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Updated September 12, 2008
On March 15, 2007, Reps. Paul Kanjorski (D-PA) and Ed Royce (R-CA)
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 percent per year on any loan, unless an alternative rate is established by federal regulation. Currently, the National Credit Union Administration Board has set that rate so that there are no loans above 18 percent. 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 recognized 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 November 15, 2007 the U.S. House of Representatives passed bipartisan legislation aimed at reforming mortgage and certain lending practices that were viewed as predatory. HR. 3915, “The Mortgage Reform and Anti-Predatory Lending Act of 2007” would establish a national standard intended to fight abusive practices that many believe led to the current mortgage financing crisis that the country is experiencing. “We are dealing with legislation that seeks to prevent a repetition of events that caused one of the most serious financial crises in recent times. There is not debate about what is the largest single cause of that. Innovations in the mortgage industry themselves are good and useful, but were conducted in such a completely unregulated manner that abuses took place,” said Financial Services Committee Chairman Barney Frank.
This comprehensive legislation will create a licensing system for residential mortgage loan originators, establish a minimum standard requiring that borrowers have a reasonable ability to repay a loan, and will attach a limited liability to secondary market securitizers. The legislation will also expand and enhance consumer protections for “high-cost loans,” will include protections for renters of foreclosed homes, and will establish an Office of Housing Counseling through the Department of Housing and Urban Development.
With H.R. 3915 stalled and in hopes of getting a housing bill moving, Senate Democrats stripped a House energy bill (H.R. 3221) and replaced the bill with the text of a Senate Housing measure – the Foreclosure Prevention Act – which the Senate passed in April. The House then took the modified H.R. 3221 and replaced it with their version of a housing package which included provisions from H.R. 3915, the House GSE Reform bill, FHA reform measures, and more.
In order to craft a Senate package that closely mirrors the new House version on H.R. 3221, Senate Banking Chairman Chris Dodd recently introduced “The Housing and Economic Recovery Act of 2008.” This housing legislation contains provisions from a previously approved measure sponsored by the Chairman and Ranking Member Shelby as well as measures from the Foreclosure Prevention Act. The legislation contains the following provisions:
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The HOPE for Homeowners Act: Creates an initiative within the Federal Housing Administration (FHA) to prevent foreclosures for hundreds of thousands of families at no estimated cost to American taxpayers.
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Affordable Housing Fund: A permanent, new fund that will help create more affordable housing for millions for Americans in communities across the country.
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Assistance for Communities Devastated by Foreclosures: To ensure that communities can mitigate the harmful effects of foreclosures, $3.92 billion in supplemental
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Community Development Block Grant Funds will be provided to communities hardest hit by foreclosures and delinquencies.
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Foreclosure Counseling for Families in Need: To help families avoid foreclosure, the bill provides $150 million in additional funding for housing counseling.
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Preserving the American Dream for Our Nation’s Veterans: This bill contains several provisions to help returning soldiers avoid foreclosure, including lengthening the time a lender must wait before starting foreclosure from three months to nine months after a soldier returns from service.
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GSE Reform: Creates a world class regulator for the government-sponsored enterprises (GSEs) so that these vital institutions can safely and soundly carry out their important mission of providing our nation’s families with affordable housing.
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FHA Modernization: A provision to modernize, streamline and expand the reach of the FHA, allowing families in all areas of the country to access secure and affordable mortgages through FHA.
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Enhancing Mortgage Disclosure: To ensure that consumers know the exact amounts of their mortgage payments, including the maximum possible payment under the terms of the loan and changes in payments associated with adjustable rate mortgages, lenders will be required to provide borrowers with timely and meaningful mortgage disclosures on all home purchase loans, loans that refinance a home, and loans that provide a home equity line of credit.
The Housing and Economic Recovery Act passed the Senate on May 20, 2008. On July 23, 2008, following actions taken by the Federal Reserve and Treasury to address the continued fall out from the subprime crisis, the House passed an amended version of the Senate passed H.R. 3221. The bill passed the Senate on July 26, 2008 and was signed by the President on July 30, 2008.
In the upcoming weeks, the House Financial Services Committee plans to examine compliance and implementation issues.
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