H.R. 200 (109^th): Prevention of Predatory Lending Through Education Act

While expanded access to credit from both prime and subprime lenders has contributed to the highest homeownership rates in the Nation’s history, there is growing evidence that some lenders are engaging in predatory lending practices—excessive front-end fees, single-premium credit life insurance, and exorbitant prepayment penalties—that make homeownership much more costly for families that can least afford it.

Borrowers with fair to good credit ratings may be able to obtain loans in the prime mortgage market, with the lowest interest rates and costs.

Borrowers with blemished credit histories obtain mortgage loans in the subprime mortgage market, with higher interest rates and loan fees than are obtainable in the prime market. Some subprime lenders have been making loans on terms that are regarded as predatory.

Predatory lending involves home mortgages, mortgage refinancing, home equity loans, and home repair loans with unjustifiably high interest rates, excessive fees, balloon payments, prepayment penalties, and the imposition of other unreasonable, and sometimes fraudulent, terms.

Predatory loans are said to have grown rapidly in minority neighborhoods, often stripping away wealth that may have taken owners decades or a lifetime to accumulate.

Some communities that have lacked access to traditional institutions were being victimized by second mortgage lenders, home improvement contractors, and finance companies who peddled high interest rate home equity loans with high loan fees to cash-poor homeowners. Borrowers, who may not have fully understood the terms of the loans, and who may not have been offered adequate disclosures of the loan terms, often have struggled to meet overwhelming mortgage payments and too often ultimately lost their homes through foreclosure.

A joint report by the Department of Housing and Urban Development and the Treasury Department, issued June 21, 2000, entitled Curbing Predatory Home Mortgage Lending, urged the Congress to adopt legislation that would restrict abusive terms and conditions on high-cost loans, prohibit harmful sales practices in mortgage markets, improve consumer literacy and disclosures, prohibit government-sponsored enterprises from purchasing loans with predatory features, and establish predatory lending as a factor in CRA evaluations.

The joint report proposed a four-point plan to address predatory lending practices, as follows:

A recent study by the Center for Community Change, entitled Risk or Race? Racial Disparities and the Subprime Refinance Market found a geographic concentration of subprime lending in minority neighborhoods and to borrowers of color at all income levels.

A number of government agencies have become involved in addressing various aspects of the predatory lending issue in an attempt to reduce the number of lenders that use high-pressure telemarketing sales techniques and mislead borrowers about increases in interest rates and monthly payments on adjustable rate mortgages.

Predatory lending threatens to undo the work of many nonprofit organizations that have worked with lenders and local governments to improve distressed neighborhoods. More needs to be done to assist borrowers who already have predatory loans, to educate consumers about the dangers and pitfalls of entering into a home loan, and to refer consumers to appropriate governmental agencies or consumer protection organizations for assistance.

Home loan

The term home loan means a loan or agreement to extend credit made to a natural person, which loan is secured by a deed to secure debt, security deed, mortgage, security instrument, deed of trust, or other document representing a security interest or lien upon any interest in one- to four-family residential property or a manufactured home, regardless of where made, including the renewal or refinancing of any such loan. Such term includes a home equity line of credit or home improvement loan or other similar agreement.

Nonprofit organization

The term nonprofit organization has the meaning given such term in section 104(5) of the Cranston-Gonzalez National Affordable Housing Act (42 U.S.C. 12704(5)), except that subparagraph (D) of such section shall not apply for purposes of this Act.

Predatory or unscrupulous lending practice

The term predatory or unscrupulous lending practice includes—

Secretary

The term Secretary means the Secretary of Housing and Urban Development.

State

The term State means each of the several States, the Commonwealth of Puerto Rico, the District of Columbia, the Commonwealth of the Northern Mariana Islands, Guam, the Virgin Islands, American Samoa, the Trust Territories of the Pacific, or any other possession of the United States.

Unit of general local government

The term unit of general local government means any city, town, township, parish, village, or other general purpose political subdivision of a State.

not more than $2,000,000 in each such fiscal year shall be for carrying out section 4; and

not more than $5,000,000 in each such fiscal year shall be for carrying out section 5.