Using Compliance to Combat Predatory Lending

The debate on what to do about predatory lending rages on. Consumer protection organizations are telling hair-raising stories and urging action. Congress is considering remedies. Draft legislation has actually been introduced. Only a few voices are urging Congress to consider existing remedies before taking steps to add to regulatory burden. These few voices belong primarily to the bank regulatory agencies.

There are already, they say, many regulatory remedies to prohibit predatory lending. These remedies are actually working. However, in order for this position to carry the day, the banking industry must provide enthusiastic support to these remedies - and that means that compliance takes on a whole new level of importance. Compliance is now more clearly than ever before the barrier to more regulatory burden.

Truth in Lending
TIL is the >
There are key elements of Truth in Lending that banks can use as more than a required disclosure for their borrowers. TIL can be used to educate customers. Clever and public-service-minded lenders can also use TIL disclosures to pre-educate consumers so that they are armed with enough information to know how to evaluate what a predatory lender is telling them.

The APR was intended to be a shopping tool. No-one, however, clearly tells customers this before they go credit shopping. Instead, the APR becomes an explanation of what the customer is getting just before the customer signs the note. This happens because few customers understand what an APR is. However, banks have the tools to empower their customers with this information.

TIL contains other shopping tools as well. The total finance charge is a place where costs may be hidden. TIL also tells the customer about specific terms, including prepayment penalties and late fees. Because TIL disclosures are fairly generic, they are not always informative standing alone. It takes a good loan officer to point out the significance of the disclosures to the customer.

There are also protective provisions in TIL. ARM and HELOC program disclosures are supposed to call customer attention to the risks and consequences of variable rates. Most important of these disclosures is the fact that the customer could lose their dwelling for non-payment.

The tendency is to provide these disclosures to borrowers with ambiguous statements intended to allay their concerns - especially when they see the total finance charge number. But this may not be the wisest way to present these disclosures. By sweetening the medicine, banks are losing the opportunity to educate customers so that customers can protect themselves against the predators.

RESPA
The Good Faith Estimate may be one of the best shopping tools out there. There is more on the GFE than the finance charges. It includes fees that are not finance charges under Truth in Lending. These fees, exempted from TIL because they are typical for home purchase transactions whether or not credit is involved, are important for customers to know about.

The HUD-1 tells the customers even more. But here, as with Truth in Lending, the loan closers and the customers are concentrating on the size of the check to write rather than how the HUD-1 discloses the costs of the transaction. If customers knew how to use the HUD-1 - and knew that they could review it a day before closing - the document might actually become useful in preventing predatory lending. Other RESPA disclosures, including the required service provider and the affiliated business arrangement disclosures, tell the customer about relationships that may cost the customer more than they would have to pay elsewhere.

RESPA doesn't stop with these up-front disclosures. The rules concerning escrow accounts and the transfer of servicing are also important protections for consumers. The more consumers understand about their mortgage and the mortgage market in general, the more able they will be to identify abuses. Finally, RESPA prohibits the kinds of arrangements and fees that take advantage of the inexperienced borrower. RESPA is aimed at the less than ethical market players that are now earning the name of predators. Prohibiting the activity doesn't stop them. But banks should stick to the rules and also explain the rules to consumers so that consumers understand what the predators are doing.

FCRA
Fair Credit Reporting ensures the consumer of the right to an accurate credit report. It also provides the privacy protection of limiting access to the credit report. With the arrival of the Financial Modernization Act and its privacy protections, FCRA has taken new importance.

The FCRA ensures that customers understand how information about them was used, from where it was obtained, and how the customers themselves may check this information. What is not built into the application process is the fact that consumers should periodically review their credit reports for several reasons. One is to identify and correct errors. Another is to identify abusive uses of the information. Knowing how to manage the credit bureau reports can be an important tool for consumers in controlling misuse of that information - including misuse by predatory lenders.

ECOA
In addition to protecting the consumer from discrimination, ECOA provides the consumer with tools for self-protection. The best-known of these is the adverse action notice. This explains the reasons for denial and provides the consumer with the numbers and addresses to learn more about credit qualifications.

The adverse action notice is important, but there are other features in Regulation B that provide the consumer with protection from predatory lending. For example, the Regulation ensures the consumer of a right to a copy of the appraisal. While most customers want this appraisal to know just what the market value of their home is, the appraisal can also be used as a tool to manage the predators.

Information provided on the application form, such as how alimony and child support income may be considered, is also useful for applicants to understand. The invisible protections provided in ECOA are much less apparent to consumers but important to them. This includes knowing that a consumer may walk into a bank and be treated with respect as a serious customer.

Others
The list doesn't end with these regulations. For example, Electronic Funds Transfers and Regulation E prohibit making an electronic payment a condition of the loan. They also include specific disclosures to provide the customer with clear information about transactions affecting their account.

Bankers go through intensive training to learn and master all of these rules. It is highly unlikely that consumers know as much about them as we do. The consumer's lack of knowledge undermines the protections that the laws provide. Therefore, consumer education programs, using advertisements, >
ACTION STEPS

Meet with your branch and marketing staff to discuss an advertising information campaign to educate customers about credit shopping tools.
Start a credit education series designed to inform customers about the tricks of predatory lenders and how to use disclosures. Take CRA service test credit for the efforts.
Prepare a series of flyers and statement stuffers that warn customers about predatory lending practices. Promote the fact that at your bank they get full information and a fair deal.
Train all customer service staff on predatory lending issues. Give them some tips on how to answer customers' questions and tell them where they can get advice or help.
While training customer service staff, alert them to the key features of identity theft and fraud. Stealing someone's identity may be what the predator is really up to.