

liability provisions under which purchasers of secondary market loans may 

be liable for violations committed by the originators or subject to a defense 

by the borrower against collecting the loan. Assignee liability is intended 

to discourage secondary market participants from purchasing loans that 

may have predatory features and to provide an additional source of redress 

for victims of abusive lenders. However, depending on the specific nature 

of the provision, assignee liability may also have unintended consequences, 

including reducing access to or increasing the cost of secondary market 

capital for legitimate loans. For example, assignee liability provisions of a 

predatory lending law in Georgia have been blamed for causing several 

participants in the mortgage lending industry to withdraw from the market, 

and the provisions were subsequently repealed.

Several States Hold 

Secondary Purchasers 

Liable for Predatory 

Lending Violations

Antipredatory lending laws in several states have included some form of 

assignee liability. Typically, with assignee liability, little or no distinction is 

made between the broker or lender originating a loan that violates 

predatory lending provisions and the person who purchases or securitizes 

the loans. Under these provisions, secondary market participants that 

acquire loans may be liable for violations of the law committed by the 

original lenders or brokers whether or not the purchasers were aware of 

the violations at the time they bought the loans. Further, borrowers can 

assert the same defenses to foreclosure against both originating lenders 

and entities in the secondary market that hold the loans (the assignees). 

Depending on the specific provisions of the law, assignees may have to pay 

monetary damages to aggrieved borrowers.

As of December 2003, at least nine states and the District of Columbia had 

enacted predatory lending laws that expressly included assignee liability 

provisions, though the nature of these provisions varies greatly, according 

to the database of state and local legislation we reviewed. Other states 

have passed predatory lending laws that do not explicitly provide for 

assignee liability, but debate has occurred in some of these states about 

whether assignee liability can be asserted anyway under existing laws or 

legal principles. The federal HOEPA statute includes an assignee liability 

provision, but, as noted in chapter 2, only a limited number of subprime 

loans are covered under HOEPA.

Assignee liability can take a variety of forms. For example, an assignee can 

be held liable only in defensive claims (defense to foreclosure actions and 
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Page 83 GAO-04-280 Predatory Lending

to claims regarding monies owed on a loan) or can also be assessed for 

damages directly, including punitive damages.11 Similarly, some laws 

include “safe harbor provisions,” under which assignee liability may not 

arise if the assignee has taken certain measures to avoid obtaining a highcost loan. For example, under New Jersey law, no assignee liability arises 

if the assignee demonstrates, by a preponderance of evidence, that a 

person exercising reasonable due diligence could not determine that the 

mortgage was a high-cost home loan.12 However, many secondary market 

participants told us that the value of these safe harbor provisions is limited, 

in part because of difficulties in demonstrating compliance with safe 

harbor standards. For example, some secondary market participants say 

that the New Jersey law does not adequately define what constitutes 

“reasonable” due diligence.

Assignee Liability May Help 

Combat Predatory Lending 

but May Also Hinder 

Legitimate Lending

The issue of whether to include assignee liability provisions in state and 

local predatory lending laws has been highly controversial, because such 

provisions can potentially both confer benefits and cause problems. 

Assignee liability has two possible primary benefits. First, holding 

purchasers and securitizers of loans liable for abusive lending violations 

provides them with an incentive not to purchase predatory loans in the first 

place. If secondary market participants took greater action—through 

policy decisions or stricter due diligence—to avoid purchasing potentially 

abusive loans, originators of predatory loans would likely see a steep 

decline in their access to secondary market capital. Second, under some 

forms of assignee liability, consumers who have been victimized by such 

lenders may have an additional source of redress. In some cases, 

originators of abusive loans that have been sold in the secondary market 

are insolvent or cannot be located, leaving victims dependent on assignees 

for relief from foreclosure or other redress.

11Under New York’s law, an assignee seeking to enforce a loan against a borrower in default 

or in foreclosure is subject to the borrower’s claims and defenses to payment that the 

borrower could assert against the original lender. See NY Banking Law § 6-l (2003). Under 

Maine’s law, an assignee may be subject to all claims and defenses that the borrower may 

assert against the creditor of the mortgage. See Maine Rev. Stat. Ann. Title 9-A § 8-209 

(2003).

12See, e.g., N.J. Stat. Ann. § 46:10B-27 (West 2003); see also, 815 Ill. Comp. Stat. 137/135 

(2003).
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However, assignee liability provisions may also have the serious if 

unintended consequence of discouraging legitimate secondary market 

activity. Secondary market participants say that because they do not 

originate the loans they purchase, even the most stringent due diligence 

process cannot ensure that all loans comply with applicable law. In 

addition, some secondary market participants state that assignee liability 

provisions require them to make subjective determinations about whether 

the loans are in compliance with law, and this ambiguity can create legal 

and financial risk. These factors, industry participants say, can actually end 

up harming consumers by raising the costs of ensuring compliance with the 

law and thus increasing the cost of loans to borrowers. Further, if 

secondary market participants are not willing to risk having to assume 

liability for violations committed by originators, they may pull out of the 

market altogether, reducing the availability and increasing the costs of 

legitimate subprime credit. Finally, if states’ predatory lending laws have 

different terms and provisions regarding assignee responsibilities, the 

secondary market as a whole could become less efficient and liquid, further 

increasing rates on legitimate subprime mortgages. 

Credit rating agencies have been among the secondary market players that 

have expressed concern about assignee liability provisions in state 

predatory lending laws. When a residential mortgage-backed security is 

created from a pool of loans, an independent credit rating agency examines 

the security’s underlying loans and assigns it with a credit rating, which 

represents an opinion of its general creditworthiness. Credit rating 

agencies need to monetize (measure) the risk associated with the loans 

underlying a security in order to assign a credit rating. Because assignee 

liability can create additional legal and financial risks, the major credit 

rating agencies typically review new predatory lending legislation to assess 

whether they will be able to measure that risk adequately to rate securities 

backed by loans covered under the law.

We talked with representatives of two major credit rating agencies, firms 

that issue mortgage-backed securities, and the GSEs Fannie Mae and 

Freddie Mac to better understand how specific assignee liability provisions 

might affect their ability to conduct secondary market transactions. In 

general, the representatives told us that the most problematic assignee 

liability provisions for secondary market participants are those with two 

characteristics:

• Ambiguous language. Credit rating agencies and other secondary 

market players seek clear and objective descriptions of the loans 
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covered by the statutes and the specific actions or omissions that 

constitute a violation. For example, some participants cited concerns 

about an ordinance enacted in Toledo, Ohio, that prohibited taking 

advantage of a borrower’s “physical or mental infirmities” but did not 

define what constituted such infirmities.13 Secondary market 

participants noted that without objective criteria, there is no way to 

ensure that an originator has complied adequately with the law.

• Punitive Damages. Under some assignee liability provisions, the 

potential damages a borrower can receive are restricted to the value of 

the loan, while other provisions allow for punitive damages, which are 

not necessarily capped. Secondary market participants say that the 

potential for punitive damages can make it very difficult to quantify the 

risk associated with a security.

Georgia’s Statute Illustrates 

Possible Effects of Assignee 

Liability Provisions

According to officials of industry and consumer advocacy organizations, 

the Georgia Fair Lending Act, which became effective on October 1, 2002, 

was one of the strictest antipredatory lending laws in the nation.14 It 

banned single-premium credit insurance and set restrictions on late fees for 

all mortgage loans originated in the state and, for a special category of 

“covered loans,” prohibited refinancing within 5 years after consummation 

of an existing home loan unless the new loan provided a “tangible net 

benefit” to the borrower. The act also created a category of “high-cost 

loans” that were subject to certain restrictions, including limitations on 

prepayment penalties, prohibitions on balloon payments, and prohibitions 

on loans that were made without regard to the borrower’s ability to repay. 

13City of Toledo Ordinance No. 291-02 (Oct. 4, 2002).

14The Georgia Fair Lending Act is codified at GA Code Ann. §§ 7-6A-1 et. seq. OTS, NCUA, 

and OCC have determined that the Georgia law does not apply to the institutions they 

supervise because it is preempted by federal law. See Office of Thrift Supervision, P-2003-1, 

Preemption of Georgia Fair Lending Act (Jan. 21, 2003); National Credit Union 

Administration, 02-0649, Applicability of Georgia Fair Lending Act to Federal Credit Unions 

(July 29, 2002); National Credit Union Administration, 03-0412, NCUA Preemption of the 

Georgia Fair Lending Act (Nov. 10, 2003); and OCC Preemption Determination and Order, 

Docket No. 03-17 (July 30, 2003). Because Georgia law contains a parity provision under 

which its state-chartered banks are treated similarly to national banks, Georgia’s 

Commissioner of Banking and Finance ruled that Georgia-chartered banks also are not 

subject to the Fair Lending Act. See Declaratory Ruling: Effect of Preemption of Georgia 

Fair Lending Act by the OCC on July 30, 2003 (Aug. 5, 2003).
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The act also included fairly strict assignee liability. Secondary market 

participants that purchased high-cost loans were liable for violations of the 

law committed by the originator of the loans they purchased, while 

purchasers of covered loans were subject to borrower defenses and 

counterclaims based on violations of the act. The act also expressly made 

mortgage brokers and loan servicers liable for violations. Remedies 

available to borrowers included actual damages, rescission of high-cost 

loans, attorney fees, and punitive damages. Most of the violations were 

civil offenses, but knowing violations constituted criminal offenses.

Shortly after the Georgia Fair Lending Act took effect, several mortgage 

lenders announced that they would stop doing business in the state due to 

the increased risk they would incur. In addition, several secondary market 

participants stated their intention to cease doing business in Georgia. In 

January 2003, the credit rating agency Standard & Poor’s announced it 

would stop rating mortgage-backed securities in Georgia because of the 

uncertainty surrounding potential liability under the act. Standard & Poor’s 

decision extended to securitizations of virtually all loans in the state, not 

just those of covered or high-cost loans. The company said that because 

the act did not provide an unambiguous definition of which loans were 

covered (and therefore subject to assignee liability), it could not adequately 

assess the potential risk to securitizers. In addition, the company said that 

it was concerned about an antiflipping provision that did not adequately 

define what constituted the “net tangible benefit” to borrowers that certain 

refinancings had to provide. The two other major credit rating agencies, 

Moody’s and Fitch, also said that the law would limit their ability to rate 

mortgage-backed securities in Georgia.

In response to these events, the Georgia legislature amended the Georgia 

Fair Lending Act on March 7, 2003. The amendments eliminated the 

category of “covered home loans” and the restrictions that had existed for 

that category of loans. In addition, the amendments greatly reduced the 

scope of assignee liability under the law, restricting such liability to “highcost” loans, and then only when the assignee is unable to show that it has 

exercised reasonable due diligence to avoid purchasing them. In addition, 

the amendments capped the amount of damages an assignee can face and 

prohibited assignee liability in class-action lawsuits. Once these 

amendments were passed, credit rating agencies announced that they 

would once again rate securities backed by mortgage loans originated in 

Georgia, and lenders said they would continue to do business in the state. 

Advocates of the original Georgia law argued that the legislature 

overreacted to actions by some members of the lending industry, and many 
Chapter 4

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Page 87 GAO-04-280 Predatory Lending

activists said that Standard & Poor’s and others had engaged in an 

orchestrated effort to roll back the Georgia Fair Lending Act. Industry 

representatives said that the response by lenders and others was a 

reasonable response to a statute that created unacceptable risks of legal 

liability for lenders and assignees. 

Policymakers and industry representatives have frequently cited the events 

in Georgia as a lesson in what can happen when secondary market 

participants are held liable for violations by the original lender. Industry 

representatives assert that assignee liability creates undue risks to the 

secondary market, or makes assessing risks difficult, and ultimately 

reduces borrowers’ access to credit. In the case of Georgia, however, it is 

unclear whether the problem was assignee liability itself or the scope and 

characteristics of the specific assignee liability provisions contained in the 

original law. Georgia’s original law created concern in large part because 

of perceived ambiguities in defining which loans were subject to assignee 

liability and because assignees’ liability was subject to unlimited punitive 

damages. Not all states with antipredatory lending statutes that include 

assignee liability provisions have had lenders and credit agencies threaten 

to withdraw from the market to the same extent, largely because these 

laws generally cap an assignee’s liability, create a safe harbor, or contain 

less ambiguous language. The challenge to states that choose to impose 

assignee liability is to craft provisions that may serve their purpose of 

deterring predatory lending and providing redress to affected borrowers 

without creating an undue adverse effect on the legitimate lending market.
Page 88 GAO-04-280 Predatory Lending

Chapter 5

The Usefulness of Consumer Education, 

Counseling, and Disclosures in Deterring 

Predatory Lending May Be Limited Chapte5r

A number of federal, state, nonprofit, and industry-sponsored organizations 

offer consumer education initiatives designed to deter predatory lending 

by, among other things, providing information about predatory practices 

and working to improve consumers’ overall financial literacy. While 

consumer education efforts have been shown to have some success in 

increasing consumers’ financial literacy, the ability of these efforts to deter 

predatory lending practices may be limited by several factors, including the 

complexity of mortgage transactions and the difficulty of reaching the 

target audience. Similarly, unreceptive consumers and counselors’ lack of 

access to relevant loan documents can hamper the effectiveness of 

mortgage counseling efforts, while the sheer volume of mortgage 

originations each year makes universal counseling difficult. While efforts 

are under way to improve the federally required disclosures associated 

with mortgage loans, their potential success in deterring predatory lending 

is likewise hindered by the complexity of mortgage transactions and by the 

lack of financial sophistication among many borrowers who are the targets 

of predatory lenders.

Many Consumer 

Education and 

Mortgage Counseling 

Efforts Exist, but 

Several Factors Limit 

Their Potential to 

Deter Predatory 

Lending

In response to widespread concern about low levels of financial literacy 

among consumers, federal agencies such as FDIC, HUD, and OTS have 

conducted and funded initiatives designed in part to raise consumers’ 

awareness of predatory lending practices. In addition, a number of states, 

nonprofits, and trade organizations have undertaken consumer education 

initiatives. Prepurchase mortgage counseling—which can include a third 

party review of a prospective mortgage loan—may also help borrowers 

avoid predatory loans, in part by alerting them to the characteristics of 

predatory loans. In some circumstances, such counseling is required. 

However, a variety of factors limit the potential of these tools to deter 

predatory lending practices. 
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Some Federal Agencies 

Have Initiatives to Promote 

Awareness of Predatory 

Lending 

A number of federal agencies and industry trade groups have advocated 

financial education for consumers as a means of improving consumers’ 

financial literacy and addressing predatory lending. The Department of the 

Treasury, as well as consumer and industry groups, have identified the lack 

of financial literacy in the United States as a serious, widespread problem.1

 

Studies have shown that many Americans lack a basic knowledge and 

understanding of how to manage money, use debt responsibly, and make 

wise financial decisions.2

 As a result, some federal agencies have 

conducted or funded programs and initiatives that serve to educate and 

inform consumers about personal financial matters. For example:

• FDIC sponsors MoneySmart, a financial literacy program for adults with 

little or no banking experience and low to moderate incomes. FDIC 

officials told us that the program, in effect, serves as one line of defense 

against predatory lending. The MoneySmart curriculum addresses such 

topics as bank services, credit, budgeting, saving, credit cards, loans, 

and homeownership. MoneySmart is offered free to banks and others 

interested in sponsoring financial education workshops. 

• The Federal Reserve System’s Community Affairs Offices issue media 

releases and distribute consumer education publications to financial 

institutions, community organizations, and to consumers directly. 

These offices also have hosted conferences and forums on financial 

education and predatory lending and have conducted direct outreach to 

communities targeted by predatory lenders.

1

The Fair and Accurate Credit Transactions Act of 2003 (Pub. L. No. 108-159), which was 

enacted on December 4, 2003, addresses financial literacy in a number of its provisions. 

Among other things, it establishes a financial literacy and education commission consisting 

of representatives of FTC, the federal banking regulators, HUD, the Department of the 

Treasury, and other federal agencies.

2

See National Endowment for Financial Education, “Financial Literacy in America: 

Individual Choices, National Consequences,” report based on the symposium “The State of 

Financial Literacy in America: Evolutions and Revolutions,” October 2002 (Greenwood 

Village, Colorado, 2002), 1 and 6; Maude Toussaint-Comeau and Sherrie L.W. Rhine, 

“Delivery of Financial Literacy Programs,” Policy Studies, Consumer Issues Research 

Series, Consumer and Community Affairs Division, Federal Reserve Bank of Chicago (2000), 

1; Marianne A. Hilgert, Jeanne M. Hogarth, and Sondra Beverly, “Household Financial 

Management: The Connection between Knowledge and Behavior,” Federal Reserve Bulletin, 

July 2003, 309 and 311.
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• OTS and NCUA have worked with community groups on financial 

literacy issues and have disseminated financial education materials, 

including literature on predatory lending issues, to their respective 

regulated institutions. 

• HUD has developed and distributed a brochure titled Don’t Be a Victim 

of Loan Fraud: Protect Yourself from Predatory Lenders, which seeks 

to educate consumers who may be vulnerable to predatory lending, 

especially the elderly, minorities, and low-income homeowners.

• Federal banking regulators give positive consideration in Community 

Reinvestment Act performance reviews to institutions for providing 

financial education to consumers in low- and moderate-income 

communities.

• OCC issued an advisory letter in 2001 providing detailed guidance for 

national banks, encouraging them to participate in financial literacy 

initiatives and specifying a range of activities that banks can provide to 

enhance their customers’ financial skills, including support for 

educational campaigns that help borrowers avoid abusive lending 

situations.3

 

• FTC and DOJ disseminate information designed to raise consumers’ 

awareness of predatory lending practices, particularly those involving 

fraudulent acts. Brochures and other consumer materials are distributed 

on the agencies’ Web sites, as well as through conferences and seminars, 

local consumer protection agencies, consumer credit counselors, state 

offices, and schools. FTC has also supported public service 

announcements on radio and television, including Spanish-speaking 

media. 

Some of these initiatives are general financial education programs that do 

not specifically address predatory home mortgage lending, some address 

predatory lending practices as one of a number of topics, and a few focus 

specifically on predatory lending. Some of these initiatives are directed to 

a general audience of consumers, while others are directed toward lowincome or other communities that are often the targets of predatory 

lenders. A number of different media have been used to deliver the 

messages, including print and online materials, speeches and spot 

3

OCC Advisory Letter 2001-1, Financial Literacy, January 16, 2001.
Chapter 5

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Page 91 GAO-04-280 Predatory Lending

announcements, and materials for the hearing- and visually impaired. In 

some cases, consumer financial education materials have been produced in 

a variety of languages, including Arabic, Chinese, Korean, and Spanish. 

Federal agencies’ consumer education campaigns typically take place in 

partnership with other entities, including community and nonprofit groups 

and state and local agencies.

Federal agencies have taken some actions to coordinate their efforts 

related to educating consumers about predatory lending. For example, in 

October 2003, the Interagency Task Force on Fair Lending, which consists 

of 10 federal agencies, published a brochure that alerts consumers to 

potential pitfalls of home equity loans, particularly high-cost loans. The 

brochure Putting Your Home on the Loan Line is Risky Business

describes common predatory lending practices and makes 

recommendations to help borrowers avoid them. 

State Agencies, Nonprofits, 

and Industry Organizations 

Have Also Initiated 

Consumer Education 

Efforts

Some state agencies have also sponsored consumer education initiatives 

that address predatory lending. For example, the Connecticut Department 

of Banking offers an educational program in both English and Spanish that 

partners with neighborhood assistance groups and others to promote 

financial literacy and educate consumers on the state’s antipredatory 

lending statute. The Massachusetts Division of Banks maintains a toll-free 

mortgage hotline to assist homeowners about potentially unethical and 

unlawful lending practices. The hotline helps consumers determine 

whether loan terms may be predatory and directs them to other sources of 

information and assistance. The New York State Banking Department 

distributes educational materials, including a video, that describe 

predatory lending practices. The department has also conducted 

educational outreach programs to community groups on the issue. 

Nonprofits provide a significant portion of consumer financial education 

on predatory lending, sometimes with support from federal, state, or local 

agencies. These efforts include both general financial literacy programs 

with a predatory lending component and initiatives that focus specifically 

on predatory lending issues. For example, the National Community 

Reinvestment Coalition, with funding support from HUD, distributes a 

training module to help communities across the country educate 

consumers about predatory lending.
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Predatory Lending May Be Limited

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Some industry trade organizations and companies also have consumer 

education initiatives related to predatory lending: 

• Freddie Mac has developed the CreditSmart program in partnership 

with universities and colleges. CreditSmart is a curriculum on credit 

education that is available online and has been used in academic 

programs and in community workshops, seminars, and credit education 

campaigns. Freddie Mac also helps fund and promote the “Don’t 

Borrow Trouble” campaign, a comprehensive public education 

campaign with counseling services that is designed to help homeowners 

avoid falling victim to predatory lenders. The campaign uses brochures, 

mailings, posters, public service announcements, transit ads, and 

television commercials. Its media toolkit and marketing consultant 

services have been provided to the U.S. Conference of Mayors for use in 

local communities.

• Fannie Mae supports financial literacy programs through its Fannie Mae 

Foundation, which sponsors homeownership education programs that 

focus on improving financial skills and literacy for adult students and atrisk populations, such as new Americans and Native Americans. Fannie 

Mae also offers a Web-based tool that allows home-buyers to compare 

loan products and prices.

• The Jump$tart Program for Personal Financial Literacy, sponsored by a 

coalition of corporations, industry associations—such as the Insurance 

Education Foundation and the American Bankers Association 

Education Foundation—and several government and nonprofit 

agencies, includes a series of modules covering topics such as managing 

debt and shopping for credit that are designed to improve the personal 

financial literacy of young adults.

• The Mortgage Bankers Association of America, a trade association 

representing mortgage companies and brokers and the real estate 

finance industry, disseminates a package of information describing 

some common warning signs of mortgage fraud and predatory lending, a 

consumer’s bill of rights, and appropriate contacts for consumers who 

believe they have been victimized by predatory lenders.

• The National Association of Mortgage Brokers makes presentations to 

first-time homebuyers to educate them on the mortgage process and 

credit reports, among other topics.
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Predatory Lending May Be Limited

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• The American Financial Services Association’s Education Foundation 

develops educational materials designed to improve consumers’ use of 

credit and overall financial literacy.

Mortgage Counseling Can 

Warn Borrowers of 

Predatory Lending and Can 

Offer a “Third Party” Review 

of Proposed Mortgage 

Loans

Mortgage counseling can be part of general “homeownership counseling” 

for new homeowners but may also be offered prior to a refinancing. It 

gives borrowers an opportunity to receive personalized advice from a 

disinterested third party about a proposed mortgage or other loan. In 

addition to providing general advice about the mortgage process and loan 

products, counselors typically review the terms of proposed loans for 

potentially predatory characteristics. Studies evaluating the impact of 

homeownership counseling have found that it helps homeowners maintain 

ownership of their homes and avoid delinquencies, particularly when the 

counseling is provided one on one.4

 HUD supports a network of 

approximately 1,700 approved counseling agencies across the country. The 

agencies provide a wide variety of education and counseling services, 

including homebuyer education and prepurchase counseling. HUD makes 

grant funds available to some of these agencies, and a portion of these 

funds has been earmarked exclusively for counseling for victims of 

predatory lending.

A number of state antipredatory lending laws, such as those in New Jersey 

and North Carolina, require some lenders to document that a borrower has 

received counseling before taking out certain types of high-cost loans. In a 

few cases, however, borrowers may waive their right to receive such 

counseling. Several states, including Colorado, New York, and 

Pennsylvania, require lenders to provide notice to borrowers of certain 

loans that mortgage counseling is available and encourage them to seek it. 

4

See, for example, Abdighani Hirad and Peter M. Zorn, “A Little Knowledge is a Good Thing: 

Empirical Evidence of the Effectiveness of Pre-Purchase Homeownership Counseling,” in 

Low-Income Homeownership: Examining the Unexamined Goal, ed. Nicolas P. Retsinas 

and Eric S. Belsky (Washington, D.C.: Brookings Institution Press and Harvard University 

Joint Center on Housing Studies, 2001), 2.
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A Variety of Factors May 

Limit the Effectiveness of 

Consumer Education and 

Mortgage Counseling in 

Deterring Predatory 

Lending

In testimony before Congress and elsewhere, representatives of the 

Mortgage Bankers Association, the Consumer Mortgage Coalition, and 

other industry organizations have promoted the view that educated 

borrowers are more likely to shop around for beneficial loan terms and 

avoid abusive lending practices. In searching the literature for studies on 

the effectiveness of consumer financial education programs, we found 

evidence that financial literacy programs may produce positive changes in 

consumers’ financial behavior.5 However, none of the studies measured the 

effectiveness of consumer information campaigns specifically on deterring 

predatory lending practices.

Limitations of Consumer 

Education

The majority of federal officials and consumer advocates we contacted said 

that while consumer education can be very useful, it is unlikely to play a 

substantial role in reducing the incidence of predatory lending practices, 

for several reasons: 

• First, mortgage loans are complex financial transactions, and many 

different factors—including the interest rate, fees, specific loan terms, 

and borrower’s situation—determine whether the loan is in a borrower’s 

best interests. Mortgage loans can involve dozens of different 

documents that are written in highly technical language. Even an 

excellent campaign of consumer education is unlikely to provide less 

sophisticated consumers with enough information to properly assess 

whether a proffered loan contains abusive terms. 

• Second, abusive lenders and brokers may use high-pressure or “push 

marketing” tactics—such as direct mail, telemarketing, and door-to-door 

contacts—that are unfair, deceptive, or designed to confuse the 

consumer. Broad-based campaigns to make consumers aware of 

predatory lending may not be sufficient to prevent many consumers—

particularly those who may be uneducated or unsophisticated in 

financial matters—from succumbing to aggressive sales tactics. 

• Third, the consumers who are often the targets of predatory lenders are 

also some of the hardest to reach with educational information. Victims 

of predatory lending are often not highly educated or literate and may 

5

See for example, B. Douglas Mernheim, Daniel M. Garrett, and Dean M. Maki, Education 

and Saving: The Long-Term Effects of High School Financial Curriculum Mandates

(Cambridge, Mass.: National Bureau of Economic Research, 1997), 29-30.
Chapter 5

The Usefulness of Consumer Education, 

Counseling, and Disclosures in Deterring 

Predatory Lending May Be Limited

Page 95 GAO-04-280 Predatory Lending

not read or speak English. Further, they may lack access to information 

conveyed through the Internet or traditional banking sources, or they 

may have hearing or visual impairments or mobility problems. 

Limitations of Mortgage 

Counseling

Consumer education campaigns have encouraged borrowers to seek 

counseling before entering into a mortgage loan, particularly a subprime 

refinancing loan. However, unreceptive consumers, lack of access to loan 

documents, fraudulent lending practices, and the uneven quality of 

counseling services can affect the success of these counseling efforts. For 

instance, some consumers may simply not respond to counseling. Officials 

at HUD have noted that not all first-time homebuyers avail themselves of 

prepurchase counseling, and that some consumers who do attend 

counseling sessions ignore the advice and information given to them. 

Further, counselors may not have access to loan documents containing the 

final terms of the mortgage loan. Although lenders are required to provide 

a good-faith estimate of the mortgage terms, they are not required to 

provide consumers with the final and fixed terms and provisions of a 

mortgage loan until closing.6

 Moreover, predatory lenders have been 

known to manipulate the terms of a mortgage loan (sometimes called “bait 

and switch”) so that the terms of the actual loan vary substantially from 

that contained in the good faith estimate. 

In addition, counseling may be ineffective against lenders and brokers that 

engage in fraudulent practices, such as falsifying applications or loan 

documents, that cannot be detected during a prepurchase review of 

mortgage loan documents. Finally, the quality of mortgage counseling can 

vary because of a number of factors. For example, one federal official cited 

an instance of a mortgage company conducting only cursory telephone 

counseling in order to comply with mandatory counseling requirements. 

Although some states have mandated counseling for certain types of loans, 

serious practical barriers would exist to instituting mandatory prepurchase 

mortgage counseling nationally. HUD officials have noted that instituting a 

mandatory counseling program for most regular mortgage transactions 

nationwide would be an enormous and difficult undertaking that might not 

6

For example, TILA requires federal lenders to make certain disclosures on mortgage loans 

within 3 business days after the receipt of a written application. It also requires a final 

disclosure statement at the time of closing that includes the contract sales price, principal 

amount of the new loan, interest rate, broker’s commission, loan origination fee, and 

mortgage and hazard insurance, among other things.
Chapter 5

The Usefulness of Consumer Education, 

Counseling, and Disclosures in Deterring 

Predatory Lending May Be Limited

Page 96 GAO-04-280 Predatory Lending

be cost-effective. Lenders originated about 10 million mortgage loans in 

2002 in the United States. The cost of providing counseling for all or many 

of these loans would be high, and it is unclear who would or should be 

responsible for paying it. In addition, there is a need for trained, qualified 

counselors, according to federal officials and representatives of consumer 

and advocacy groups, and currently no system exists for effectively 

training large numbers of counselors while maintaining quality control. 

HUD requires counseling for its reverse mortgages. These mortgages allow 

homeowners to access the equity in their home through a lender, who 

makes payments to the owner.7

 Borrowers who receive a home equity 

conversion mortgage insured through FHA must attend a consumer 

information session given by a HUD-approved housing counselor. 

Mandatory counseling for reverse mortgages may be reasonable because 

these products are complex and subject to abuse. However, reverse 

mortgages are also relatively uncommon; only approximately 17,610 HUDinsured reverse mortgages were originated in fiscal year 2003.

Disclosures, Even If 

Improved, May Be of 

Limited Use in 

Deterring Predatory 

Lending

Federally mandated mortgage disclosures, while helpful to some 

borrowers, may be of limited usefulness in reducing the incidence of 

predatory lending practices. TILA and RESPA have requirements 

concerning the content, form, and timing of information that must be 

disclosed to borrowers. The goal of these laws is to ensure that consumers 

obtain timely and standardized information about the terms and cost of 

their loans. Federal agencies, advocacy groups, and the mortgage industry 

have said that mortgage disclosures are an important source of information 

for borrowers, providing key information on loan terms and conditions and 

enabling borrowers to compare mortgage loan products and costs. 

Representatives of the lending industry in particular have said that 

disclosures can play an important role in fighting predatory lending, noting 

that clear, understandable, and uniform disclosures allow borrowers to 

understand the terms of their mortgage loans and thus make more 

informed choices when shopping for a loan. 

However, industry and advocacy groups have publicly expressed 

dissatisfaction with the current scheme of disclosures as mandated by 

TILA and RESPA. A 1998 report by the Board and HUD concluded that 

7

The loan is not repaid in full until the homeowner permanently moves out of the home, 

passes away, or other specified events have occurred.
Chapter 5

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Counseling, and Disclosures in Deterring 

Predatory Lending May Be Limited

Page 97 GAO-04-280 Predatory Lending

consumers cannot easily understand current disclosures, that disclosures 

are often provided too late in the lending process to be meaningful, that the 

information in disclosures may differ significantly from the actual final loan 

terms, and that the protections and remedies for violations of disclosure 

rules are inadequate.8 

Improving the disclosure of pertinent information has been part of efforts 

under way over the last few years to streamline and improve the real estate 

settlement process. HUD issued proposed rules in July 2002 to simplify 

and improve the process of obtaining home mortgages and reduce 

settlement costs for consumers. HUD stated that the proposed changes to 

its RESPA regulations would, among other things, “make the good faith 

estimate [settlement cost disclosure] firmer and more usable, facilitate 

shopping for mortgages, make mortgage transactions more transparent, 

and prevent unexpected charges to consumers at settlement.”9

 Debate 

over the proposed rules, which as of December 2003 were still under 

review, has been contentious. Industry groups claim that the proposal 

would help fight predatory lending by helping consumers understand loan 

costs up front and thus enable consumers to compare products, or 

comparison shop. Several advocacy organizations and an industry group 

say the proposed rules would still allow unscrupulous mortgage originators 

to hide illegal or unjustified fees.

Although streamlining and improving mortgage loan disclosures could help 

some borrowers better understand the costs and terms of their loans, such 

efforts may play only a limited role in decreasing the incidence of predatory 

lending practices. As noted above, mortgage loans are inherently complex, 

and assessing their terms requires knowing and understanding many 

variables, including interest rates, points, fees, and prepayment penalties. 

Brokers and lenders that engage in abusive practices may target vulnerable 

individuals who are not financially sophisticated and are therefore more 

susceptible to being deceived or defrauded into entering into a loan that is 

clearly not in their interests. Even a relatively clear and transparent system 

of disclosures may be of limited use to borrowers who lack sophistication 

about financial matters, are not highly educated, or suffer physical or 

mental infirmities. Moreover, as with prepurchase counseling, revised 

8

Board of Governors of the Federal Reserve System and the Department of Housing and 

Urban Development, Joint Report to the Congress Concerning Reform to the Truth In 

Lending Act and the Real Estate Settlement Procedures Act (Washington, D.C.: July 1998).

9

See 67 Fed. Reg. 49134 (Jul. 29, 2002).
Chapter 5

The Usefulness of Consumer Education, 

Counseling, and Disclosures in Deterring 

Predatory Lending May Be Limited

Page 98 GAO-04-280 Predatory Lending

disclosure requirements would not necessarily help protect consumers 

against lenders and brokers that engage in outright fraud or that mislead 

borrowers about the terms of a loan in the disclosure documents 

themselves.
Page 99 GAO-04-280 Predatory Lending

Chapter 6

Elderly Consumers May Be Targeted for 

Predatory Lending Chapte6r

Although little data is available on the incidence of predatory lending 

among the elderly, government officials and consumer advocacy 

organizations have reported consistent observational evidence that elderly 

consumers have been disproportionately victimized by predatory lenders.1 

Abusive lenders are likely to target older consumers for a number of 

reasons, including the fact that older homeowners are more likely to have 

substantial equity in their homes and may be more likely to have 

diminished cognitive function or physical impairments that an 

unscrupulous lender may try to exploit. Most educational material and 

legal activity related to predatory lending targets the general population 

rather than elderly borrowers in particular. Some federal agencies and 

nonprofit organizations provide consumer education materials on 

predatory lending that specifically target the elderly. 

A Number of Factors 

Make Elderly 

Consumers Targets of 

Predatory Lenders

Nearly all federal, state, and consumer advocacy officials with whom we 

spoke offered consistent observational and anecdotal information that 

elderly consumers have disproportionately been victims of predatory 

lending. Little hard data exist on the ages of victims of predatory lending or 

on the proportion of victims who are elderly. Nonetheless, several factors 

explain why unscrupulous lenders may target older consumers and why 

some elderly homeowners may be more vulnerable to abusive lenders, 

including higher home equity, a greater need for cash to supplement limited 

incomes, and a greater likelihood of physical impairments, diminished 

cognitive abilities, and social isolation.

On average, older homeowners have more equity in their homes than 

younger homeowners, and abusive lenders could be expected to target 

consumers who have substantial home equity. 2

 By targeting these owners, 

unscrupulous lenders are more easily able to “strip” the equity from a 

borrower’s home by including unjustified and excessive fees into the cost 

1

No clear agreement exists on the age at which someone is considered “elderly.” While we 

do not designate any specific age in this report with reference to the terms “older” or 

“elderly,” we are generally referring to persons over the age of 65.

2

For example, a study by the Board found that in 1997, some 55 percent of the homeowners 

who had fully paid off their mortgage were 65 years of age or older. See Glenn B. Canner, 

Thomas A. Durkin, and Charles A. Luckett, “Recent Developments in Home Equity Lending,” 

Federal Reserve Bulletin, April 1998, 241-51. Borrowers may have substantial equity in their 

homes but still not qualify for a prime loan because their capacity to repay the loan is limited 

or their credit score is beneath a certain threshold. 
Chapter 6

Elderly Consumers May Be Targeted for 

Predatory Lending

Page 100 GAO-04-280 Predatory Lending

of the home equity loan.3 Federal officials and consumer groups say that 

abusive lenders often try to convince elderly borrowers to repeatedly 

refinance their loans, adding more costs each time. “Flipping” loans in this 

way can over time literally wipe out owners’ equity in their homes. 

In addition, some brokers and lenders aggressively market home equity 

loans as a source of cash, particularly for older homeowners who have 

limited cash flows and can use money from a home equity loan for major 

home repairs or medical expenses. In the overall marketplace it is 

common, and can be advantageous, to tap into one’s home equity when 

refinancing. However, unscrupulous brokers and lenders can take 

advantage of an elderly person’s need for cash to steer borrowers to loans 

with highly unfavorable terms. 

Further, diseases and physical impairments associated with aging can 

make elderly borrowers more susceptible to abusive lending. For example, 

declining vision, hearing, or mobility can restrict elderly consumers’ ability 

to access financial information and compare credit terms. In such 

situations potential borrowers may be susceptible to the first lender to 

offer what seems to be a good deal, especially if the lender is willing to visit 

them at home or provide transportation to the closing. Physical 

impairments like poor hearing and vision can also make it difficult for older 

borrowers to fully understand loan documents and disclosures.

Similarly, while many older persons enjoy excellent mental and cognitive 

capacity, others experience the diminished cognitive capacity and 

judgment that sometimes occurs with advanced age. Age-related 

dementias or mental impairments can limit the capacity of some older 

persons to comprehend and make informed judgments on financial issues, 

according to an expert in behavioral medicine at the National Institute on 

Aging. Furthermore, a report sponsored by the National Academy of 

Sciences on the mistreatment of elderly persons reported that they may be 

more likely to have conditions or disabilities that make them easy targets 

for financial abuse and they may have diminished capacity to evaluate 

proposed courses of action. The report noted that these impairments can 

3

For example, a loan might be offered to a borrower who owns a home worth $100,000 and 

owes $20,000 from a previous mortgage. An abusive lender might refinance the loan for 

$25,000 (providing the borrower with a $5,000 “cashout”) but then charge fees of $15,000, 

which are financed into the loan. The borrower then would owe $40,000, but might not be 

aware of the excessive fees that were charged because the monthly repayment schedule had 

been spread over a much longer period of time. 
Chapter 6

Elderly Consumers May Be Targeted for 

Predatory Lending

Page 101 GAO-04-280 Predatory Lending

make older persons more vulnerable to financial abuse and exploitation. 4 

Representatives of legal aid organizations have said that they frequently 

represent elderly clients in predatory lending cases involving lenders that 

have taken advantage of a borrower’s confusion and, in some cases, 

dementia.

Finally, both the National Academy of Sciences report and representatives 

of advocacy groups we spoke with noted that elderly people—particularly 

those who live alone—may feel isolated and lonely, and may lack support 

systems of family and friends who could provide them with advice and 

assistance in obtaining credit. Such individuals may simply be more willing 

to discuss an offer for a home equity loan made by someone who 

telephones or knocks on their door, makes personal contact, or makes an 

effort to gain their confidence. These personalized marketing techniques 

are common among lenders and brokers that target vulnerable individuals 

for loans with abusive terms.

Federal officials, legal aid services, and consumer groups have reported 

that home repair scams targeting elderly homeowners are particularly 

common. Elderly homeowners often live in older homes and are more 

likely to need someone to do repairs for them. The HUD-Treasury report 

noted that predatory brokers and home improvement contractors have 

collaborated to swindle older consumers. A contractor may come to a 

homeowner’s door, pressure the homeowner into accepting a home 

improvement contract, and arrange for financing of the work with a highcost loan. The contractor then does shoddy work or does not finish the 

agreed-on repairs, leaving the borrower to pay off the expensive loan. 

The result of lending abuses, such as losing a home through foreclosure, 

can be especially severe for the elderly. The National Academy of Sciences 

report noted that losing financial assets accumulated over a lifetime can be 

devastating to an elderly person, and that replacing them is generally not 

viable for those who are retired or have physical or mental disabilities. The 

financial losses older people can suffer as a result of abusive loans can 

result in the loss of independence and security and a significant decline in 

quality of life. Moreover, older victims of financial exploitation may be 

4

Richard J. Bonnie and Robert B. Wallace, eds., “Elder Mistreatment: Abuse, Neglect, and 

Exploitation in an Aging America,” Panel to Review Risk and Prevalence of Elder Abuse and 

Neglect, National Research Council (Washington, D.C.: National Academies Press, 2003), 

393.
Chapter 6

Elderly Consumers May Be Targeted for 

Predatory Lending

Page 102 GAO-04-280 Predatory Lending

more likely to become dependent on social welfare services because they 

lack the funds to help compensate them for their financial losses. 

Elderly consumers represent just one of several classes of people that 

predatory lenders appear to target. The HUD-Treasury task force report 

noted that many predatory lenders also specifically target minority 

communities. Consumer advocacy and legal aid organizations have 

reported that elderly African American women appear to be a particular 

target for predatory lenders. This population may be targeted by predatory 

lenders at least in part because of their relatively low literacy levels—the 

result of historical inequalities in educational opportunities—which, as 

discussed earlier, may increase vulnerability to abusive lending.5

Some Education and 

Enforcement Efforts 

Focus on Elderly 

Consumers

Because elderly people appear to be more susceptible to predatory lending, 

government agencies and consumer advocacy organizations have focused 

some educational efforts and legal assistance on this population. Several 

booklets, pamphlets, and seminars are aimed at helping inform elderly 

borrowers about predatory lending. In addition, while most legal activities 

related to predatory lending practices are designed to assist the general 

population of consumers, some have focused on elderly consumers in 

particular.

Federal and Nonprofit 

Agencies Sponsor Some 

Financial Education Efforts 

Targeted at Older 

Consumers

Consumer financial education efforts of government and nonprofit 

agencies and industry associations generally seek to serve the general 

consumer population rather than target specific subpopulations. However, 

some federal and nonprofit agencies have made efforts to increase 

awareness about predatory lending specifically among older consumers. 

For example:

• DOJ has published a guide entitled Financial Crimes Against the 

Elderly, which includes references to predatory lending. In 2000, the 

5

For example, about 25 percent of elderly black Americans had graduated from high school 

in 1992, compared with about 58 percent of elderly white Americans, and about 57 percent 

of elderly black Americans were reported to have had fewer than 9 years of formal 

education. See Robert Joseph Taylor and Shirley A. Lockery, “Socio-Economic Status of 

Older Black Americans: Education, Income, Poverty, Political Participation and Religious 

Involvement,” African American Research Perspectives 2 (1): 3-4.
Chapter 6

Elderly Consumers May Be Targeted for 

Predatory Lending

Page 103 GAO-04-280 Predatory Lending

agency cosponsored a symposium that addressed, among other topics, 

financial exploitation of the elderly.

• OTS has produced an educational training video addressing financial 

abuse of the elderly. 

• The U.S. Department of Health and Human Services’ Administration on 

Aging provides grants to state and nonprofit agencies for programs 

aimed at preventing elder abuse, including predatory or abusive lending 

practices against older consumers. Supported activities include senior 

legal aid programs, projects to improve financial literacy among older 

consumers, and financial educational materials directed at senior 

citizens.

• FTC publishes a number of consumer information products related to 

predatory lending and home equity scams that discuss abusive practices 

targeted at the elderly.

• AARP, which represents more than 35 million Americans age 50 and 

over, offers a borrowers’ kit containing consumer tips for avoiding 

predatory lenders, supports a toll-free number to call for assistance 

regarding lending issues, and distributes fact sheets on predatory 

lending. Some of these materials are provided in Spanish and in formats 

accessible to the hearing- and visually impaired. AARP also provides 

information on its Web site that is designed to educate older Americans 

on predatory lending issues. In addition, the organization has 

conducted focus groups of older Americans to gather data on their 

borrowing and shopping habits in order to better develop strategies for 

preventing older people from becoming the victims of predatory 

lending.

• The National Consumer Law Center has developed a number of 

consumer materials aimed in part at helping elderly consumers recover 

from abusive loans, including a brochure titled Helping Elderly 

Homeowners Victimized by Predatory Mortgage Loans.

Some Legal Assistance Is 

Aimed Specifically at 

Helping Older Victims of 

Predatory Lending

Federal consumer protection and fair lending laws that have been used to 

address predatory lending do not generally have provisions specific to 

elderly persons. For example, age is not a protected class under the Fair 

Housing Act, which prohibits discrimination in housing-related 

transactions. In addition, HMDA—which requires certain financial 
Chapter 6

Elderly Consumers May Be Targeted for 

Predatory Lending

Page 104 GAO-04-280 Predatory Lending

institutions to collect, report, and disclose data on loan applications and 

originations—does not require lenders to report information about the age 

of the applicant or borrower. However, ECOA does specifically prohibit 

unlawful discrimination on the basis of age in connection with any aspect 

of a credit transaction. In the case against Long Beach Mortgage Company 

noted earlier, the lender was accused of violating ECOA by charging elderly 

borrowers, among other protected classes, higher loan rates than it 

charged other similarly situated borrowers.

Federal and state enforcement actions and private class-action lawsuits 

involving predatory lending generally seek to provide redress to large 

groups of consumers. Little hard data exist on the age of consumers 

involved in these actions, but a few cases have involved allegations of 

predatory lending targeting elderly borrowers. For example, FTC, six 

states, AARP, and private plaintiffs settled a case with First Alliance 

Mortgage Company in March 2002 for more than $60 million. According to 

AARP, an estimated 28 percent of the 8,712 borrowers represented in the 

class-action suit were elderly. The company was accused of using 

misrepresentation and unfair and deceptive practices to lure senior citizens 

and those with poor credit histories into entering into abusive loans. The 

company used a sophisticated campaign of telemarketing and direct mail 

solicitations, as well as a lengthy sales presentation that FTC said was 

designed to mislead consumers in general and elderly consumers in 

particular about the terms of its loans.

Some nonprofit groups provide legal services focused on helping elderly 

victims of predatory lending:

• The AARP Foundation Litigation, which conducts litigation to benefit 

Americans 50 years and older, has been party to 7 lawsuits since 1998 

involving allegations of predatory lending against more than 50,000 

elderly borrowers. Six of these suits have been settled, and the other is 

pending. 

• The National Consumer Law Center has a “Seniors Initiative” that seeks 

to improve the quality and accessibility of legal assistance with 

consumer issues for vulnerable older Americans. One focus of the 

initiative is preventing abusive lending and foreclosure. The center 

publishes a guide for legal advocates to help them pursue predatory 

lending cases, and has been involved in litigation related to cases of 

predatory lending against senior citizens. 
Chapter 6

Elderly Consumers May Be Targeted for 

Predatory Lending

Page 105 GAO-04-280 Predatory Lending

• Some local legal aid organizations that help victims of predatory lending 

have traditionally served older clients. For example, the majority of 

clients assisted by South Brooklyn Legal Services’ Foreclosure 

Prevention Project are senior citizens.

The limited number of education and enforcement efforts related to 

predatory lending that specifically target older consumers—as opposed to 

the general population—is not necessarily problematic. Given limited 

resources, the most efficient and effective way to reach various 

subpopulations, including the elderly, is often through general education 

and information campaigns that reach broad audiences. Similarly, 

enforcement actions and private lawsuits that seek to curb the activities of 

the worst predatory lenders in general are likely to aid the elderly 

borrowers that these lenders may be targeting.
Page 106 GAO-04-280 Predatory Lending

Appendix I

FTC Enforcement Actions Related to Apendxies

Predatory Lending ApendxiI

Primary defendant Date of settlementa Federal laws cited Alleged unfair or deceptive practices

Capital City Mortgage 

Corporationb

(litigation ongoing) FTC Act, TILA, ECOA, Fair 

Debt Collection Practices 

Act

Using deception/misrepresentation to manipulate 

borrowers into loans, ECOA recordkeeping and 

notice violations, unfair and deceptive loan 

servicing violations

OSI Financial Services, 

Inc., and Mark Diamondc

November 2003 FTC Act Using deception/misrepresentation to charge 

excessive loan fees

First Alliance Mortgage 

Companyd

March 2002 FTC Act, TILA Using deception/misrepresentation to charge 

excessive loan fees

Associates First Capital 

Corporation, Associates 

Corporation of North 

America, Citigroup Inc., and 

CitiFinancial Credit 

Company 

September 2002 FTC Act, TILA, ECOA, 

FCRA

Using deception/misrepresentation to manipulate 

borrowers into loans, packing undisclosed 

products (insurance) into loans, unfair debt 

collection

Mercantile Mortgage 

Company, Inc.e

July 2002 FTC Act, TILA, HOEPA, 

RESPA, Credit Practices 

Rule

Using deception/misrepresentation to manipulate 

borrowers into loans, illegal kickbacks, HOEPA 

disclosure violations, taking unlawful security 

interests

Action Loan Company, Inc.f August 2000 FTC Act, TILA, RESPA, 

Credit Practices Rule, 

ECOA, FCRA

Packing undisclosed products (insurance) into 

loans, kickbacks for the referral of loans, ECOA 

violation for failing to meet requirements upon 

adverse actions, taking unlawful security interest

FirstPlus Financial Group, 

Inc.

August 2000 FTC Act, TILA Using deception/misrepresentation to manipulate 

borrowers into home equity loans, TILA 

disclosure violations

Nu West, Inc. July 2000 FTC Act, TILA, HOEPA HOEPA disclosure violations, right of rescission 

violations

Delta Funding Corporation 

and Delta Financial 

Corporationg

March 2000 HOEPA, RESPA, ECOA, 

Fair Housing Act 

Pattern or practice of asset-based lending and 

other HOEPA violations, paying kickbacks and 

unearned fees to brokers, intentionally charging 

African American females higher loan prices than 

similarly situated white males

Fleet Finance, Inc. and 

Home Equity USA, Inc.

October 1999 FTC Act, TILA Failure to provide, or provide accurately, (1) timely 

disclosures of the costs and terms of home equity 

loans and/or (2) information to consumers about 

their rights to cancel their credit transactions

Barry Cooper Properties July 1999 FTC Act, HOEPA Pattern or practice of asset-based lending and 

other HOEPA violations

Capitol Mortgage 

Corporation

July 1999 FTC Act, TILA, HOEPA HOEPA disclosure violations, right of rescission 

violations

CLS Financial Services, 

Inc.

July 1999 FTC Act, HOEPA Pattern or practice of asset-based lending and 

other HOEPA violations

Granite Mortgage, LLC and 

others

July 1999 FTC Act, TILA, HOEPA Pattern or practice of asset-based lending and 

other HOEPA violations
Appendix I

FTC Enforcement Actions Related to 

Predatory Lending

Page 107 GAO-04-280 Predatory Lending

Source: FTC.

Note: In addition to the cases listed, FTC has also recently addressed abuses in the mortgage loan 

servicing industry. In November 2003, it announced settlements with Fairbanks Capital Holding Corp., 

its wholly owned subsidiary Fairbanks Capital Corp., and their founder and former CEO (collectively, 

Fairbanks) on charges that Fairbanks violated the FTC Act, RESPA, and other laws by failing to post 

consumers’ mortgage payments in a timely manner and charging consumers illegal late fees and other 

unauthorized fees. The settlement will provide for $40 million in redress to consumers. The case was 

jointly filed with HUD. United States of America v. Fairbanks Capital Corp. et al., Civ. Action No. 03-

12219-DPW (D. Mass.)(filed 11/12/03).

a

In some cases, the date of settlement listed is the date of the press release announcing the 

settlement.

b

DOJ filed an amicus curiae brief in a private suit alleging discrimination in violation of the ECOA and 

Fair Housing Act, which was joined with the FTC case, but settled separately.

c

The state of Illinois was also a plaintiff in this case.

d

The states of Arizona, California, Massachusetts, Florida, New York, Illinois, AARP, and private 

attorneys were also plaintiffs in this case.

e

HUD and the state of Illinois were also plaintiffs in this case. Violations of Illinois state law were also 

claimed. 

f

HUD was also a plaintiff in this case, and DOJ formally filed the complaint on behalf of FTC and HUD. 

g

DOJ and HUD were also plaintiffs in this case.

Interstate Resource 

Corporation

July 1999 FTC Act, HOEPA HOEPA disclosure violations

LAP Financial Services, 

Inc.

July 1999 FTC Act, TILA, HOEPA Pattern or practice of asset-based lending and 

other HOEPA violations, right of rescission 

violations

Wasatch Credit Corporation July 1999 FTC Act, TILA, HOEPA Pattern or practice of asset-based lending and 

other HOEPA violations, right of rescission 

violations

R.A. Walker and Associates July 1991 FTC Act Using deception/misrepresentation to convince 

borrowers to transfer title to defendant

Nationwide Mortgage 

Corporation

May 1988 FTC Act, TILA Using deception/misrepresentation to manipulate 

borrowers into unaffordable loans with balloon 

payments

(Continued From Previous Page)

Primary defendant Date of settlementa Federal laws cited Alleged unfair or deceptive practices
Page 108 GAO-04-280 Predatory Lending

Appendix II

Comments from the Board of Governors of 

the Federal Reserve System ApendxiI
Appendix II

Comments from the Board of Governors of 

the Federal Reserve System

Page 109 GAO-04-280 Predatory Lending
Appendix II

Comments from the Board of Governors of 

the Federal Reserve System

Page 110 GAO-04-280 Predatory Lending
Page 111 GAO-04-280 Predatory Lending

Appendix III

Comments from the Department of Justice ApendxiI
Appendix III

Comments from the Department of Justice

Page 112 GAO-04-280 Predatory Lending
Appendix III

Comments from the Department of Justice

Page 113 GAO-04-280 Predatory Lending
Page 114 GAO-04-280 Predatory Lending

Appendix IV

Comments from the Department of Housing 

and Urban Development ApendxiIV
Appendix IV

Comments from the Department of Housing 

and Urban Development

Page 115 GAO-04-280 Predatory Lending
Appendix IV

Comments from the Department of Housing 

and Urban Development

Page 116 GAO-04-280 Predatory Lending
Appendix IV

Comments from the Department of Housing 

and Urban Development

Page 117 GAO-04-280 Predatory Lending
Page 118 GAO-04-280 Predatory Lending

Appendix V

Comments from the National Credit Union 

Administration ApendxiV
Appendix V

Comments from the National Credit Union 

Administration

Page 119 GAO-04-280 Predatory Lending
Page 120 GAO-04-280 Predatory Lending

Appendix VI

GAO Contacts and Staff Acknowledgments ApendxiVI

GAO Contacts David G. Wood, (202) 512-8678

Harry Medina, (415) 904-2000

Staff 

Acknowledgments

Jason Bromberg

Emily R. Chalmers

Randall C. Fasnacht, Jr.

Rachelle C. Hunt

Alison J. Martin

Marc W. Molino

Elizabeth Olivarez

Carrie Puglisi

Mitchell B. Rachlis

Peter Rumble

Paul Thompson

James D. Vitarello

(250118)
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