As stated above, predatory lending is an illegal credit practice. The Division will take aggressive action against any institution which engages in predatory lending.
Although subprime lending is legal, it often results in an increased likelihood of delinquency and the potential for increased consumer compliance violations and therefore requires institutions to take additional precautions. Lending to borrowers with past delinquencies or bankruptcies increases the chance of future delinquent payments. This forces the lender to spend additional resources collecting delinquent credits. Institutions must ensure that all debt collection practice laws and regulations are carefully followed and that consumers are aware of their rights under fair debt collection laws and regulations.6
Subprime lending triggers the same consumer credit disclosures as all other similar types of lending. In the area of mortgage lending, management must ensure that adequate policies and procedures are in place to provide all applicable borrowers with full disclosures as prescribed by statute and regulation. This is particularly true in the area of broker/lender relationships. Institutions should review all policies and practices for compliance with the Real Estate Settlement Procedures Act (RESPA) regarding the payment of commissions to outside brokers. Mortgage brokers and those institutions compensating brokers must pay particular attention to the fee and point disclosure requirements of G.L. c. 183, § 63 as well as to RESPA and its provisions concerning disclosure of the payment of yield spread premiums. In addition, institutions cannot deny credit applicants because they decline to choose credit insurance and this information must be clearly disclosed to consumers.7 Failure to provide adequate consumer disclosures will trigger remedial regulatory action by the Division.
Institutions should also review their pricing structures to ensure that they do not discriminate against individuals on a prohibited basis, or on the basis of the location of the property in violation of the Equal Credit Opportunity Act (ECOA), the Fair Housing Act (FHA), or Massachusetts anti-discrimination and anti-redlining statutes, including G.L. c. 151B and c. 183, s. 64. The practice of charging overages (charging a higher interest rate, origination fee, or number of points on a loan for certain borrowers than is charged for the same loan product to other borrowers in the same time period) is permitted unless the practice violates the ECOA or FHA. For example if members of a protected class under ECOA and FHA (including race, gender, age, etc.) are charged an overage more often than other borrowers, the lender would be in violation of ECOA and FHA unless the lender could show a legitimate nondiscriminatory business reason for the disparate treatment. Both the Federal Reserve Bank of Boston and the U.S Department of Housing and Urban Development have issued policy statements on the practice of overages. 8 Management should review all policies and pricing and compensation structures to ensure that these policies do not create a disparate impact, even on an unintentional basis. In addition, a review of Home Mortgage Disclosure Act (HMDA) data by the Federal Financial Institutions Examination Council indicates that minority applicants are almost twice as likely to seek a mortgage from a subprime lender as is a white borrower. For state-chartered banks and credit unions, subprime lending may also raise concerns regarding Community Reinvestment Act (CRA) compliance.9
Institutions should be aware that certain questionable practices will be checked for and, if found, will be closely scrutinized during the Division's examination process. These include the following: repeated refinancing of loans and other debts, also known as "flipping"; high percentage of consumer acceptance of credit insurance; and unusually high debt-to-income ratios of borrowers. All cases of discrimination, or unfair or deceptive practices, will be referred to the appropriate law enforcement agency.
The Division has a strong interest in ensuring that consumers are treated fairly by the financial services industry. Many borrowers who refinance with a subprime loan have had past difficulties and seek to obtain funds in the hope of placing their financial matters in order. A subprime loan is often their only means to work toward reentering the financial mainstream. However, some borrowers who turn to the subprime lending markets are financially unsophisticated, or even desperate, and are less likely to comparison shop for the financing alternative which is best for their unique situation. Some borrowers have repeatedly refinanced their debts without improving, and in some cases having worsened their financial situation.
This raises the question of the suitability of a subprime loan for certain consumers. Even if an institution is in compliance with each of the above consumer protection laws and regulations and it underwrites loans on a safe and sound basis, its policies could still be considered unfair and deceptive practices. Unconscionable acts or practices are prohibited by G.L. c. 93A and the regulations of the Office of the Attorney General found at 904 CMR 3.00. One method of ensuring that consumers make informed choices in the credit transaction is the use of credit counseling. Credit counseling has been an effective means of preparing first-time homebuyers for the challenges of homeownership. First-time homebuyers who participate in pre-purchase counseling are also less likely to default on their loans than are buyers who have never had counseling. This type of credit counseling could also be appropriate for potential subprime borrowers. Therefore, the Division urges institutions engaging in subprime lending to consider referring borrowers to a credit counseling agency before accepting an application. As a result of such counseling, some borrowers may not refinance their loan. However, those consumers who do refinance their loans after having gone through credit counseling will be better informed and less likely to default and the institution will have performed an overall benefit.