	Background

While there is no uniformly accepted definition of predatory lending, a  number of practices are widely acknowledged to be predatory. 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. Among federal agencies, FTC has a prominent role in  combating predatory lending because of its responsibilities in  implementing and enforcing certain federal laws among lending  institutions that are not depository institutions supervised by federal  banking regulators. FTC reported that it has filed 19 complaints—17 since  1998—alleging deceptive or other illegal practices by mortgage lenders or  brokers and that some actions have resulted in multimillion dollar  settlements. Federal banking regulators have stated that their monitoring and  examination activities have uncovered little evidence of predatory lending  in federally regulated depository institutions. Issues related to federal oversight and regulation of certain nonbank  mortgage lenders may challenge efforts to combat predatory lending. Nonbank mortgage lending companies owned by financial or bank holding  companies (i.e., nonbank mortgage lending subsidiaries) account for an  estimated 24 percent of subprime loan orginations, according to the  Department of Housing and Urban Development, and some have been the  target of notable federal and state enforcement actions involving  allegations of abusive lending. Many States Have Passed Laws Addressing Predatory Lending, but Federal Agencies Have Preempted Some Statutes

In response to concerns about the growth of predatory lending and the  limitations of existing laws, 25 states, the District of Columbia, and 11  localities have passed their own laws addressing predatory lending  practices, according to a database that tracks such laws. Some states have also increased the regulation of and licensing  requirements for mortgage lenders and brokers, in part to address  concerns that some unscrupulous lenders and brokers have been  responsible for lending abuses and that these entities have not been  adequately regulated. The regulators also said they found little to no evidence of  predatory lending by the institutions they regulate. A number of factors may make the elderly particularly susceptible to  predatory lending practices. For example:    Diseases and physical impairments associated with aging—such as  declining vision, hearing, or mobility—can restrict elderly consumers’  ability to access financial information and compare credit terms. Elderly homeowners often live in older homes and are more likely to  need someone to do repairs for them. The Usefulness of Consumer Education, Counseling, and Disclosures in Deterring Predatory Lending May Be Limited

While representatives of the mortgage lending industry and consumer  groups have noted that financial education may make some consumers  less susceptible to abusive lending practices, GAO’s review of literature  and interviews with consumer and federal officials suggest that consumer  education by itself has limits as a tool for deterring predatory lending. Prepurchase mortgage counseling—which can offer a “third party” review  of a prospective mortgage loan—may help borrowers avoid predatory  loans, in part by alerting consumers to predatory loan terms and practices. While beneficial,  the role of mortgage counseling in preventing predatory lending is likely to  be limited. However, the secondary market may also inadvertently  facilitate predatory lending by providing a source of funds for  unscrupulous originators, allowing them to quickly sell off loans with  predatory terms. However, the  degree of due diligence purchasers undertake varies. In contrast, according to some market participants, the due  diligence of other secondary market purchasers of residential mortgages  may be more narrowly focused on the creditworthiness of the loans and  on their compliance with federal, state, and local laws.
Why GAO Did This Study

While there is no universally accepted definition, the term "predatory lending" is used to characterize a range of practices, including deception, fraud, or manipulation, that a mortgage broker or lender may use to make a loan with terms that are disadvantageous to the borrower. Concerns about predatory lending have increasingly garnered the attention and concern of policymakers, consumer advocates and participants in the mortgage industry. This statement is based on GAO's report, released at today's hearing, and discusses federal and state efforts to combat predatory lending; factors that may make elderly consumers more susceptible to predatory lending; the roles of consumer education, mortgage counseling, and loan disclosures in preventing predatory lending; and how the secondary mortgage market can affect predatory lending.

What GAO Found

Federal agencies have taken a number of enforcement actions, sometimes jointly, using various federal consumer protection laws to combat predatory lending. The Federal Trade Commission (FTC) has played the most prominent enforcement role, filing 19 complaints and reaching multimillion dollar settlements. The Departments of Justice and Housing and Urban Development have also taken various predatory lending-related enforcement actions. Federal banking regulators report little evidence of predatory lending by the institutions they supervise. However, concerns exist about nonbank mortgage lending companies owned by financial or bank holding companies. While FTC is the primary federal enforcer of consumer protection laws for these entities, it is a law enforcement agency that conducts targeted investigations. In contrast, the Federal Reserve Board is well equipped to routinely monitor and examine these entities and, thus, potentially deter predatory lending activities, but its authority in this regard is less clear. As of January 2004, 25 states, as well as several localities, had passed laws to address predatory lending, often by restricting the terms or provisions of certain high-cost loans; however, federal banking regulators have preempted some state laws for the institutions they supervise. Also, some states have strengthened their regulation and licensing of mortgage lenders and brokers. While there are no comprehensive data, federal, state, and consumer advocacy officials report that elderly people have disproportionately been victims of predatory lending. According to these officials and relevant studies, predatory lenders target older consumers in part because they are more likely to have substantial home equity or may live on limited incomes that make them more susceptible to offers for quick access to cash. Older consumers may also have cognitive or physical impairments such as poor eyesight, hearing, or mobility that limit their ability to access competitive sources of credit. GAO's review of literature and interviews with consumer and federal officials suggest that consumer education, mortgage counseling, and loan disclosures are useful, but may be of limited effectiveness in reducing predatory lending. A variety of factors limit their effectiveness, including the complexity of mortgage transactions, difficulties in reaching target audiences, and counselors' inability to review loan documents. The secondary market--where mortgage loans and mortgage-backed securities are bought and sold--benefits borrowers by expanding credit, but may facilitate predatory lending by allowing unscrupulous lenders to quickly sell off loans with predatory terms. In part to avoid certain risks, secondary market participants perform varying degrees of "due diligence" to screen out loans with predatory terms, but may be unable to identify all such loans.