Predatory Lending: Out of the Mouths of Regulators
One of the top concerns put to the regulator panel at ABA's National Regulatory Compliance Conference was predatory lending. Discussions included ways to define predatory lending and new approaches to and merits of regulating predatory lending.When asked to define predatory lending, the panel of regulators respectfully declined, giving some very good reasons. Dolores Smith, Director of the FRB's Division of Consumer and Community Affairs, observed that a lending practice may be legitimate but "problematic in the circumstances."
Ralph Sharpe, OCC, agreed with Smith, stating that there is some danger in defining a sharp line for identifying predatory lending, favoring a more flexible approach. He discussed the techniques used for measuring and determining the safety and soundness of lending practices. For years, safety and soundness has been judgmental, with examiners basing conclusions on the circumstances of each situation.
Smith identified several practices that are likely to be predatory, including making loans without ensuring the borrower's ability to repay, and loan flipping that eats into the borrower's equity. A key test of predatory lending is whether there is benefit in the loan to both the borrower and lender. If only the lender benefits, Smith warned, the examiner may have concerns.
The entire panel, representing all of the bank regulatory agencies, agreed that sub-prime lending is important and that no regulation should inhibit or deter responsible sub-prime lending. Rick Riese, OTS, noted that if responsible lenders actively compete in sub-prime lending markets, providing responsible and affordable credit, there should be less room for predatory lenders. Riese believes that competition will benefit more people than a prescriptive regulatory approach.
In the context of predatory lending, the panel also answered questions about risk-based pricing. The panel agreed that risk-based pricing has legitimate uses. For example, Rick Riese pointed out that compliance must relate to your business enterprise. Compliance is not a price control mechanism. However, he cautioned, pricing should be supported by sound reasons.
Smith reminded the audience that the Electronic Funds Transfers Act specifically permits offering electronic services at a lower cost. She cited this authority to support the proposition that pricing relates to the product.
Copyright © 2001 Compliance Action. Originally appeared in Compliance Action, Vol. 6, No. 7, 7/01
First published on 07/01/2001