Consumer Law & Policy Blog

More on Proposed Military Predatory Lending Regs

We've previously blogged several times (including here, here, here and here) about the new federal legislation regulating predatory lending to the military, known as the Military Lending Act or MLA (10 U.S.C. 987).  Comments to the Defense Department's proposed regulations implementing the statute were due this week, and the docket is now overflowing with views from the entire gamut of the consumer credit industry, from banks to pawnshops, all seeking various carve-outs for their business.  Here's a sampling of some of the other views:

• The other day, Jon Sheldon posted about the comments of the Center for Responsible Lending, National Consumer Law Center, and Consumer Federation of America, and other consumer groups.
• Public Citizen's comments, which you can read here, echo some of the policy arguments made in considerable depth in the NCLC/CRL/CFA comments, but emphasize an administrative-law approach, arguing that proposed regulations would be arbitrary and capricious and contrary to the MLA.
• Yesterday, I learned that the Federal Trade Commission has also filed comments that largely endorse the narrow scope of the proposed regulations.  On the bright side, FTC specifically rejects the suggestion that the DOD should carve out banks from the regulations' coverage, noting that banks offer many of the same products that are covered by the regulations and that exempting them would create an enormous loophole in the law.  The FTC specifically points to "the absence of market studies or other evidence that military consumers benefit when banks and similar entities engage in the practices that Congress generally found harmful."
• Our co-blogger Christopher Peterson, whose research informed the report that led to the legislation and who testified before Congress on the subject, filed comments that are accessible here.

Home Foreclosure Rate Hits 50-Year High

The Washington Post reports here this morning that, according to none other than the Mortgage Bankers Association, the percentage of home mortgage foreclosures in the first three months of this year hit a 50-year high.  As the Post article explains, this tragic problem is most acute in the sub-prime market:

The most dramatic fallout took place in the subprime market, which caters to people with blemished credit or other factors that make them a risk to lenders.  Those borrowers entered foreclosure at a rate of 2.43 percent, up from 2 percent the previous quarter.

The Post story goes into considerable detail on the issue, discussing, among other things, the connection between the popularity of adjustable rate mortgages and the increasing foreclosure rate.  The Wall Street Journal reports the same story, and notes that the Mortgage Bankers Association's chief economist predicts that the foreclosure rate will continue to rise into next year.

House Hearing on Fairness in Consumer Lending and Federal Preemption

    Americans for Fairness in Lending discusses here an important hearing held today before the House Committee on Financial Services.  The topic of the hearing was federal regulation (or the lack thereof) of consumer lending practices and preemption (or not) of relevant state consumer protection law.  Go directly to the Committee's website for full information on today's hearing, including testimony from federal and state regulators.

Some Details on Yesterday's House Hearing on Credit Cards

    As Deepak previously reported, yesterday the Financial Institutions and Consumer Credit Subcommittee of the House Committee on Financial Services held a hearing regarding credit card practices. U.S. PIRG's  consumer blog has this nice report on the hearing, including links to testimony and other information. 

Utilities and Payday Loans: A Dangerous Combination

The National Consumer Law Center today issued a very interesting report on how utilities are funneling their most financially-vulnerable customers to payday loan stores.

As the report explains, when utilities send their customers to pay bills in the storefronts of ultra-highcost payday lenders, those customers become targets for predatory loans.  The practice is widespread.  A review of lists of authorized payment stations of 21 large utility chains found more than 650 licensed payday lenders.  To utilities, the use of payday lenders as authorized bill payment agents provides an inexpensive way to satisfy customers’ demands for locations where they can pay utility bills in person and in cash.  Payday lenders make the deals in order to bring into their establishments potential customers for their ultra-high-cost loan products.  In fact, payday lenders so covet the traffic generated by bill payment that some bypass making arrangements with utilities and offer “unauthorized” bill payment services.  Why utility customers?  Because there are millions of them.  And those who pay bills in person have some of the characteristics--low-income, minority, female, elderly--that make them prime targets for payday lenders. 

Among other things, the NCLC report recommends (1) that regulators prohibit utilities from using payday loan stores as authorized payment centers and (2) that utilities discourage customers from paying bills where ultra-high-cost loans are marketed and transacted, and provide them with safe alternatives.

Payday Loan Store Manager Speaks Out

by Christopher Peterson

The Center for Responsible Lending recently posted a chilling four minute video with Rebecca Flippo, a former payday loan store manager from Virginia. Ms. Flippo explains that the effect of payday lending on low income consumers is "worse than you think." Her comments give a sense of how some borrowers may end up trapped in long term obligations.

Particularly interesting were her comments suggesting that many of her customers mistakenly believed that their loans were cheaper than credit cards. Apparently, her company had a policy of "playing down" the significance of their high annual percentage rates, even though most borrowers ended up with longer term obligations.

Former Ameriquest Workers Tell of Deception

From Morning Edition, May 14, 2007

Americans are losing their homes in record numbers due to subprime lenders who allegedly lied to customers about their mortgages. Some former employees of Ameriquest, the nation's leading subprime lender, say the company encouraged them to conceal rate terms, make fake fixed-loan documents that pushed customers into loans they couldn't afford, and more.

Listen now.

Is There A Relationship Between Predatory Mortgage Lending And Political Contributions?

by Brian Wolfman

Common Cause has just issued this intriguing report suggesting a link between the severe problems in the subprime lending market and political contributions made by the lending industry to lawmakers.  Read it in its entirety, but, for now, I'll tease you with this excerpt from the report's executive summary:

While investing nearly $210 million on Washington lobbying and campaign contributions, the mortgage lending industry for seven years successfully blocked Congress from taking action to restrict lending abuses that saddled economically vulnerable families with home mortgages they could not afford. In 2006 alone, foreclosure filings across the country were up 42 percent compared to 2005—a total of 1.2 million homes in jeopardy, or one in every 92 homes.  And foreclosures continue to mount in 2007, with March foreclosure filings up 47 percent compared to the year before.

Common Cause's press release is available here.

 

A Look At The Subprime Lending Industry

The Washington Post continues its coverage of subprime lending with this front-page expose on the pressure felt by employees at one subprime lender, New Century, to approve mortgage loans.  The following short excerpt from the Post article gives you a flavor for the story:

New Century has become the premier example of a group of companies that grew rapidly during the housing boom, selling working-class Americans with questionable credit huge numbers of "subprime" loans with "teaser" rates that typically rose after the first two years. This business transformed the once-tiny New Century into a lending powerhouse that was held up as a model of the mortgage industry's success.

But now, with home values falling and adjustable loan rates rising, record numbers of homeowners are failing to make their payments. And a detailed inquiry into the situation at New Century and other subprime lenders suggests that in the feeding frenzy for housing loans, basic quality controls were ignored in the mortgage business, while the big Wall Street investment banks that backed these firms looked the other way.

New Century, which filed for bankruptcy protection last month, has admitted that it underreported the number of bad loans it made in its financial reports for the first three quarters of 2006. Hardiman and other former employees of New Century interviewed said there was intense pressure from bosses to approve loans, even those with obviously inflated housing appraisals or exaggerated homeowner incomes.

Disappointing Draft Military Lending Regs: Comments Sought

by Lauren Saunders

[Ed Note:  Last month, we blogged about the DOD's proposed regs and request for comments on predatory lending limits and the reaction of consumer groups.  In this post, Lauren Saunders of NCLC provides further details on the regs and how to comment.]

Last fall, the Talent/Nelson Military Lending Act (MLA) imposed a 36% interest rate cap, banned mandatory arbitration, and imposed other restrictions on credit offered to active duty military service members and their dependents.  DOD published draft regulations to implement the Act last month, and they are very disappointing.  They limit the law only to payday, auto title and refund anticipation loans, and offer plentiful opportunities for evasion even within those categories.

Comments on the draft regulations must be received by DOD no later than June 11, 2007. Ironically, DOD is asking for comments on whether it should go further in exempting banks, fees or credit products, but does not ask whether the regulations will stop the abusive high-cost lending to military borrowers that it believes is impairing military readiness.