Comptroller Speaks Out on Predatory Lending Solutions

The OCC has been out in front in the enforcement game against predatory lending. There have been cases including Providian and The Associates that made clear that OCC will not tolerate predatory lending. In addition, the OCC has taken the lead in making pronouncements about ways to prevent predatory lending. It is the OCC that first raised the moniker of "Unfair or Deceptive Trade Practices" in the context of predatory lending.

While taking action to stop predatory lending and to require corrective action including reimbursement, the OCC has also taken a position that national banks are not subject to specific state laws on predatory lending. This position draws on a long tradition (and lots of case law) of federal preemption.

The Comptroller recently spoke out on predatory lending and in defense of the OCC's position on preemption of state laws. Hawke observed that the well-intentioned efforts to combat predatory lending, such as Georgia's law, is actually impeding the flow of credit to creditworthy subprime borrowers.

The consequence of anti-predatory lending laws has been threefold. First, compliance costs increase, particularly for lenders operating in multiple jurisdictions. Second, underwriting expenses increase. Third, concerns about legal liability have caused some lenders to avoid lending in jurisdictions with protective laws. This last reaction is compounded by the responses of Fannie Mae and Freddie Mac who have set stringent limits on the purchase of high-cost loans. With the secondary market drying up, available credit will become increasingly limited.

Hawke stated that there is widespread recognition that federally related financial institutions and their subsidiaries are not part of the problem, but these institutions are subject to the onerous laws. Hawke recommends that a more effective approach would be to focus the "formidable enforcement powers" of federal regulators on abusive practices among the institutions they supervise.

With federal enforcement, consumer advocates should not oppose the OCC's position on preemption of the Georgia law. Instead, the OCC and other federal regulators can protect consumers from abusive practices without imposing over-broad requirements that have the result of limiting availability of credit.

Copyright © 2003 Compliance Action. Originally appeared in Compliance Action, Vol. 8, No. 8, 8/03