Each year, millions of American consumers take out mortgage loans through mortgage brokers or lenders to purchase homes or refinance existing mortgage loans. While the majority of these transactions are legitimate and ultimately benefit borrowers, some have been found to be “predatory”—that is, to contain terms and conditions that ultimately harm borrowers. Loans with these features, often targeted at the elderly, minorities, and low-income homeowners, can strip borrowers of home equity built up over decades and cause them to lose their homes.
The Chair and Ranking Minority Member of the Senate Special Committee on Aging asked GAO to examine the efforts under way to combat predatory lending. GAO reviewed (1) federal laws related to predatory lending and federal agencies’ efforts to enforce them, (2) actions taken by states to address predatory lending, (3) the secondary market’s role in facilitating or inhibiting predatory lending, (4) how consumer education, mortgage counseling, and loan disclosures may deter predatory lending, and (5) the relationship between predatory lending activities and elderly consumers. The scope of this work was limited to home mortgage lending and did not include other forms of consumer loans. To address these objectives, GAO reviewed data and interviewed officials from federal, state, and local agencies and from industry and consumer advocacy groups; examined federal, state, and local laws; and reviewed relevant literature. At GAO’s request, federal agencies identified enforcement or other actions they have taken to address predatory lending. GAO also obtained data from publicly available databases; the data were analyzed and found to be sufficiently reliable for this report. Chapter 1 provides the details of the scope and
methodology of this report. The work was conducted between January 2003 and January 2004 in accordance with generally accepted government auditing standards.
While there is no uniformly accepted definition of predatory lending, a number of practices are widely acknowledged to be predatory. These include, among other things, charging excessive fees and interest rates, lending without regard to borrowers’ ability to repay, refinancing borrowers’ loans repeatedly over a short period of time without any economic gain for the borrower, and committing outright fraud or deception—for example, falsifying documents or intentionally misinforming borrowers about the terms of a loan.1 These types of practices offer lenders that originate predatory loans potentially high returns even if borrowers default, since many of these loans require excessive up-front fees. No comprehensive data are available on the incidence of these practices, but banking regulators, consumer advocates, and industry participants generally agree that predatory loans are most likely to occur in the market for “subprime” loans. The subprime market serves borrowers who have limited incomes or poor or no credit histories, in contrast with the prime market, which encompasses traditional lenders and borrowers with credit histories that put them at low risk of default.
Originators of subprime loans most often are mortgage and consumer finance companies but can also be banks, thrifts, and other institutions. Serious data limitations make the extent of predatory lending difficult to determine. However, there have been a number of major settlements resulting from government enforcement actions or private party lawsuits in the last 5 years that have accused lenders of abusive practices affecting large numbers of borrowers. For example, in October 2002, Household International, a large home mortgage lender, agreed to pay up to $484 million to homeowners to settle states’ allegations that it used unfair and deceptive lending practices to make mortgage loans with excessive interest
and fees. In addition, the rate of foreclosures of subprime loans has increased substantially since 1990, far exceeding the rate of increase for subprime originations. Some consumer groups and industry observers have attributed this development, at least in part, to an increase in abusive lending, particularly of loans made without regard to borrowers’ ability to
repay. Additionally, groups such as legal services agencies have reported seeing an ever-greater number of consumers, particularly the elderly and minorities, who are in danger of losing their homes as a result of predatory lending practices.
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