May 8, 2000
The Honorable Phil Gramm
Committee on Banking, Housing and
United States Senate
Washington, DC 20510
Dear Mr. Chairman:
Thank you for your letter requesting information about predatory lending. I have noted with interest the increasing frequency of media reports about the victimization of lower-income people by lenders charging unconscionably high rates and fees, and I was heartened to see your inquiry.
In answer to your first question, NCUA has not developed a hard-and-fast definition of predatory lending. Distinct from most other lenders, federal credit unions are currently subject to a statutory and regulatory interest rate ceiling of 18% on loans and are prohibited from charging prepayment penalties. Thus, it is difficult to imagine how a federal credit union could legally engage in many of the types of activities which have recently attracted media and congressional scrutiny. It is my impression that the companies which engage in these activities have managed to place themselves outside the realm of most consumer protection laws and financial regulators. Since credit unions, by their nature and by statute, are unlikely to engage in predatory practices, NCUA has never had a reason to collect data about predatory lending activity. Thus, we cannot provide an answer to your second question.
While we may lack an exact definition and specific data on predatory lending, I believe that lenders engaging in the practices such as those recently highlighted in the media clearly prey upon low-income consumers in particular. Further, while it seems that the term "predatory lending" is now largely focused on just predatory mortgage lending, I believe that the term should encompass other abusive practices such as high-interest payday loans. While certainly abusive home equity and refinancing schemes are predatory, Senator Lieberman's forum last December demonstrates that many consumers who do not have home equity are also victimized by overly high interest rates and fees for consumer loans. Accordingly, I urge that any definition of predatory lending include all types of loans, not merely mortgage-related transactions.
NCUA has taken steps to investigate and address predatory lending issues. The NCUA Board adopted a resolution in December, 1999 establishing the agency's support of efforts by the National Association of State Credit Union Supervisors (NASCUS) on the issue of predatory mortgage lending practices. The resolution further pledged the
NCUA's willingness to work on a cooperative basis with NASCUS to review issues of mutual interest related to effective regulation of predatory mortgage lending. NCUA senior staff are meeting periodically with the NASCUS Task Force on predatory mortgage lending to discuss NASCUS data gathering efforts, the means for raising credit union awareness of the issue, and coordination of state and federal regulatory efforts.
Credit unions, and other mainstream financial institutions, can help deter predatory lending activity in two ways. They can increase access to reasonably-priced credit and they can increase consumer education efforts, which credit unions are well-positioned to do. First, I am hopeful that credit unions will do even more than they already are doing to reach out to low and moderate income families to provide a fair and valuable financial services alternative. If reasonably priced financial services were available to those who now rely on pawnshops, rent-to-own-stores, abusive payday lenders, and high-interest home equity lenders, such businesses might cease to exist. While credit unions comprise only a small pan of the financial landscape compared to other types of depository institutions, I believe they can make a positive difference by fulfilling the financial needs of many underserved Americans thereby reducing the role played by predatory lenders. As you may know, I take every opportunity to encourage credit unions to increase their services to low-income members in their existing fields of membership as well as to expand into underserved areas.
NCUA has acted to encourage credit unions to serve their members with less than perfect credit histories by authorizing and advocating risk-based lending. Risk-based lending encourages credit unions to make loans to members with a blemished or nonexistent credit history, albeit under more conservative guidelines, by pricing the loans consistent with the higher implied risk Through risk-based lending, credit unions can expand the availability of credit to underserved elements of their membership and these borrowers pay a reasonably higher rate than would a prime borrower for their loans. Even with higher pricing, risk-based lending provides a fair and reasonable alternative to the higher, confiscatory interest rates and fees charged by alternative financial services providers, such as payday lenders, pawnshops, and rent-to-own stores.
In addition to serving more low-income and underserved members, credit unions can also play an important role in consumer education. Provided an alternative, if consumers truly understood the risks and costs inherent in payday loans and high-interest home equity loans, they would be less likely to patronize these lenders. Most consumers would benefit from basic financial and budgeting information, and traditionally, many credit unions have considered consumer education an important part of their mission. I believe that credit unions and other institutions should expand their education and outreach activities in order to give consumers the information and tools they need to avoid abusive lending practices.
Thank you again for considering this important issue. I would be happy to discuss it further if you desire additional information.
Norman E. D'Amours
Resolution on Predatory Lending Adopted by the NCUA Board
Letter to Credit Unions 99-5, Risk-Based Lending