Testimony 

Before the Special Committee on Aging, 

U.S. Senate

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 10:00 a.m. EST 

Tuesday, February 24, 2004 CONSUMER PROTECTION 

Federal and State Agencies 

Face Challenges in 

Combating Predatory 

Lending 

Statement of David G. Wood, Director 

Financial Markets and Community Investment 

GAO-04-412T 
www.gao.gov/cgi-bin/getrpt?GAO-04-412T.

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-04-412T, a testimony 

before the Special Committee on Aging, 

U.S. Senate 

February 24, 2004 

CONSUMER PROTECTION

Federal and State Agencies Face 

Challenges in Combating Predatory 

Lending 

Federal agencies have taken a number of enforcement actions, sometimes 

jointly, using various federal consumer protection laws to combat predatory 

lending. 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 taken various predatory lending-related enforcement 

actions. Federal banking regulators report little evidence of predatory 

lending by the institutions they supervise. However, concerns exist about 

nonbank mortgage lending companies owned by financial or bank holding 

companies. 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 Federal Reserve Board is 

well equipped to routinely monitor and examine these entities and, thus, 

potentially deter predatory lending activities, but 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. 

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

advocacy officials report that elderly people have disproportionately been 

victims of predatory lending. According to these officials and relevant 

studies, predatory lenders target older consumers in part because they are 

more likely to have substantial home equity or may live on limited incomes 

that make them more susceptible to offers for quick access to cash. Older 

consumers may also have cognitive or physical impairments such as poor 

eyesight, hearing, or mobility that limit their ability to access competitive 

sources of credit. 

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

officials suggest that consumer education, mortgage counseling, and loan 

disclosures 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. 

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. 

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. 

Concerns about predatory lending 

have increasingly garnered the 

attention and concern of 

policymakers, consumer advocates 

and participants in the mortgage 

industry. This statement is based 

on GAO’s report, released at 

today’s hearing, and discusses 

federal and state efforts to combat 

predatory lending; factors that may 

make elderly consumers more 

susceptible to predatory lending; 

the roles of consumer education, 

mortgage counseling, and loan 

disclosures in preventing predatory 

lending; and how the secondary 

mortgage market can affect 

predatory lending. 

In its report, GAO suggested that 

Congress consider (1) 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, and (2) giving the Board 

specific authority to initiate 

enforcement actions under those 

laws against these nonbank 

mortgage lending subsidiaries. 
Page 1 GAO-04-412T 

Mr. Chairman and Members of the Committee: 

I appreciate the opportunity to be here today to discuss federal and state 

efforts to deter predatory home mortgage lending, especially as it affects 

the elderly. While there is no universally accepted definition, the term 

“predatory lending” is used to characterize a range of practices, including 

charging excessive fees and interest rates, making loans without regard to 

borrowers’ ability to repay, or refinancing loans repeatedly over a short 

period of time without any economic gain for 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. Predatory practices, 

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. 

My statement today is based on the report on predatory lending that you 

requested and are releasing today.1

 Specifically, my statement discusses 

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

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

(3) factors that make elderly consumers susceptible to predatory lending 

practices; (4) the roles of consumer education, mortgage counseling, and 

loan disclosure requirements in preventing predatory lending; and (5) how 

the secondary market for mortgage loans can affect predatory lending. The 

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

include other forms of consumer loans. In preparing the report, we 

examined federal laws, as well as selected state and local laws, and 

interviewed officials from federal, state, and local agencies. At GAO’s 

request, federal agencies identified enforcement or other actions they have 

taken to address predatory lending. We also met with officials from 

industry and consumer advocacy groups and reviewed relevant literature. 

We conducted our work in accordance with generally accepted 

government auditing standards from January 2003 through January 2004. 

 1

U.S. General Accounting Office, Consumer Protection: Federal and State Agencies Face 

Challenges in Combating Predatory Lending, GAO-04-280 (Washington, D.C.: Jan. 30, 

2004). 
Page 2 GAO-04-412T 

In summary: 

• Federal agencies have addressed predatory lending by enforcing a 

variety of federal laws, including the Federal Trade Commission Act, 

the Home Ownership and Equity Protection Act (HOEPA), the Real 

Estate Settlement Procedures Act (RESPA), and the Truth in Lending 

Act (TILA). The Federal Trade Commission (FTC) took 19 enforcement 

actions against predatory home mortgage lenders and brokers between 

1983 and 2003—17 of them between 1998 and 2003—to combat alleged 

deceptive acts or other illegal practices, with some resulting in 

multimillion dollar settlements. The Department of Justice and the 

Department of Housing and Urban Development have also taken 

individual and joint enforcement actions related to abusive lending. 

While federal banking regulators—the Federal Deposit Insurance 

Corporation, the Board of Governors of the Federal Reserve System 

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

Thrift Supervision, and the National Credit Union Administration—

report little evidence of predatory lending by the depository 

institutions that they supervise, concerns exist about nonbank 

mortgage lending companies that are owned by financial or bank 

holding companies. Our report recommends that Congress consider 

making statutory changes to provide the Board with clear authority to 

monitor, examine, and take enforcement actions against nonbank 

mortgage lending subsidiaries of financial and bank holding companies. 

• As of January 2004, 25 states, 11 localities, and the District of Columbia 

have passed their own laws addressing predatory lending, according to 

a database that tracks state and local legislation.2

 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. However, a state law may not 

apply to all mortgage lenders within the state. The Office of the 

Comptroller of the Currency, the Office of Thrift Supervision, and the 

National Credit Union Administration have asserted that federal law 

preempts some state predatory 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. 

 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. These laws only include state and local laws that placed actual 

restrictions on lending. For example, they do not include local ordinances that consist 

solely of a resolution that condemns predatory lending. 
Page 3 GAO-04-412T 

• 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. 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. While most government and private class-action enforcement 

activities seek to provide redress to large groups of consumers, some 

private efforts have focused on helping older victims of predatory 

lending. 

• 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. Most of these efforts seek to serve the general 

consumer population, but a few education initiatives have specifically 

addressed predatory lending and the elderly. GAO’s review of literature 

and interviews with consumer and federal officials suggest that while 

consumer education, mortgage counseling, and disclosures are useful, 

they may be of limited effectiveness in reducing predatory lending. For 

example, consumer education is hampered by the complexity of 

mortgage transactions and the difficulty of reaching the target 

audience. Similarly, unreceptive consumers, lack of access to relevant 

loan documents, and the sheer volume of mortgage originations each 

year limit the potential impact of universal counseling. And while 

efforts are under way to improve the federally required disclosures 

associated with mortgage loans, the complexity of mortgage 

transactions hinders the effectiveness of disclosures, especially given 

the lack of financial sophistication among many borrowers who are 

targeted by predatory lenders. 

• 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 that enables 

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 use 
Page 4 GAO-04-412T 

varying degrees of “due diligence”—a review and appraisal of legal and 

financial information—to avoid purchasing loans with abusive terms, 

but even the most extensive due diligence may not detect some 

predatory lending practices. 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. 

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 (referred to as “loan flipping”), and 

committing outright fraud or deception—for example, falsifying 

documents or intentionally misinforming borrowers about the terms of a 

loan. These types of practices offer lenders that originate predatory loans 

potentially high returns even if borrowers default, because 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. Subprime lending is not inherently abusive, and, 

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. 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 

Background 
Page 5 GAO-04-412T 

for subprime originations. Some consumer groups and industry observers 

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

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

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

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

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

lending practices. 

As shown in figure 1, Congress has passed numerous laws that federal 

agencies and regulators have used to combat predatory lending. Among 

the most frequently used laws—HOEPA, the Federal Trade Commission 

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 Federal Trade 

Commission 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. 

Federal Agencies 

Have Taken 

Enforcement and 

Other Actions to 

Address Predatory 

Lending, but Face 

Challenges 
Page 6 GAO-04-412T 

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. 

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 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 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. The Department of Justice, which is responsible for enforcing 

certain federal civil rights laws, has taken two such enforcement actions 

related to predatory mortgage lending practices and has taken an 

additional action on behalf of FTC. The Department of Housing and Urban 

Development has undertaken enforcement activities related to abusive 
Page 7 GAO-04-412T 

lending that focus primarily on reducing losses to the Federal Housing 

Administration insurance fund.3

 It has also taken three enforcement 

actions in abusive mortgage lending cases for violations of the Real Estate 

Settlement Procedures Act’s prohibitions on certain types of fees. 

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, while the fifth—the Office of the 

Comptroller of the Currency—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 actions. The banking 

regulators have also issued guidance to the institutions they supervise on 

avoiding direct or indirect involvement in predatory lending. In addition, in 

2001 the Board 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 in 2002 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, the Department of Justice, and the Department of Housing 

and Urban Development 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 (i.e., nonbank mortgage lending subsidiaries) account for an 

estimated 24 percent of subprime loan orginations, according to the 

Department of Housing and Urban Development, and some have been the 

 3

The Department of Housing and Urban Development’s Federal Housing Administration 

mortgage insurance program makes loans more readily available for low- and moderateincome families by providing mortgage insurance to purchase or refinance a home. Lending 

institutions such as mortgage companies and banks fund the loans. 
Page 8 GAO-04-412T 

target of notable federal and state enforcement actions involving 

allegations of abusive lending.4

 The Board may be better equipped than 

FTC to monitor and examine these holding company subsidiaries because 

of its role in overseeing financial and bank holding companies, but the 

Board does not have clear authority to do so. Our report recommends that 

Congress consider (1) making appropriate statutory changes that would 

grant the Board 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 and (2) giving the Board specific 

authority to initiate enforcement actions under those laws against these 

nonbank mortgage lending subsidiaries. In commenting on our report, the 

Board stated that while the existing structure has not been a barrier to 

Federal Reserve oversight, the approach we recommended for 

consideration by the Congress would likely be useful for catching some 

abusive practices that might not be caught otherwise. The Board also 

noted that the approach would present 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. 

However, these nonbank mortgage lenders are already subject to a 

different supervisory scheme than other lenders. We agree that costs could 

increase and believe that Congress should consider both the potential 

costs and benefits of clarifying the Board’s authorities. 

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. 

 4

These nonbank mortgage lending subsidiaries are owned by the bank or financial holding 

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

Many States Have 

Passed Laws 

Addressing Predatory 

Lending, but Federal 

Agencies Have 

Preempted Some 

Statutes 
Page 9 GAO-04-412T 

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 added 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. 

Three federal banking regulators—the National Credit Union 

Administration, the Office of the Comptroller of the Currency, and the 

Office of Thrift Supervision—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. 

In response, federal banking regulators have noted that federally 

supervised institutions are highly regulated and subject to comprehensive 

supervision. The regulators also said they found little to no evidence of 

predatory lending by the institutions they regulate. 

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. Because older 

homeowners, on average, have more equity in their homes than younger 

homeowners, abusive lenders could be expected to target these borrowers 

in order to “strip” the equity from their homes. According to federal 

officials and consumer groups we contacted, abusive lenders often try to 

convince elderly borrowers to repeatedly refinance their loans, adding 

more costs each time—an abuse known as loan flipping. In addition, some 

brokers and lenders aggressively market home equity loans as a source of 

Predatory Lenders 

May Target Elderly 

Consumers 
Page 10 GAO-04-412T 

cash, particularly for older homeowners who may have limited incomes 

but require funds for major home repairs or medical expenses. 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 

their quality of life. 

A number of factors may make the elderly particularly susceptible to 

predatory lending practices. For example: 

• 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. 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. 

• Some older people may also have diminished cognitive capacity, which 

can impair their ability to comprehend and make informed judgments 

on financial issues. According to a report sponsored by the National 

Academy of Sciences, elderly people 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.5

 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. 

• 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. 

• Elderly homeowners often live in older homes and are more likely to 

need someone to do repairs for them. Federal officials, legal aid 

services, and consumer groups have reported that home repair scams 

targeting elderly homeowners are particularly common. For example, a 

joint report on predatory lending by the Department of Housing and 

Urban Development and the Department of the Treasury noted that 

 5

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. 
Page 11 GAO-04-412T 

predatory brokers and home improvement contractors have 

collaborated to swindle older consumers.6

 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 

high-cost loan. The contractor then does shoddy work or does not 

finish the agreed-on repairs, leaving the borrower to pay off the 

expensive loan. 

Federal agencies, states, nonprofits, and trade organizations 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. 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 Department of Justice 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. 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. 

However, 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, the Home Mortgage Disclosure Act (HMDA)—

which requires certain financial 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. An 

exception is the Equal Credit Opportunity Act, which prohibits unlawful 

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

transaction. 

Little comprehensive data exist on the ages of consumers involved in 

federal and state enforcement actions and private class-action lawsuits 

 6

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

Lending: A Joint Report (June 2000). 
Page 12 GAO-04-412T 

involving predatory lending. Such actions generally seek to provide 

redress to large groups of consumers, 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. 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; an estimated 28 percent of the 

8,712 borrowers represented in the class-action suit were elderly. 

Some nonprofit groups—such as the AARP Foundation Litigation, the 

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

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

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. 

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 interest. Even an excellent campaign of consumer 

education is unlikely to provide less sophisticated consumers with enough 

information for them to determine 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. 

The Department of Housing and Urban Development supports a network 

The Usefulness of 

Consumer Education, 

Counseling, and 

Disclosures in 

Deterring Predatory 

Lending May Be 

Limited 
Page 13 GAO-04-412T 

of approximately 1,700 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. 

Finally, disclosures made during the mortgage loan process, while 

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

predatory lending practices. Certain federal laws, including 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. In July 2002, the Department of Housing 

and Urban Development issued proposed rules intended to streamline the 

disclosure process and make disclosures more understandable and timely, 

and debate over the proposed rules has been contentious.7

 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 disclosures would not necessarily help protect 

consumers against lenders and brokers who engage in outright fraud or 

who mislead borrowers about the terms of loans in the disclosure 

documents themselves. 

 7

67 Fed. Reg. 49134 (July 29, 2002). 
Page 14 GAO-04-412T 

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, the existence of a secondary market may reduce 

the incentive for originating lenders—who generally make their profits 

from high origination fees—to ensure that borrowers can repay. 

Purchasers of mortgage loans undertake a process of due diligence 

designed to avoid legal, financial, and reputational risk. However, the 

degree of due diligence purchasers undertake varies. Officials of 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 

their organizations undertake a series of measures aimed at avoiding the 

purchase of 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 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 held liable 

for violations committed by the originating lenders—referred to as 

“assignee liability” provisions. 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, but some argue that it 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. 

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 Secondary 

Market May Benefit 

Consumers but Can 

Also Facilitate 

Predatory Lending 
Page 15 GAO-04-412T 

Mr. Chairman, this concludes my prepared statement. I would be happy to 

answer any questions at this time. 

For further information on this testimony, please contact David G. Wood 

at (202) 512-8678, or Harry Medina at (415) 904-2000. Individuals making 

key contributions to this testimony included Jason Bromberg, Randall C. 

Fasnacht, Jr., Elizabeth Olivarez, and Paul Thompson. 

Contacts and 

Acknowledgements 

(250183) 
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