Letter from Ellen Seidman, Director, Office of Thrift Supervision

May 19, 2000

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

Dear Mr. Chairman:

This is in response to your April 12, 2000 letter requesting the Office of Thrift Supervision's (OTS) definition of, and all data on predatory lending. I appreciate your interest in this subject and your recognition of the difficulty of identifying and defining predatory lending practices.

OTS has been working to identify and address the issue of predatory lending for some time. This is a somewhat difficult task since loan terms alone do not make a loan predatory, although certain loan terms such as prepayment penalties and financing of extremely high fees and single-premium credit life insurance, seem to be fairly consistently associated with loans that are associated with predatory marketing practices. What primarily distinguishes predatory lending from other lending activities are marketing practices that target unsophisticated borrowers and take advantage of their inexperience and lack of information to manipulate them into a loan they cannot afford to pay. These practices include providing misleading and confusing information about loan terms, high pressure sales tactics aimed at getting borrowers to purchase home improvements and similar products financed with a home equity mortgage, and loan flipping that results in higher and higher loan balances that eventually strip a borrower's equity in their home.

In an effort to gain a better understanding of the prevalence and nature of predatory lending activities, OTS participates with the other federal banking agencies and several otherfederal regulators on an interagency working group that is examining the state of the law and determining the strength of existing enforcement mechanisms. This effort includes consideration of how to define predatory practices and which policy, regulatory, and legislative options, if any, to pursue.

In addition, on April 5, 2000, OTS published an advance notice of proposed rulemaking (ANPR) in the Federal Register as a means to gather information to help identify the extent of predatory lending activities. The ANPR solicits comment on a wide range of

issues concerning predatory lending, both to identify what it may encompass and the prevalence of abusive lending practices. We asked for comments by July 5. We hope you have an opportunity to review the ANPR (copy enclosed) and are interested in any comments and suggestions you may have regarding this issue.

As a preliminary matter. an issue highlighted in the ANPR is the effect and enforcement of the Alternative Mortgage Transaction Parity Act (Parity Act). Congress enacted the Parity Act in 1982, a time of high interest rates, to encourage variable rate mortgages and other creative financing to stimulate credit- We are seeking information to determine whether the Parity Act has had the unintended effect of increasing predatory lending practices.

The purpose of the Parity Act was to give state-chartered housing creditors parity with federally-chartered institutions by giving them the authority to make, purchase, and enforce alternative mortgage loans. Alternative mortgage loans are loans with any alternative payment features, such as variable interest rates, balloon payments, or call features. State housing creditors have the option to comply with OTS regulations instead of state laws for alternative mortgage instruments, but the Act does not place state housing creditors under the supervision of OTS or any other federal agency. The states retain this authority. The ANPR discusses this issue as well as other aspects of the Parity Act and the Home Ownership and Equity Protection Act of 1994 (HOEPA), which provides certain protections for home equity mortgages- It is our hope that comments on the ANPR will provide additional data an the extent of abuses in these areas so that informed decisions can be made to address predatory lending problems.

While there is some data available on the extent of existing predatory lending practices in the United States, most of it is anecdotal. The data we have compiled so far on this subject are discussed in the ANPR, and of course the purpose of the ANPR is to gather more data.

Thank you for your interest in our efforts to identify predatory lending practices. If my staff or I can provide you with any additional information in the interim, please contact our Director of Congressional Affairs, Kevin Petrasic, at 202-906-6288.


Ellen Seidman