Letter from Donna Tanoue, Chairman, Federal Deposit Insurance Corporation

May 8, 2000

Honorable Phil Gramm
Committee on Banking, Housing, and Urban Affairs
United States Senate
Washington, D.C. 20510
Dear Mr. Chairman:

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:

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.


Donna Tanoue