Abusive, Costly, Predatory . . .

During the past months there has been an outburst of criticisms of the consumer credit industry for its lending practices to inner city or low-income consumers. In a speech to the National Community Reinvestment Coalition, Federal Reserve Chairman Alan Greenspan expressed concern about "abusive lending practices that target specific neighborhoods or vulnerable segments of the population and can result in unaffordable payments, loss of homeowners' equity and foreclosure . . . . The Federal Reserve is working on several fronts to address these issues." Frank Torres, legislative counsel for Consumers Union, responded, "So when are we going to see laws, regulation, and enforcement to put a stop to it? Action speaks louder than words."

The Fed has recently formed an interagency task force representing about ten federal agencies. It is reported to be considering more vigorous enforcement of existing laws as well as the need for new legislation. At the same time, more vigorous action against subprime lending has been proceeding on other fronts. Subprime loans are loosely considered to be those carrying high interest rates extended to consumers with imperfect credit records. In the latter part of March about 400 members of Acorn marched on Citigroup's office of Salomon Smith Barney in Washington, D.C. to protest that firm's dealings with a subprime lender. Rep. Jan Schaakowsky (D., Ill) and seven state legislators have submitted new legislation to impose more limits on subprime lending." More legislative activity in this area seems is likely on the way.

Franklin D. Raines, CEO of Fannie Mae, has suggested still another approach. Do not give abusive lenders access to financing. The approach is derived from the "Sullivan principle" that was applied to lenders to firms in South Africa. If borrowers did not adhere to a specified "code of conduct," lenders were advised not to make loans to them. Similarly, firms that finance subprime lenders should refuse to finance companies that did not adhere to a code of conduct. Mr. Raines is quoted in the New York Times (4/2/00) as warning, "Too many legitimate lenders are being tempted to get into this business because of its profits."