Predatory Lending

On January 20 of this year, Governor Edward M. Gramlich of the Federal Reserve Board spoke at a national conference in Ann Arbor, Michigan. His remarks on the issue of "predatory lending" should help state legislators deal with the issue. He began by observing; "Great progress has been made as evidenced by new highs in home ownership rates for nearly all racial and income groups ... Studies ... have shown that lower-income and minority consumers, groups that traditionally had difficulty in getting home mortgage credit, have been taking out housing loans at record levels in recent years. Specifically, the number of conventional home mortgage purchase loans to lower-income borrowers nearly doubled between 1993 and 2000, whereas the number of loans to upper-income borrowers rose by 66 percent. Also, over the same period, the number of conventional mortgage loans increased 122 percent to African-American borrowers and 147 percent to Hispanic borrowers, compared with an increase of 35 percent to white borrowers."

Later, he urges that we distinguish between subprime lending and predatory lending. Predatory lending refers to such practices as "loan flipping, packing of unnecessary fees and insurance, fraudulent or deceptive practices. Subprime lending, on the other hand, refers to entirely appropriate and legal lending to borrowers who do not qualify for prime rates reserved for borrowers with virtually blemish-free credit histories."

The Governor concluded his talk by urging greater attention to the financial education of consumers: "Throughout our process of collecting opinions on how to address predatory lending, one strategy that has been unanimously embraced is consumer education. Educated borrowers who understand their rights under lending contracts and who know how to exercise those rights put up the best defense against predatory lenders."