A U.S. House committee will host a hearing this week on subprime [bad credit mortgage] loans and predatory lending trends, following a tumultuous last few weeks in the lending sector.

The Subcommittee on Financial Institutions and Consumer Credit will head the hearing, which focuses on subprime lenders - or companies which loan money to people with poor credit.

During the housing boom, Florida mortgage providers crafted loans for many thousands of people who likely otherwise couldn’t afford to buy a home.

At the time, it wasn’t as big a problem because with home prices on the rise, a buyer could apply for Florida mortgage refinancing with relative ease if he or she ran into problems with payments.

But the market downturn has led to lower home prices and fewer home sales, forcing some Florida mortgage borrowers to default.

The trend has also pushed some subprime lenders to the verge of bankruptcy, and caused stock prices to plummet. Investors also worry that the troubles will spread to other parts of the economy.

Regulators are eyeing some bad credit Florida mortgage lenders for discriminatory practices that target the poor, minorities and the elderly - scams that have long existed but gone relatively unnoticed.

In the U.S. House, Democrats are drafting legislation intended aiming to curb predatory lending. One example of when this occurs is when a lender pressures a borrower into a high-interest loan they can’t repay.

The Department of Housing And Urban Development’s Office of Fair Housing has brought several charges against home loan lenders for predatory actions. Those enforcement efforts continue.

SOURCE: Business Week

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.”