Letter from John D. Hawke, Jr., Comptroller of the Currency

May 5, 2000

The Honorable Phil Gramm
Committee on Banking, Housing, and Urban Affairs
United States Senate
Washington, D.C. 20510-6075

Dear Chairman Gramm:

This is in response to your letter dated April 12, 2000. In your letter, you note that many news stories have reported an increasing regulatory concern over "predatory lending." In order for the Committee to understand this term, you have asked the OCC to provide its definition of "predatory lending" and all data that the OCC has regarding "predatory lending."

1. Definition of "Predatory Lending."

With respect to your first request, OCC does not have a formal definition of "predatory lending," and I am concerned that attempting to define this term risks either over- or under-inclusiveness. However, while we have not defined "predatory lending," we are aware that over the past few years, many practices have been identified as abusive or predatory in Congressional hearings and federal agency reports.

For example, during the 1993 Congressional hearings that led to the passage of the Home Ownership Equity Protection Act of 1994 ("HOEPA"), witnesses were particularly concerned about "abusive" practices that result in equity "stripping" or "skimming" (such as making home-secured loans to borrowers without an ability to repay the loan).1 Subsequent hearings by the Senate's Special Committee on Aging in 1998 identified the following as "predatory" lending practices affecting the elderly: equity "stripping," "flipping" 2 and "packing," 3 steering borrowers to high cost lenders, falsifying loan applications, and abusive collection practices.4 Finally, in 1998, the Federal Reserve Board and the Department of Housing and Urban Development ("HUD") issued their Joint Report to the Congress Concerning Reform to the Truth in Lending Act and the Real Estate Settlement Procedures Act (the "Federal Reserve-HUD Report"). In developing the Federal Reserve-HUD Report, the Federal Reserve Board held hearings to assess HOEPA's effectiveness in combating abusive lending practices. The report identifies several lending practices as predatory and abusive, including forging signatures or obtaining signatures on blank documents, falsifying loan applicants' income or the appraised value of the property, "manipulat[ing] a borrower into accepting an exorbitantly- priced" loan, and most of the practices criticized in the 1993 and 1998 Congressional hearings.

One problem with the fact that "predatory lending" is not susceptible to precise definition is that many people make the mistake of equating subprime lending to predatory lending. Responsible, risk-based subprime lending, that provides access to credit for individuals with less than perfect credit histories, should not, in and of itself, be considered predatory. The OCC encourages national banks to engage in responsible subprime lending, and has issued guidance to ensure that banks engaging in this type of business do so in a safe and sound manner and consistent with applicable consumer protection law.

2. Data on Predatory Lending.

In response to your second request, the OCC has not independently collected or internally analyzed any specific data regarding lending that would be considered "predatory." Assuming that it would be feasible to define the concept precisely, it would be a difficult undertaking for OCC to gather data on predatory lending. The type of lending that is characterized as predatory does not appear to be done to any perceptible degree by national banks, and information about unregulated lenders that may engage in these practices is not available to the OCC as part of its supervisory activities. Further, as noted above, subprime lending is not necessarily "predatory." Consequently, reports about increases in subprime lending may not support a conclusion that there have been corresponding increases in predatory lending.

While the scope of the problem of predatory lending is not clear and the available data is primarily anecdotal, it has nevertheless been sufficient to prompt actions to curb predatory lending. Congress enacted HOEPA to protect consumers from abusive lending practices in home equity loan transactions in response to evidence that abusive loans were being made to elderly and unsophisticated borrowers. The Federal Reserve-HUD Report stated that, despite the enactment of HOEPA, "[a]busive practices continue to exist in some segments of the home-equity lending market, demonstrating the need for additional protections. 5 The Federal Reserve-HUD Report recommends expanding HOEPA to address several practices that the agencies considered abusive. As you know, there are several bills pending in Congress that would expand HOEPA to address these practices.

Further, there are efforts in the secondary mortgage market to curtail the existence of predatory practices by limiting the marketability of certain loans. Fannie Mae and Freddie Mac recently announced that they will not purchase mortgages that are made without regard to the borrower's ability to repay the loan or with features such as prepaid single premium credit insurance. Finally, HUD and the Department of Treasury recently established a task force on predatory lending practices that will hold public forums around the country to assist the agencies in gathering information about the scope of the concerns that have been raised.

Through our supervision, we seek to ensure compliance with the fair lending and consumer protection laws and the continued safe and sound operation of our banks. In particular, we believe it would be a fundamentally unsound banking practice to extend credit under circumstances where a bank had no reasonable expectation that a loan could be repaid by the borrower without recourse to liquidating the collateral. While I have no reason to believe that national banks are involved in predatory lending, it is important for the OCC to understand the issues relating to such lending and to use our supervisory authority appropriately so that national banks and their subsidiaries avoid the legal and reputational risks connected with such practices.

Thank you for this opportunity to comment on this important issue. I hope this information is helpful to you and the Committee.


John D. Hawke, Jr.
Comptroller of the Currency

1 See, e.g., Problems in Community Development Banking, Mortgage Lending Discrimination, Reverse Redlining, and Home Equity Lending: Hearings Before the Senate Committee on Banking, Housing, and Urban Affairs, 103rd Cong. (1993) and The Home Ownership and Equity Protection Act of 1993 -- S.924: Hearings Before the Senate Committee on Banking, Housing, and Urban Affairs, 103rd Cong. 6 (1993)("S. 924 Hearings"); See also S. 924 Hearings at 6 (statement of Lawrence B. Lindsey, Board of Governors of the Federal Reserve System).

2 "Flipping" refers to the practice of frequently refinancing a loan and rolling additional points and fees into the amount financed with each refinancing.

3 "Packing" involves adding unnecessary or unwanted features or services to the loan to increase the lender's profit.

4 See Equity Predators: Stripping, Flipping and Packing Their Way to Profits, Hearings Before the Senate Special Committee on Aging, 105th Cong. (1998); See also id. at 6 (prepared statement of Senator Larry E. Craig)(" Stripping, flipping, and packing are the three most prevalent abuses perpetrated by equity predators.")

5 Federal Reserve-HUD Report at 51.