My testimony today will discuss the distinction between subprime and predatory loans, describe what the FDIC is doing to address predatory lending, and provide some comments on legislative proposals to address predatory lending. As your letter of invitation suggests, abusive lending practices in the home mortgage industry are often directed at low-income and elderly borrowers. We believe that federally insured depository institutions have a good record of avoiding involvement in such activities. Nonetheless, the FDIC recognizes that predatory lending practices raise a number of consumer concerns as well as safety and soundness issues.
Subprime lending is linked to the credit status of the borrower.
Consequently, the FDIC does not want to inhibit subprime lending which meets these criteria. While most predatory loans are made to subprime borrowers, predatory lending is product-driven. One example of how predatory lenders strip equity from homeowners is through repetitive refinancing. In some instances, a loan may be refinanced two or three times in a single calendar year. However, at each refinancing, new points and fees are charged and made part of the loan balance, so that the loan payment savings that the borrower hopes to realize are lost.