Predatory Lending

Updated August 27, 2007

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. 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. Therefore, NAFCU believes credit union-specific regulations on predatory lending would be misdirected and unnecessary.

Currently a number of different legislative proposals aimed at curbing abusive lending practices are being considered in Congress. The House of Representatives Financial Services Committee Chairman Barney Frank has stated that a legislative response to what he views as abusive practices in the subprime lending segment of the population is pending. Some of the key aspects of this legislative response by the House Financial Services Committee will include:

Mandating better underwriting of loans by lenders and mortgage brokers alike.
A guaranteed measured response in order to ensure that abusive practices are stopped while at the same time not cutting off readily available credit for all Americans.
Requiring better disclosure of loan terms to borrowers from lenders and brokers.
Measures aimed at combating the practice of “Redlining” which is essentially discriminatory practices by lenders that cut off access to capital in certain segments of the population that usually tend to consist of minorities and lower income households.
A response that will eliminate incentives for lenders to place people into mortgages and loans that they can not afford.

In addition to the pending legislation that will be introduced in the next coming months, the House Financial Services Committee has also held numerous hearings on the topic of predatory and subprime lending over the course of the past few months. Some of the topics have included:

“Possible Responses to Rising Mortgage Foreclosures.”
“The Role of the Secondary Market in Subprime Mortgage Lending.”
“Improving Federal Consumer Protection in Financial Services.”

In addition to this close examination by the House Financial Services committee in the House of Representatives, the Senate Banking Committee has also considered a number of predatory and subprime lending issues as well, including:

“Examining the Billing, Marketing, and Disclosure Practices of the Credit Card Industry, and Their Impact on Consumers.”
“Preserving the American Dream: Predatory Lending Practices and Home Foreclosures.”
“Subprime Mortgage Market Turmoil: Examining the Role of Securitization.”
“Ending Mortgage Abuse: Safeguarding Homebuyers.”

In addition to these hearings, Chairman Dodd promises legislation to be introduced in the coming months aimed at combating abusive practices by the credit card industry.

Targeting the Military

The issue of predatory lending specifically targeted to the military continues to be an important issue for the 110th Congress. Many servicemen and women have limited financial management skills and predatory lenders have sprung up around a number of military installations. The most injurious predatory lending practices are the application of excessive fees and charging exorbitant annual percentage rates, sometimes more than 500 percent as well as the automatic “roll-over” or refinancing of small, short-term loans that perpetuate a “cycle of indebtedness.” These practices are becoming more and more prevalent in military markets.

Due to the number of young troops lacking basic financial management capabilities, unscrupulous lenders see U.S. servicemen and women as a captive and somewhat naïve borrowing audience for various lending schemes. Unfortunately, these practices are becoming more and more prevalent, especially during time of extended troop deployment. Last Congress, a number of preventative legislative measures introduced aimed at combating predatory lending targeted at our nations armed services men and women.

Specifically, on January 4, 2005, Representative Sam Graves (R-MO) introduced the Servicemembers Anti-Predatory Lending Protection Act (HR. 97) which would cap the federal interest rate for loans at 36 percent APR for service members and their families. Currently, credit unions are capped at 18 percent. NAFCU was invited to testify in a field hearing by the Congressman in Kansas City, Missouri on March 29, 2005. Hank Klein, President and CEO of Arkansas FCU and former NAFCU Board Chairman, testified on behalf of NAFCU.

In June of 2006, Senators Jim Talent (R-MO) and Bill Nelson (D-FL) introduced an amendment to the FY 07 DoD Authorization bill that was identical to HR. 97. The amendment was passed and was included in the overall 2007 Department of Defense Authorization bill. The Regulatory division of NAFCU presented comments on the proposed rule to the DoD on June 11, 2007. Currently, NAFCU is awaiting implementation of the new military lending rules.