FDIC Issues Letter on Predatory Lending

Federal bank regulators sent out a letter this week describing Florida mortgage lending practices they consider to be predatory, stating they expect lenders to “treat consumers fairly, adhere to all applicable legal requirements, and underwrite loan products appropriately.”

The Federal Deposit Insurance Corp.’s Jan. 22 Supervisory Policy on Predatory Lending describes characteristics of predatory lending, reaffirming that such practices “are inconsistent with safe and sound lending and undermine individual, family and community economic well-being.”

According to the policy letter, predatory Florida home loans include at least one, and “perhaps all three,” of the following characteristics:

1. Making unaffordable loans based on the assets of the borrower rather than on the borrower’s ability to repay an obligation;

2. Inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced (”loan flipping”); or

3. Engaging in fraud or deception to conceal the true nature of the loan obligation, or ancillary products, from an unsuspecting or unsophisticated borrower.”

However, the policy letter warns: “There is no simple checklist for determining whether a particular loan or loan program is predatory.”

Loan terms that are helpful to one borrower may be harmful to others, regulators said, and it is important to distinguish subprime lending from predatory lending. Subprime lending includes loans to persons who present heightened credit risk because they have experienced problems repaying credit in the past, or because they have only a limited credit history, the FDIC said.

Florida home loans that serve those borrowers “have a legitimate place in the market when they have been responsibly underwritten, priced and administered.”

Predatory lending, the letter said, is not limited to one class of borrowers. Signs of predatory lending include the lack of a fair exchange of value or loan pricing that reaches beyond the risk that a borrower represents or other customary standards.

The letter said the FDIC will continue to address predatory lending “through vigorous safety and soundness and compliance examinations and enforcement, industry outreach and adult financial education programs.”