Letter from Donna Tanoue, Chairman, Federal Deposit Insurance Corporation
May 8, 2000
Honorable Phil Gramm
Thank you for your recent letter requesting the Federal Deposit Insurance Corporation's definition of "predatory lending,"
and all data that the FDIC has regarding "predatory lending." We appreciate your questions because they pinpoint the
nature of a dilemma the FDIC and other regulators face in responding to anecdotal accounts of abusive lending practices.
The abusive lending practices that we would characterize as "predatory" are more readily described by their features than
defined with precision. Lenders who "prey" on vulnerable individuals tend to use marketing tactics, collection practices,
and loan terms that, when combined, deceive and exploit borrowers. Practices that in combination are commonly found in
predatory loans, principally home equity or second mortgage loans, include:
Committee on Banking, Housing, and Urban Affairs
United States Senate
Washington, D.C. 20510
Dear Mr. Chairman:
Some loans that would be considered predatory may involve fraud and deceptive sales practices that are illegal. The
regulators are working collectively through an inter-agency working group to improve enforcement of existing laws.
However, we have not adopted a precise definition of "predatory lending." That is, in part, due to our recognition
that some features enumerated above may, in certain circumstances, benefit a borrower. For example, balloon
payments may benefit a borrower through lower interest rates and monthly payments. In other cases those features
may trap borrowers in an unaffordable loan. The FDIC will proceed cautiously to avoid unintended consequences
from an overly broad definition of "predatory lending."
Without a precise definition of predatory lending in the home-equity market, we have not acquired data that
measures bank involvement in this activity. Nevertheless, we do not believe that insured depository institutions are
actively originating loans with predatory features. We are concerned, however, that banks and thrifts, like other
institutional investors, may purchase loans from, or offer credit lines to, lenders that do make loans with predatory
features. In the course of our routine supervisory monitoring of the banks and thrifts we regulate, we will watch for
signs that might point to problems in those areas.
Mr. Chairman, we appreciate your time and attention to this important issue. If we can be of further service, please
call me at (202) 898-6974 or Alice Goodman, Director of our Office of Legislative Affairs, at (202) 898-8730.
- high-pressure and misleading marketing and sales practices;
- excessive fees and interest rates that are well beyond the levels appropriate or necessary to cover risk and a profitable return;
- the financing of excessively priced or unnecessary products, such as single-premium credit life insurance;
- large prepayment penalties that are intended to trap borrowers in an unfavorable or unaffordable loan;
- balloon payments that conceal the true cost of the financing and often result in foreclosure;
- "loan flipping" or frequent refinancing, with fees repeatedly folded into the loan balance resulting in rising
loan balances and the "stripping" of equity; and
- aggressive, often abusive, collection practices.