Task force takes aim at predatory lenders,
outlines steps to eliminate abusive practices
By Michael D. Larson • Bankrate.com

Borrowers need new rules and legislation, as well as increased federal enforcement of existing lending laws, to protect them from excessively expensive and abusive mortgage loans, according to a comprehensive government report released this week.

The report, which the National Predatory Lending Task Force put out June 20, contains several recommendations for officials working to eliminate predatory mortgages. Such loans have fees, terms and conditions so onerous they can force borrowers into repeated high-cost refinance transactions or even foreclosure. Officials with the Treasury Department and Department of Housing and Urban Development said their task force's study should serve as a blueprint for Congressional and regulatory action in the months ahead.

"Predatory lenders are greedily devouring families' life savings and destroying good neighborhoods all across the country," HUD Secretary Andrew Cuomo said. "We ask Congress to join us and move swiftly to give American home buyers the protection they need from predatory lenders."

Providing borrowers a protective blanket
The debate over abusive mortgage lending has raged for more than a year, with everyone from state legislatures to ripped-off widows weighing in. But the new report provides the most complete picture of how the federal government may try to eliminate the problem.

Members of the task force, which included appraisal experts, banker trade group representatives, community activists and politicians, came up with their suggestions after holding group meetings and five public forums around the country this spring.

"These critical recommendations will help protect American families from the abusive practices of some unscrupulous lenders," said Treasury Secretary Lawrence Summers.

The proposals aim to restrict lenders from packing excessive fees into loan transactions, tricking unsophisticated borrowers into loans they can't possibly repay and hiding the loan repayment histories of subprime borrowers so they can't refinance into prime loans, among other things. They aren't binding, but the recommendations suggest Congress tighten existing federal laws such as the Home Ownership and Equity Protection Act, Truth in Lending Act and Real Estate Settlement Procedures Act, or consider writing new ones.

That may be a tall order, however. Observers aren't sure whether legislators will revise existing predatory lending bills to match the task force suggestions, move forward with their current bills intact or drop the ball altogether in favor of activities related to this fall's election season.

"The task force has made strong recommendations that -- if they are fully implemented -- can make a real difference in curbing abusive predatory lending practices," said Rep. John LaFalce (D-N.Y.), whose H.R. 4250 is one of a handful of bills related to the problem that legislators have introduced recently.

But not all of the proposed changes require congressional action. Some could be studied and implemented by regulatory agencies such as the Office of the Comptroller of the Currency and the Federal Reserve Board under their existing charters.

That wouldn't make everyone happy, though.

Lenders cry foul
The Mortgage Bankers Association of America, for one, said the proposed changes could make borrowing more complicated and expensive. Certain loan options, such as "no-cost" loans that allow people to roll up-front loan fees into the principal balance in exchange for accepting a higher rate, could be effectively eliminated too.

"The recommendations in this report would confuse even the most savvy home buyer and do little to eliminate the complexity that permits abuses to exist," said MBAA president Christopher Sumner.

Nevertheless, change may be coming, and for consumer advocates, it's not a moment too soon.

"Overall, the report was thorough and thoughtful, comprehensive and a good document to work from," says Peter Skillern, executive director with the Community Reinvestment Association of North Carolina. "Our mantra is legislation, regulation, education, litigation and appropriation."