HUD/Treasury Announcement

Today, Treasury Secretary Lawrence H. Summers and Housing and Urban Development Secretary Andrew Cuomo released a joint HUD-Treasury report detailing the agencies' recommendations on legislative, regulatory and other steps that will help to curb predatory and abusive home mortgage lending.

The report's analysis and recommendations are based on information that HUD and Treasury gathered as co-chairs of the National Predatory Lending Task Force, convened in April, 2000. Through public forums with industry, consumers, consumer advocates, and local and state governments in Washington, Atlanta, Los Angeles, New York, Baltimore and Chicago, HUD and Treasury collected evidence on the nature and growing incidence of predatory lending practices nationwide.

The report finds that while no one set of abusive practices or terms characterizes a predatory mortgage loan, a loan can be predatory when lenders or brokers: charge borrowers excessive, often hidden fees; successively refinance loans at no benefit to the borrower; make loans without regard to a borrower's ability to repay; and engage in high-pressure sales tactics or outright fraud and deception. Vulnerable populations, including elderly and low-income individuals, and low-income or minority neighborhoods may be targeted by these unscrupulous lenders.

To combat these abusive practices, HUD and Treasury recommend that Congress, the regulators and states take new action to protect consumers, encourage healthy market competition and improve the information available to mortgage borrowers, especially in the high-cost mortgage loan market where these practices often occur. The agencies propose a four-point plan to address these practices nationwide, including:

• Creditors should be required to recommend that high-cost loan applicants avail themselves of home mortgage counseling, and to disclose credit scores to all borrowers upon request.
• The federal government should take new steps to improve the financial literacy of mortgage borrowers, especially those in the subprime mortgage market.
• As part of a package of reforms that includes proposals to address predatory lending, Congress should enact amendments to the Real Estate Settlement Procedures Act (RESPA) and Truth in Lending Act (TILA) to give borrowers more timely and accurate information as to loan costs and terms.

Prohibit Harmful Sales Practices.

• Congress should enact new legislation, and the Federal Reserve Board should use its existing authority, to prohibit abusive lending practices, including loan "flipping" and lending to borrowers without regard to their ability to repay the loan.
• New requirements should be imposed on mortgage brokers to document the appropriateness of a loan for high-cost loan applicants, lenders should be liable for broker misconduct if they knew or should have known of the activity, and lenders who report to credit bureaus should provide the full payment history for their mortgage customers.

Restrict Abusive Terms and Conditions on High-Cost Loans.

• Congress should amend the Home Ownership and Equity Protection Act (HOEPA) to: increase the number of borrowers in the subprime market covered by HOEPA's protections; further restrict balloon payments on high-cost loans; and prohibit mandatory arbitration agreements on high-cost loans.
• Congress should prohibit the sale of single-premium insurance products in connection with all mortgage loans, and place greater restrictions on prepayment penalties and the financing of points and fees for HOEPA loans.

Improve Market Structure.

• The federal financial institution regulators should provide favorable CRA consideration to banks and thrifts that "promote" borrowers from the subprime to prime mortgage market, and should deny CRA consideration for the origination or purchase of loans that violate applicable lending laws.
• Lenders should disclose the incidence of HOEPA loans in mortgage-backed securities pools to the rating agency and secondary market, and securitizers should disclose that same incidence in the offering documents.
• Congress should enact legislation to clarify, as necessary, the authority of HUD and the Federal Housing Finance Board, to prohibit, through regulation, the government-sponsored enterprises (Fannie Mae, Freddie Mac and the Federal Home Loan Banks) from purchasing loans with predatory features.