Home equity lenders are bracing for a government report expected to tell the U.S. Congress how to crack down on unfair lending practices.
The most controversial option under review would give consumers the right to sue lenders under federal law for unfair and deceptive practices, an easier legal test than suing for fraud, according to industry lobbyists and consumer activists.
Banks, finance companies and other lenders say that would lead to an explosion of unnecessary lawsuits over perceived lending problems.
“It’s a trial lawyers’ dream,” said Wright H. Andrews Jr., a prominent Washington lobbyist hired by National Home Equity Mortgage Association.
The Federal Reserve and the Department of Housing and Urban Development are considering the new right to sue and other options as part of a broad review of key consumer protection laws, the truth-in-lending act and the real estate settlement procedures act, or Respa. The report is expected to be issued before a House Banking subcommittee hearing Wednesday on ways to overhaul the laws and could eventually be embraced in legislation.
Home equity lending in the U.S. has exploded. The industry originated loans totaling $268 billion in 1997, nearly 50 percent higher than levels in 1992, according to the National Home Equity Mortgage Association.
Congress and regulators have been struggling to respond to dramatic tales of “predatory” lenders who charge high rates and hidden fees to the elderly or minority borrowers.
Throughout the country, consumers are suing home equity lenders, charging that undisclosed referral fees paid to mortgage brokers amount to illegal kickbacks and lead to excessive interest rates and fees.
In a significant federal case amid a broader industry probe, the Federal Trade Commission in January sued Washington-based Capital City Mortgage Corp., alleging unfair lending practices, including charging interest rates as high as 24 percent on loans made to minority borrowers. U.S. home equity loans currently average slightly more than 9 percent nationwide, according to recent surveys.
Jeffrey Zeltzer, executive director of the National Home Equity Mortgage Association, condemned abuses within the industry.
“Our intent is to work with regulators to put bad actors out of business,” Zeltzer said.
Yet the group, which represents 350 lenders such as the Money Store Inc., NationsBank Corp. and Household International Inc., fears some recommendations the Fed and HUD are reviewing go too far.
Lenders say providing consumers with additional rights to sue could force lenders to restrict credit.
“The lender is going to be gun shy to make loans to a borrower because of the threat of litigation,” said Laura J. Borrelli, executive vice president of Residential Money Centers Inc., a Montvale, N.J. lender. Officials at the American Association of Retired Persons and the American Bankers Association also said the expanded powers to sue lenders are an option but didn’t know if it would make the final report.
“A lot of issues have been raised. HUD and the Fed have been sifting through and analyzing them to shape their proposals,” said Victor Lambert, a HUD spokesman.
“Predatory lending has been part of the discussion. In the context of that discussion, groups have raised the `udapt’ standard (unfair deceptive acts and practices) as a possibility,” he added.
Such a legal remedy is available under state laws but not under federal law, government officials said.
The idea is backed by consumer advocates such as William Brennan of the Atlanta Legal Aid Society. Brennan was a central figure in the home equity lending lawsuits against the finance company arm of Fleet Financial Group Inc. The firm settled the suits with the state of Georgia for $30 million.
“We need a national `udapt’ law to cover abuses that are not covered” by the other federal consumer lending laws, Brennan said.
One consumer activist involved in discussions, attorney Jean Constantine-Davis of AARP Foundation Litigation, said regulators are serious about beefing up the laws.
“They’re putting out feelers on how to provide substantive protections to people,” said Davis, who’s successfully sued mortgage lenders for abusive practices.
Home equity loans include second mortgages and refinanced first mortgages secured by a borrower’s home. Much of the regulators’ attention focuses on players dealing primarily with riskier borrowers, or the so-called sub-prime loan market, or borrowers with tarnished credit histories or low incomes.
Another item under study would require lenders to disclose and guarantee settlement costs, such as appraisal, title insurance and survey fees, for home equity borrowers, said Andrews and others. This would eliminate consumer confusion and the opportunity for lending abuses.
Andrews said the home equity trade group wants to make guaranteed settlement costs mandatory and not have a two-tiered system where some companies provide guaranteed rates while others won’t.
Consumer groups are pushing a plan to classify home equity loans in three categories and expand protections for the riskiest loans on high fees, balloon payments and multiple refinancings or loan “flipping.” Industry lobbyists suggested regulators weren’t likely to embrace such a plan.
Consumers also want prohibitions on prepayments of credit life insurance policies in risky home equity loans, which can add several thousand dollars at settlement.
