Testimony of Michael P. Smith, President, New York Bankers Association
before the New York State Senate Committee on Banks
March 18, 2002 on Predatory Lending

Good morning Chairman Farley and Members of the Committee.  My name is Michael P. Smith and I am the President of the New York Bankers Association (NYBA).  NYBA is comprised of community, regional and money center commercial banks in the State of New York.  In the aggregate, our members have over 220,000 employees and assets in excess of $1 trillion.  We welcome the opportunity to participate in a cooperative dialogue on this issue.

I am pleased to be joined by Samuel H. Cooper, Executive Vice President of Chase Manhattan Mortgage Corporation, Carl Howard, General Counsel –Bank Regulatory of Citigroup, and Roberta Kotkin, General Counsel of the New York Bankers Association.

I am pleased to re-affirm our unwavering opposition to predatory lending practices.  We remain committed to working with state and federal officials to help eradicate the problem.  Our policy includes:  (i)  consumer education and community outreach; (ii) support for current federal and state laws and regulations; (iii)  self-regulation and industry discipline through Best Practices; (iv) expansion of credit to low and moderate income borrowers; and (v) new laws and regulations which strengthen criminal and civil penalties for clearly defined predatory practices.  For example, we support S.3971, S.4431 and S.5598, all of which are currently pending in the New York State Senate. These bills impose additional reasonable protections for consumers against predatory lending practices by mortgage bankers and brokers.  Our policy is based on a single principal – stopping predatory practices without hurting the availability of credit for low and moderate income borrowers.  We object to additional legislation and regulations that would inadvertently limit home ownership and improvement opportunities for many New Yorkers.

First, it is essential to define and distinguish between predatory lending and legitimate subprime home lending.  Predatory lenders seek to take advantage of vulnerable consumers by misleading or deceiving them about the terms and conditions of their loans and committing them to loans they probably will not be able to repay.  Legitimate subprime lenders provide loans to borrowers who do not meet the creditworthiness standards for conventional prime loans. These are borrowers who might otherwise be deprived of the chance to own their own home or to benefit from the equity in a home they already own.

It is important to note that subprime borrowers span all demographic groups.  Often they are people who have experienced a temporary life-disrupting event, such as a job loss or a medical emergency.  Subprime borrowers may also have a history of credit problems.  Typically, they require more flexibility from their lenders on underwriting standards.  They also present more credit or property risk.  The higher risk, and volatility associated with these nonprime loans understandably result in higher rates and fees to borrowers than on prime loans.  When compared to prime rates and fees, some may regard these loans as “high cost,” but that does not mean these loans are predatory.  There should not be a stigma attached to loans that are responsibly priced for the risk involved.  There should be a stigma attached to loans that are made using abusive, deceptive or fraudulent practices.

Recognizing the critical difference between predatory lenders and legitimate subprime lenders is the key to effective legislation or regulation.  Until recently, subprime borrowers had limited access to mainstream lenders.  Now, however, due to improvements in credit scoring technology and risk management, mainstream lenders are serving the needs of this segment of the population.  In fact, as reported by economist Robert E. Litan of the Brookings Institution, between 1993 and 1998 the number of subprime loans increased roughly ten-fold.  (See Exhibit A)  Thus, with the recent expansion of the subprime market, tens of thousands more Americans have been able to finance the purchase of homes, consolidate and manage debt, overcome financial crises, and pay for higher education.

If restrictive rules are imposed on legitimate lenders, however, access to credit may be significantly reduced.  There is already evidence of this where severe restrictions were adopted.  For example, legitimate lenders in a number of jurisdictions around the country left the market due to litigation and reputational risk, and the increased costs and risks of servicing the subprime market.  (See Exhibit B)  Restrictive legislation may adversely impact the sale of such loans into the secondary market, placing another potential impediment to credit.  Already, mortgages which are subject to the requirements in the Home Ownership and Equity Protection Act of 1994 (HOEPA) that apply to “high cost” mortgages, are not eligible for purchase by Fannie Mae.  Additionally, in a recent comment letter to the Federal Deposit Insurance Corporation (FDIC), the Bond Market Association noted that the imposition of “subjective and unreasonable responsibilities on secondary market participants” would have a “detrimental effect on legitimate subprime secondary market activity in which banks are broadly engaged, and would reduce the amount of legitimate and valuable credit available to subprime borrowers.” Thus, it is critical that while seeking to stop abusive predatory loan practices, we do not “throw the baby out with the bath water.”  That is, we must be careful not to impose restrictions on legitimate lenders that inadvertently deny access to credit to those very consumers we are seeking to protect.

We, therefore, are very concerned about both the thresholds and some of the lending restrictions in the current version of S.5005, which is pending in the New York Senate.  We believe that if S.5005 is enacted as currently drafted, it could have a chilling effect on the availability to New Yorkers of subprime credit.  We are, however, currently engaged in a constructive dialogue with the legislature and lead advocate, AARP, to help preserve the dual goals of protecting consumers against predatory lending practices, while maintaining low and moderate income borrowers’ access to legitimate subprime loans.  We look forward to reporting to you the result of these talks in the coming weeks.

There currently exists a wide body of federal and state law and regulation that address most of the practices associated with predatory lending.  HOEPA, for example, which was enacted by Congress in l994, has significant disclosure requirements.  It also prohibits covered loans from containing certain onerous prepayment penalties, or charging an interest rate after default that is higher than the rate prior to default.  Additionally, HOEPA prohibits lenders from engaging in patterns of granting covered loans that do not take into account the borrower’s ability to repay.  In addition, HOEPA gives the Federal Reserve broad regulatory authority to prohibit additional practices it finds to be unfair or deceptive.

Closer to home, New York’s Part 41 High Cost Home Loan Regulation is one of the strongest regulations in the nation and has proven to be effective against predatory lenders.  In January, the Superintendent of Banks announced the surrender of a mortgage broker’s registration – with prejudice – for circumventing the Department’s regulation by disguising mortgage broker fees as home improvement costs.  The Banking Department also made criminal referrals of all loan officers involved in this alleged fraudulent activity to the U.S. Attorney’s Office.   Thus, it is apparent that many tools already exist to address this problem.  This is just one instance where vigorous enforcement of current law can go a long way to eradicate predatory lending practices.  Strengthening the criminal penalties for clearly defined predatory practices would go even further to combat this problem.

The New York Bankers Association is also a strong believer in self-regulation and was the first state bankers association in the nation to adopt Home Loan Best Practices for so-called “high cost” loans.  (See Exhibit C)  We developed our Best Practices to guide our members in developing lending policies for covered loans.  They not only reflect our commitment to adherence to current law and regulations, but in several areas, even exceed current legal requirements. Since many of our members operate throughout the country, our Best Practices have national significance.

We are also closely watching developments in Congress with respect to yield spread premiums and possible remedies to abuses in this area.  We believe that our Best Practices reflect the integrity of our member’s loan practices and their ongoing nationwide commitment to serving their subprime customers with fairness and in good faith.  Our members’ pledge to regulate themselves also clearly illustrates the difference between us and the predators.

Our Association also believes that consumer education is a key component of any plan to eradicate predatory loan practices.  NYBA is currently working with the Federal Trade Commission, AARP, Better Business Bureau and others on a public education campaign warning consumers about unfair and deceptive lending practices.  The first result of this fair lending coalition is a consumer awareness flyer (see Exhibit D) designed for wide distribution in New York City and throughout the State.  Our Association is also engaged in a community outreach program known as H.E.L.P.  – the House Equity Lending Program – which links potential borrowers in low and moderate income neighborhoods directly with bank lenders.  The program is the collaboration of our Association and member banks, faith-based community groups, Fannie Mae and the Office of Senator Charles Schumer.

In conclusion, the New York Bankers Association not only strongly supports the wide range of existing law, it has adopted its own Best Practices which, in several areas, exceed current law.  In addition, we have committed resources to community and consumer based awareness programs to help keep New Yorkers from becoming victims of predators. We want to be part of the solution to this problem, and we want to work with you to achieve a mortgage market that is predator-free. We hope that this dialogue gives rise to meaningful consumer protection. We thank you for the opportunity to discuss this important issue.  We would be happy to answer any questions you may have.

Click here to read NYBA's High Cost Home Loans "Best Practices"