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Updated February, 2010
While there is no industry standard definition for “predatory” lending, it is a term used to describe a wide range of abuses. These abuses include extremely high fees, costly (and often unnecessary) insurance policies, large balloon payments, high interest rates, and frequent refinancing or loan "flipping.”
NAFCU is working to ensure that any legislation targeting predatory loan practices does not inadvertently discourage legitimate efforts of lenders to meet the needs of borrowers with sub-par credit records. NAFCU believes there is little, if any, evidence of predatory lending practices by credit unions, and that existing laws and regulations should be effectively enforced and applied to all individuals and businesses that regularly extend credit for personal, family, or household purposes. In fact, credit unions are constantly trying to develop ways to offer alternative financing to help individuals avoid abusive loan practices. Credit unions are working hard to be a part of the solution to predatory lending.
Credit unions are the only financial institutions to have a “usury” rate defined by federal statute; federal credit unions cannot charge more than 15% annually on any loan, unless an alternative rate is established by federal regulation. The NCUA Board has currently set that rate at 18%. In addition, federal credit unions are prohibited from charging pre-payment penalties to their members.
The subprime housing crisis that exploded in 2007 has focused attention on the issue of subprime mortgage lending. Credit unions are widely recognized as not being the cause of this problem. A widely accepted definition of a “subprime” mortgage loan is one that is outside of the 3% Treasury rate spread for comparable maturity. Home Mortgage Disclosure Act (HMDA) data shows that less than 5% of credit union mortgage loans meet this definition, while that number is significantly higher for other types of institutions.
On May 7, 2009 the House of Representatives passed H.R. 1728, the Mortgage Reform and Anti-Predatory Lending Act of 2009, by a vote of 300 to 114. The bill would establish a national standard intended to fight abusive practices that many believe led to the current mortgage financing crisis the country is experiencing. This includes a prohibition on “steering” consumers to high-cost loans, new liability for violating the federal standards, and the establishment of an Office of Housing Counseling under the Department of Housing and Urban Development (HUD).
Under H.R. 1728, lenders would need to ensure that borrowers have a “reasonable ability to repay” their mortgage loans, based on factors like income, credit history, employment status, and indebtedness. The legislation also contains a credit risk retention requirement, not included in past versions of the legislation: lenders would need to keep a 5% stake in all home loans made and sold on the secondary market, except where the loan is defined as a “qualified mortgage” and therefore protected by the bill’s Safe Harbor provisions.
The House Financial Services Committee added two NAFCU-sought amendments during the bill’s mark-up. As originally drafted, H.R. 1728 defined a “qualified mortgage” as a 30-year, fixed-rate loan. NAFCU lobbied in favor of expanding the Safe Harbor to include fully amortized 15- and 40-year loans, with interest rates that do not exceed 1.5% over prime for first mortgages, and 3.5% over prime for seconds. This expansion was contained in an amendment introduced by Representatives Bean and Castle, and included in the final House-passed version of the bill.
Along with several other industry groups, NAFCU also supported an amendment introduced by Representative Biggert, which called for the withdrawal and revision of HUD’s Real Estate Settlement Procedures Act (RESPA) rule. The rule would need to be re-drafted by HUD, in conjunction with the Federal Reserve, to prevent the unnecessary costs associated with each agency’s separate disclosure requirements at the time of the consumer’s application and closing. The current RESPA rule would need to be withdrawn, and a new rule issued, within 12 months of the bill’s enactment.
At present, no corresponding legislation to H.R. 1728 has been introduced in the Senate, but the issue remains a significant one. NAFCU will continue to monitor mortgage reform proposals closely as they continue to come up in the 111th Congress.
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