FDIC Issues Supervisory Policy on Predatory Lending
February 15, 2007
John R. Mussman- Chicago
Predatory lending has continued to be the focal point of policy makers at both the federal and state level. On January 22, 2007, the FDIC issued a new Supervisory Policy on Predatory Lending emphasizing that it would “address predatory lending through vigorous safety and soundness and compliance examinations and enforcement, industry outreach and adult financial education programs.”
To identify predatory loans, the FDIC will use a previously issued, 2001 Interagency Guidance, which identifies predatory lending as possessing one or more of the following three elements:
1) making loans that are unaffordable to the borrower “based on the assets of the borrower rather than on the borrower’s ability to repay.”
2) loan flipping,” i.e., “Inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced.”
3) “Engaging in fraud or deception to conceal the true nature of the loan obligation, or ancillary products, from an unsuspecting or unsophisticated borrower.”
The FDIC promised expanded education programs through its office of Public Affairs and its FDIC Call Center. The real thrust of its policy, however, is a commitment to stronger enforcement for banks subject to FDIC enforcement and to use the bank examination process to identify predatory loans and take supervisory actions. The FDIC promised to use both safety and soundness and Community Reinvestment Act (CRA) examinations to enforce the policy. Obviously, an “unsound” rating can result in stiff regulatory sanctions, but even a negative CRA rating may impede regulatory approval of a branch application, a proposed merger or an expansion plan. The FDIC made it clear it was committed not only to enforcement actions under the Federal Deposit Insurance Act, but to joint enforcement actions with other federal and state agencies, under both the federal FTC Act and state unfair and deceptive practices acts.
What’s the Point?
Although a stronger enforcement regime will make it more likely that banks supervised by the FDIC and other federal banking agencies may try to avoid some predatory practices, with the new Democratic-controlled Congress, it is highly likely that broad federal legislation restricting predatory lending will be considered in both the House and the Senate. Moreover, state and local governments will continue to experiment with their own “solutions” to predatory lending (See the following article titled Illinois Governor Suspends Predatory Lending Pilot Program).
For more information, e-mail John R. Mussman at john.mussman@hklaw.com or call toll free, 1-888-688-8500.