Letter from Robert Raben, Assistant Attorney General, U.S. Department of Justice

June 5, 2000

The Honorable Phil Gramm
Committee on Banking, Housing, and Urban Affairs
United States Senate
Washington, DC 20510

Dear Mr. Chairman:

This refers to your recent letter concerning this Department's views on "predatory" lending practices.

This Department's involvement in the predatory lending issue arises from our enforcement efforts under the Fair Housing Act of 1968, as amended, 42 U.S.C. 3601, et seq., and the Equal Credit Opportunity Act of 1972, as amended, 15 U.S.C. 1691, et seq., that are intended to break down barriers that minorities and others protected by these fair lending laws face when seeking credit. We are concerned not merely with fair access to credit, but also with access to credit on fair terms and at fair prices. We have become aware in recent years of abusive or predatory lending practices that occur most often, but not exclusively, in the subprime market. While subprime loans provide an important source of capital for individuals whose loans may pose higher risks to creditors, minorities are disproportionately represented in the subprime market, and not always because they actually pose higher risks. Minority borrowers, therefore, may be paying more for loans than necessary and may be more likely to be subjected to the hard-sell promotions and unfair lending practices that some subprime lenders use. Thus, we believe that "predatory" lending is a civil rights issue as well as a consumer protection issue.

In our view, such practices and terms that may be predatory or abusive either singly or in combination, include: steering minority or elderly borrowers to disadvantageous loan products; making loans that will predictably result in default given the payment terms and a borrower's income level; pressuring borrowers to purchase and finance certain products from loan proceeds, such as single-premium credit insurance, that they don't need or could get on better terms elsewhere; imposing prepayment penalties that effectively prevent borrowers from refinancing within a reasonable time, or force them to finance the penalties in order to refinance the loan; using unreasonable balloon payment terms that a borrower is unlikely to be able to meet, leading to foreclosure or costly refinancing; inducing borrowers to refinance repeatedly and unnecessarily, with high closing costs financed out of proceeds; persuading a borrower to refinance a first mortgage at a higher rate when a small second mortgage would be more appropriate given the borrower's financial circumstances; and when undertaking these unnecessary refinancings, calculating broker fees on the entire loan amount (instead of the incremental amount) and financing the fees from loan proceeds. In some circumstances, one or more of these loan terms or conditions may not be predatory and could conceivably be in a borrower's financial interest. However, as described by the cases in which we have been involved, a combination of these various practices can indeed be abusive and "predatory.,,

We have enclosed with this letter copies of our court papers in three cases discussed below that have addressed some of these issues. These papers detail the factual predicates, including a summary of the information or data that was available to the Department, and the legal bases for our actions in these instances. As a result of this Department's lack of jurisdiction to collect data on a regular basis from financial institutions, our information is limited to those data relating to entities against whom we have taken some enforcement action.

In 1996, we filed and settled a suit brought under the FaiLHousing Act and Equal Credit Opportunity Act against the Long Beach Mortgage Company. The company allowed its employee loan officers and independent loan brokers to charge, at their discretion, an additional amount over the lender's base price for loans and we alleged that these additional amounts were unrelated to increased risk. We further alleged that African American, Hispanic, female, and older borrowers paid higher interest rates and fees than other similarly situated borrowers. United States v. Long Beach Mortgage Company, CV-96-61S9DT(CWx), (C.D. Cal. Sept. 5,- 1996). Copies of the complaint and consent order in that case are enclosed.

In March of this year, the Department of Justice, along with Department of Housing and Urban Development and the Federal Trade Commission filed a complaint, as well as a proposed consent decree, against Delta Funding Corporation. United States v. Delta Funding Corporation, CVOO-1872, (E.D. N.Y. March 30, 2000). The complaint alleged that Delta violated (1) the Fair Housing and Equal Credit Opportunity Acts by making loans with higher broker fees to African American females than those for white males, (2) the Real Estate Settlement Procedures Act, by allowing unreasonable broker fees, and (3) the Truth in Lending Act, as amended by the Home ownership and Equity Protection Act, by engaging in a pattern or practice of asset-based lending. Copies of the complaint and consent order are enclosed.

Also in March of this year, we filed an amicus curiae brief in private litigation brought against the Capital City Mortgage Company. Hargraves v. Capital City Mortgage Company, C.A. 981021(JHG/AK), (D.D.C. filed Aug. 24, 1998). The plaintiffs in that case alleged that the lender targeted minorities for loans that were designed to fail, due to unfair payment terms and income levels of the borrowers that would not sustain the loan payments. Plaintiffs alleged that Capital City's lending practices violated several federal laws, including the Fair Housing and the Equal Credit Opportunity Acts. Our amicus brief supported the view that lending practices designed to induce minorities to enter into loans destined to fail could violate the fair lending laws. A copy of the brief is enclosed.

Since December 1999, we have been participating in series of meetings, convened by the Federal Reserve Board, with representatives of the Department of Housing and Urban Development, the office of the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Trade Commission, and the National Credit Union Association to discuss predatory lending issues and to develop an understanding about what actions the respective agencies can take, whether jointly or individually, to address lending abuses under current law.

We hope that this information is helpful. Please do not hesitate to contact the Department of Justice on this or other matters.


Robert Raben
Assistant Attorney General


cc: Honorable Paul S. Sarbanes
Ranking Minority Member