H. R. 200
IN THE HOUSE OF REPRESENTATIVES
January 4, 2005
Mr. Scott of Georgia introduced the following bill; which was referred to the Committee on Financial Services
To authorize the Secretary of Housing and Urban Development to make grants to States, units of general local government, and nonprofit organizations for counseling and education programs for the prevention of predatory lending and to establish a toll-free telephone number for complaints regarding predatory lending, and for other purposes.
This Act may be cited as the
Prevention of Predatory Lending Through Education Act.
The Congress finds the following:
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 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:
To improve consumer literacy and disclosures, the report recommended requiring lenders to recommend that applicants for high-cost loans avail themselves of home mortgage counseling, to disclose credit scores to all borrowers upon request, and to give borrowers more timely and more accurate information on loan costs and terms.
To prohibit harmful sales practices in the mortgage market, the report recommended the banning of practices such as loan
flipping and lending to borrowers without regard to their ability to repay the loan, imposing new requirements on mortgage brokers to document the appropriateness of a high-cost loan for certain applicants, and requiring lenders who report to credit bureaus to provide
full-file payment history for their mortgage customers.
To restrict abusive terms and conditions on high-cost loans, the report recommended that the Congress increase the number of borrowers in the subprime market covered by legislative protections, further restrict balloon payments on high-cost loans, restrict prepayment penalties and the financing of points and fees, prohibit mandatory arbitration agreements on high-cost loans, and ban lump-sum credit life insurance and similar products.
To improve market structure, the report recommended the award of credit under the Community Reinvestment Act of 1977 (CRA) to lenders that promote borrowers from the subprime to prime mortgage market, the denial of CRA credit to lenders for the origination or purchase of loans that violate applicable lending laws, the disclosure by lenders of the incidence of high-cost loans in pools of mortgage-backed securities, and the disclosure of the incidence of such loans in the offering documents for such securities.
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.
Grant program for education and counseling regarding predatory lending
The Secretary of Housing and Urban Development may make grants under this section to States, units of general local government, and nonprofit organizations, which shall be used only for costs of carrying out eligible anti-predatory lending activities under subsection (b).
Eligible anti-predatory lending activities
Amounts from a grant under this section may be used only for carrying out the following activities:
For education programs to inform and educate consumers, particularly those most vulnerable to being taken advantage of by predatory and unscrupulous lending practices relating to home loans (such as low-income borrowers and senior citizens), regarding 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.
For programs, provided only by organizations certified by the Secretary as competent to provide homeownership counseling, that counsel homeowners and prospective homeowners regarding predatory and unscrupulous lending practices relating to home loans.
For services that provide referrals, for homeowners and prospective homeowners—
to education and counseling programs described in paragraphs (1) and (2); or
to appropriate agencies or authorities responsible for handling consumer complaints, allegations, or requests for assistance regarding predatory and unscrupulous lending practices relating to home loans or for investigating the circumstances surrounding home loans for possible violations of law.
Eligibility and application
To be eligible for a grant under this section, a State, unit of general local government, or nonprofit organization shall submit to the Secretary an application for a grant in such form and including such information as the Secretary shall require, which shall include such information as the Secretary considers appropriate to ensure that the grant amounts are used for activities eligible under subsection (b).
Maximum grant amount
The maximum amount of grant funds that may be provided under this section to any single grantee for any single fiscal year shall be $1,000,000.
Selection of applicants
The Secretary shall provide for States, units of general local government, and nonprofit organizations to submit applications for grants under this section. The Secretary shall select applications to receive such grants according to selection criteria, which the Secretary shall establish.
Toll-free telephone number for predatory lending complaints
The Secretary shall, using any amounts reserved under section 7(1), provide for the establishment, operation, and publication of a nationwide toll-free telephone number to receive consumer complaints regarding predatory and unscrupulous lending practices relating to home loans, provide information about predatory lending, refer borrowers who already have predatory loans to the appropriate governmental agencies or consumer protection organizations for assistance, and coordinate between existing State and nonprofit community organizations to create a resource database of information for consumers.
Predatory Lending Advisory Council
There is established in the Department of Housing and Urban Development a Predatory Lending Advisory Council (in this section referred to as the
Council) to advise the Secretary on policies and issues relating to predatory and unscrupulous lending practices relating to home loans.
The Council shall be composed of 13 members appointed by the Secretary, who shall include—
4 members who are representatives of community-based organizations that work with consumers, lenders, and State and local governments to improve distressed neighborhoods, assist borrowers who already have predatory loans, educate consumers about the dangers and pitfalls of entering into a home loan, and refer consumers to appropriate governmental agencies or consumer protection organizations for assistance;
3 members who are officials of State agencies or offices for consumer affairs or consumer protection;
3 members who are private homeowners who are familiar with home mortgages, mortgage refinancing, home equity loans, and home repair loans; and
3 members who are representatives of the private real estate industry, such as realtors, mortgage brokers, and bankers.
Terms and vacancies
Members of the Council shall serve terms of two years, except that, of the initial members appointed, half shall serve terms of one year and half shall serve terms of two years. A vacancy in the Council shall be filled in the manner in which the original appointment was made.
Members of the Council shall serve without compensation but shall receive travel expenses, including per diem in lieu of subsistence, in accordance with sections 5702 and 5703 of title 5, United States Code.
The Secretary shall designate a chairperson of the Council at the time of appointment.
Meetings and hearings
The Council shall meet upon the call of the chairperson, except that the council shall meet not fewer than 3 times per year. The Council shall have the authority, when a majority of the members deem necessary, to hold public hearings and to take testimony and receive evidence from individuals and organizations.
The Council shall provide advice to the Secretary regarding—
the grant program under section 3, including advice regarding criteria for selection of applications to receive grant amounts;
the establishment, operation, and publication of the toll-free telephone number under section 4;
coordination of activities of the Secretary regarding prevention of predatory and unscrupulous lending practices relating to home loans with such activities of lending institutions; and
any other matters regarding predatory and unscrupulous lending practices relating to home loans that the Secretary considers appropriate.
Study of defaults and foreclosures
The Council shall conduct an extensive study of the root causes of default and foreclosure of home loans, using as much empirical data as are available. The Council shall submit a report to the Secretary and the Congress, not later than 12 months after the full membership of the Council is first appointed, regarding the results of the study, which shall include recommendations for consumer protection legislation regarding predatory and unscrupulous lending practices relating to home loans.
For purposes of this Act, the following definitions shall apply:
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.
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—
making any loan that—
is solely based on the borrower’s home equity;
is made without regard to the borrower’s ability to repay the obligation; and
is unaffordable to the borrower, as may be evidenced by a failure to fully understand the terms of the loans, a failure to offer adequate disclosures of the loan terms, a difficulty in meeting overwhelming mortgage payments, loss of a home through foreclosure, or otherwise;
inducing a borrower to refinance a loan repeatedly and charging additional points and fees, even though refinancing may not be in the borrower’s interest; and
engaging in fraud or deception to conceal the true nature of the loan obligation from an unsuspecting or unsophisticated borrower.
The term Secretary means the Secretary of Housing and Urban Development.
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.
Authorization of appropriations
There is authorized to be appropriated for carrying out this Act $55,000,000 for each of fiscal years 2006 through 2010, of which—
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.
The Secretary may issue any regulations necessary to carry out this Act.