WASHINGTON The
Office of the Comptroller of the Currency issued two releases today
establishing nationwide guidance to guard against predatory lending practices
among institutions it supervises. Concurrently, it published for comment a
request for an opinion that a Georgia law concerning predatory lending is
preempted insofar as it might apply to national banks.
In two separate
letters to national banks, the OCC noted that many common types of abusive
practices are already illegal under federal law. But even in the absence of
specific legal prohibitions, the OCC believes abusive lending practices may
present significant safety and soundness problems or may involve unfair and
deceptive practices in violation of the Federal Trade Commission Act.
The advisory
letters emphasized that national banks should have policies and procedures in
place to ensure that neither they nor their subsidiaries engage in any practices
that might be considered predatory, and that their lending complies with safety
and soundness standards and consumer protection laws.
Our guidance
provides a framework to deal effectively with predatory lending without setting
up a rigid system that creates burdens and obstacles for lenders to serve
low-income customers, said Comptroller of the Currency John D. Hawke, Jr.
The Comptroller
said that while the OCC has no reason to believe that any national bank is
engaging in predatory lending, the agencys guidance will help prevent problems
from arising in the future by prescribing steps national banks should take to
avoid abusive practices.
The guidance emphasizes that the OCC will
review credible evidence that a national bank has engaged in abusive lending
practices. If the bank is found to have violated an applicable law or safety
and soundness standard, the OCC will take appropriate supervisory action.
One of the two
advisory letters issued by the OCC provides guidelines to help banks avoid
engaging in predatory and abusive lending practices, while the other covers
abusive and
predatory practices
in brokered and purchased loans.
The advisory
letters emphasize that it is an unsafe and unsound practice to extend credit to
consumers based on the liquidation value of the collateral, rather than the
borrowers ability to repay the loan. These loans pose a high risk of default,
and represent a defining characteristic of predatory lending credit extended
with the expectation of seizing the borrowers equity in a home or other
collateral.
Our guidance goes
right to the heart of predatory lending the provision of credit to people who
cannot afford the terms being offered and who may lose their homes as a
result, said Mr. Hawke.
The guidance also
makes clear that abusive lending may constitute unfair and deceptive practices
under Section 5 of the Federal Trade Commission Act. The OCC took the lead
among the federal bank and thrift regulatory agencies in applying Section 5 to
banks through a series of enforcement actions beginning in 2000, and in a 2002
Advisory Letter that provided guidance on unfair and deceptive practices.
The guidance issued
today said practices may be considered deceptive if:
·
There is a representation, omission, act or practice
that is likely to mislead;
·
The act or practice would likely mislead a reasonable
consumer in the targeted audience; and
·
The representation, omission, act, or practice is
likely to mislead in a material way.
A practice may be
found to be unfair if:
·
The practice causes substantial consumer injury such as
monetary harm;
·
The injury is not outweighed by benefits to the
consumer or to competition; and
·
The injury caused by the practice is one that consumers
could not reasonably have avoided.
In addition, the
guidance also outlines a number of abusive lending practices that often
accompany predatory loans, such as packaging excessive or hidden fees in the
amount financed, refinancings of subsidized mortgages that result in the loss
of beneficial terms, and equity stripping. Other practices that may be
abusive include:
·
Loan flipping, or the repeated refinancing of a loan
under circumstances that result in little or no economic benefit to the
borrower, with the objective of generating additional loan points, loan fees,
prepayment penalties and fees from the sale of credit-related products.
·
The use of loan terms or structures, such as negative
amortization, that make it more difficult or impossible for borrowers to reduce
or repay their indebtedness;
·
Balloon payments that conceal the true burden of the
financing and force borrowers into costly refinancing transactions or
foreclosures;
·
The targeting of inappropriate or excessively expensive
credit products to the elderly, to persons who are not financially
sophisticated or who may be otherwise vulnerable to abusive practices, and to
persons who could qualify for mainstream credit products and terms;
·
Inadequate disclosure of the true costs, risks and,
where necessary, appropriateness to the borrower, of a loan transactions;
·
The offering of single premium credit life insurance,
and the use of mandatory arbitration clauses.
The OCC also
announced that it is publishing notice in the Federal Register to give
interested members of the public 30 days to comment on a request the agency has
received to issue a preemption determination or order on the Georgia Fair
Lending Act. The Georgia law restricts the ability of creditors to charge
certain fees and engage in some practices when making three types of loans,
each of which is characterized by the annual percentage rate and the amount of
points and fees charged.
The request for a
preemption determination or order was sought by National City Bank, N.A.,
National City Bank of Indiana, N.A., and two of their operating subsidiaries,
National City Mortgage Company and First Franklin Financial Company.
In its letter,
National City asked the OCC to determine that the Georgia law is preempted by
12 U.S.C. 24 (Seventh) and 12 U.S.C. 371. Section 371 provides that national
banks may make real estate loans and that their authority is subject only to
such restrictions and requirements as the Comptroller of the Currency may
prescribe by regulation or order. The exercise of lending powers under the
section is not conditioned on compliance with any state law.
National City
argues that in implementing section 371, the OCC has occupied the field of
regulation of national banks real estate lending activities. National City
points out that the OCC has already expressly provided by regulation that five
types of state limitations on real estate loans are not applicable to national
banks or their operating subsidiaries, including the schedule for repayment of
principal and interest.
National City
argued that a number of provisions of the Georgia law, including the
prohibition on balloon payments, fall within the scope of that section and are
therefore preempted. National City also argues that because 12 U.S.C. 371 and
OCC regulations occupy the field for real estate lending for national banks,
other provisions of the Georgia law are also inapplicable to national banks.
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The OCC charters, regulates and examines
approximately 2,100 national banks and 52 federal branches of foreign banks
in the U.S., accounting for more than 55 percent of the nations banking
assets. Its mission is to ensure a safe and sound and competitive national
banking system that supports the citizens, communities and economy of the
United States.
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