FROM THE OFFICE OF PUBLIC AFFAIRS

I. Introduction

It's an honor to be here today with my colleagues from Washington before such a distinguished audience. I'd like to thank Attorney General Ketterer for hosting this summit. This is a unique and important opportunity for state and federal officials to share information and collaborate on ways to address problems that victimize our nation's most vulnerable consumers.

The state attorneys general have long led the way in rooting out abusive trade practices and advancing consumer protections. The new laws in North Carolina we heard about earlier today provide the most recent example of the states' leadership in helping to curb predatory lending practices. For our part, the federal government has taken an increasing interest in the issue as evidence has indicated that these types of abuses are growing, and occurring on a national basis.

To that end, as the members of this panel have described and will describe, the federal agencies represented here have undertaken a series of efforts to better understand the problems that are occurring in this marketplace, to propose substantive new protections for consumers, and to use our authorities where applicable to curb predatory practices.

The FTC and the Department of Justice have a long history of working with the states to bring actions against lenders that have violated federal laws such as HOEPA, TILA, ECOA and the Fair Housing Act.

Congress gave the Federal Reserve Board important authorities to ensure that consumers receive clear and consistent information on consumer credit, and to provide substantive protections for consumers in the high-cost mortgage market where evidence of abuses exists. As we speak, the

Board's staff is actively engaged in an effort to propose new consumer protections in this area.

HUD, too, has significant rulemaking and enforcement authority with respect to the mortgage market through RESPA. In 1998, it joined with the Fed to issue recommendations to streamline the mortgage lending process and to provide new protections against abusive practices in the mortgage market.

All this, of course, leaves open the question of why Treasury is part of this panel. While our financial institution regulatory bureaus - the OCC and OTS - have important authorities that I will discuss later, our interest in the issue of predatory lending also has a broader policy basis. Secretary Summers and the rest of us at Treasury believe we have the responsibility of ensuring that our credit markets operate efficiently and fairly for all Americans. And the area of Treasury that I represent, Community Development Policy, has the task of advancing policies that democratize access to capital and credit, especially among the lower-income individuals and economically distressed communities in our nation that too often lack such access.

It was with these concerns in mind that Secretary Summers joined with HUD Secretary Cuomo this past spring to convene a National Task Force on Predatory Home Mortgage Lending. Through discussions across the country with industry, consumer advocates, state and local government officials, and victims of abuses in the mortgage market, Treasury and HUD gathered evidence on the incidence and nature of these problems. In June, we wrote a joint report to Congress offering our recommendations for legislative, regulatory and budgetary remedies to curb predatory mortgage lending. Our colleagues at FTC, Justice and the bank regulatory agencies were of great assistance in informing those recommendations.

Based on the research that Treasury did for that report, as well as our ongoing involvement with fair lending and other issues affecting access to credit, I'd like to discuss three areas this afternoon:

• First, I'd like to describe the characteristics of our nation's credit markets that may be giving rise to abusive lending practices.
• Second, I'll highlight the major issues facing lower-income borrowers, and describe some of the actions that are being taken to curb abusive practices.
• Third, and finally, I'll outline the specific steps that Treasury and others are taking to improve the credit marketplace as a whole.

I would argue that the first and most important characteristic of the consumer credit market today is high demand. With each progressive month, statistics reveal that we are less and less a nation of savers, and more and more a nation of debtors. In July, our nation's personal savings rate dipped below zero, and it remains there today. At the high end of the income spectrum, this trend may point to individuals increasing their consumption in response to holding unrealized capital gains. At the low end of the income spectrum, however, where the abuses we're concerned about are most likely to occur, increases in household debt may be more problematic.

The most recent Survey of Consumer Finances reveals that in 1998, nearly one in five households with income between $10,000 and $20,000 reported debt payments totaling more than 40 percent of its income. Increasingly, lower-income families are looking to their home equity to secure this debt - the median value of home-secured debt for these families increased by 15 percent from 1995 to 1998, and contributed to their overall decrease in net worth.

Having the ability to tap into home equity to pay for important expenses is crucial. Nonetheless, this trend is of concern, not only because it represents an increase in debt burden for struggling families, but also because it means that these families are putting their homes - their most important assets - at risk in the event of default.

A second important characteristic concerns where these markets operate. When lower-income families went looking for home equity debt in the past, many may not have been able to find it due to their limited or poor credit history. With the rise of the subprime lending market, however, it has become relatively easier for these borrowers to access credit. As the Treasury-HUD report noted, the volume of subprime mortgage originations has increased nearly five times over in the last five years. As a means for expanding the availability of credit, the development of this market has represented a signal achievement for our economy.

But because the astounding growth in subprime lending has occurred largely outside the purview of the heavily regulated banking system - mostly among nondepository mortgage finance companies - the potential for abuses has grown in tandem with the new opportunities for credit. The number of players in this market - considering both brokers and lenders - is huge, but the resources and legal authorities to monitor their activities are limited. This is largely true of the payday lending industry as well. Some estimate that there are 10,000 companies in operation today offering payday loans. The overwhelming majority are licensed at the state level, but subject to no examination and little regulation. The business is growing by leaps and bounds. Investment analysts predict that payday lending volume will triple over the next three years.

The rise in subprime mortgage and payday lending, however, hasn't been driven by increasing consumer demand alone. A third characteristic of today's credit markets is that, while enormous gains have been made in democratizing access to capital, for many lower-income Americans, banks, thrifts, and their credit products may still remain relatively inaccessible. Low-income consumers in struggling neighborhoods may have little choice but to turn to alternative lenders.

Some of the most troubling stories that Treasury and HUD heard in their regional hearings on predatory lending came from residents of inner-city, predominantly minority neighborhoods - in Baltimore, in the Bronx and on Chicago's South Side. When these individuals were approached by a predatory broker or mortgage lender, it never occurred to them that they could seek financing on better terms at a bank, thrift or credit union. This is partly an issue of consumer education, but it is difficult to convince someone that she should seek a mortgage at a traditional lender when that lender is not serving her neighborhood.

This is not to say that banks and thrifts have done a poor job of serving the housing needs of lower-income Americans. In fact, as research has shown, quite the opposite is true. According to statistics from Harvard's Joint Center on Housing Studies, banks, thrifts and their affiliates originated over $580 billion in home mortgages for low- and moderate-income borrowers and neighborhoods from 1993 to 1999. But evidence that a sizeable percentage of subprime borrowers could qualify for prime credit, and evidence that many victims of predatory lending are inner-city residents, suggests that banks and thrifts may be missing an opportunity to compete for a customer base seeking home equity and home improvement credit.

The problem extends to smaller product offerings as well. The demand for payday loans highlights a need for short-term consumer credit, and for products like basic savings accounts, secured credit cards, and checking accounts with overdraft protection. But lower-income consumers, particularly those with past account problems, often cannot access these products.

Given these characteristics of the lower-income consumer credit market - high demand from a population with imperfect or limited credit history, many lightly regulated players and reduced competition from mainstream lenders - the potential for abuses is ripe. The specific issues are numerous. Recognizing this, our joint report with HUD proposed a four-part approach to curbing predatory home mortgage lending, including recommendations to: improve consumer literacy and disclosure, prohibit harmful sales practices, restrict abusive terms and conditions, and improve overall market structure.

At the state level, perhaps one of the most important areas to consider is mortgage broker conduct. Nearly all of the borrowers who gave testimony at the Treasury-HUD regional forums were taken advantage of not only by a lender but also by an unscrupulous mortgage broker who arranged the transaction. The most egregious cases of predatory lending often involved fraud, deception or misrepresentation of the loan terms on the part of the broker. While such broker actions are often illegal under state law, state authorities often lack the resources to police the activities of the thousands of mortgage brokers that may be doing business in their state. One place to consider curbing abusive broker practices may be at the door - by adopting strict certification and licensing processes for these brokers at the state level. Ultimately, holding lenders liable for broker misconduct under certain circumstances may be one of the most effective ways of reducing broker abuses.

On the federal level, the Fed is taking a careful look at how it might address the harmful sales practices and abusive terms often associated with high-cost mortgages. Our report asked the Fed to consider using its authority under HOEPA to prevent such abuses, and we are pleased that the Fed is considering taking steps in this regard.

OCC and OTS are also taking important steps to prevent abusive practices. In June, using its authority to enforce the Federal Trade Commission Act, the OCC entered into a settlement with a national bank that directs the bank to cease deceptive credit card practices and to pay $300 million to consumers harmed by those practices. Those practices included charging consumers for credit protection coverage they did not request, and charging consumers higher interest rates than the lower rates that were advertised as "guaranteed." The OCC will be able to take actions in the future under this authority where evidence confirms that these harmful practices exist.

For its part, OTS is continuing to design and implement new modules and overlays in its examinations of thrifts and their operating subsidiaries to detect predatory practices. The OTS is also evaluating comments it received on the Advance Notice of Proposed Rulemaking it issued in March regarding its regulations implementing AMTPA, the Alternative Mortgage Transaction Parity Act. One area that OTS is looking closely at is whether state housing creditors who originate alternative mortgages under AMTPA should continue to comply with the same requirements that federal thrifts, which are subject to OTS supervision, including regular compliance examinations, must follow in originating mortgages. Placing standard-setting and licensing back in the same hands might make a good deal of sense. Alternatively, OTS is considering whether the federal real estate lending guidelines - which implicitly hinder asset-based mortgage lending - should apply to state-licensed lenders originating loans under AMTPA. OTS is currently consulting with state regulators on the issue to gather information and feedback.

The regulators are to be commended for taking important steps toward preventing harmful practices in this marketplace. For the remainder of my remarks, I'd like to focus on consumer literacy and market structure. Efforts to make improvements in these areas go to the heart of Treasury's objective to ensure a fair and efficient credit market for all consumers.

Treasury is taking steps - and encouraging the federal banking regulators to take steps - to build that better marketplace today.

While the benefits of improving consumer financial literacy are innumerable, two stand out with respect to predatory lending. First, helping individuals to better understand credit, and encouraging them to prepare for financial contingencies through saving, can reduce their demand for credit altogether. Second, with solid financial skills, consumers who do need credit will be more likely to consider all of their credit options and avoid high-cost, high-pressure products like mortgage refinancings and payday loans.

With these benefits in mind, last April Secretary Summers announced the National Partners for Financial Empowerment (NPFE)-a broad based coalition made up of over 80 private, non-profit and government organizations dedicated to raising the level of financial awareness and improving the personal financial skills of all Americans. The NPFE is working to promote personal financial skills among all Americans in areas such as saving, investing, budgeting and managing credit.

Recently, NPFE launched a series of national public service announcements to raise awareness of the importance of saving for retirement. Too often, the elderly are the targets of unscrupulous brokers, lenders and home improvement contractors who are all too willing to refinance a mortgage at a very high cost, and with very little benefit to the borrower. If more Americans make it a priority to save for their retirement, however, they can accumulate the savings from which to pay for home repairs or medical expenses, instead of having to turn to a potentially predatory mortgage loan.

Understanding one's finances, of course, goes hand in hand with understanding financial products. Unfortunately, there are 10 million American families today who lack this understanding because they have no relationship with a financial institution - not even a bank account. That's why Treasury is launching the First Accounts initiative. Last month, President Clinton signed into law legislation that provides Treasury with $8 million to fund pilot projects that provide lower-income "unbanked" Americans with access to low-cost deposit accounts, more banking access points in their communities, and basic financial literacy education.

By funding financial literacy efforts, the First Accounts initiative will help to inform lower-income consumers about the benefits of having a bank account, managing household finances, and building assets. At the same time, it will help to forge new relationships between the mainstream financial services sector and residents of the underserved communities that are all too often the targets of abusive lending practices. These relationships will help lower-income individuals to build the credit history they need to qualify for a mortgage loan on better terms, and help them to build the small amounts of savings they need to avoid high-cost payday lending.

First Accounts will provide but one example of the sort of innovation that banks should employ to compete for lower-income consumers with new retail services. The provision of retail services is an important part of the Community Reinvestment Act, but one need look no further than the explosion in payday lending to realize that insufficient attention is paid to consumer needs in this sector. We believe that bank regulators can help by focusing additional attention, and providing additional guidance, on the CRA services test for large banks. We are encouraging the regulators to promote further innovation and expanded access in retail services among the banks and thrifts they regulate.

Serving the credit needs of lower-income borrowers and communities, as intended under the CRA, also means giving these consumers access to the mortgage products for which they qualify. However, the anecdotal evidence we gathered at the Task Force hearings, as well as some empirical evidence on credit scores, suggests that too many lower-income borrowers may be ending up in a bank's subprime unit, or subprime affiliate, when in fact they could qualify for a mortgage on better terms. Banks and thrifts should have in place procedures to "upstream" these borrowers with good credit histories into their prime mortgage units. As the federal banking regulators draft their interagency policy statement on predatory lending, we encourage them to also consider how banks and thrifts might be given CRA credit for "promoting" borrowers from the subprime to the prime market.

An effort to create a fairer credit marketplace also demands that we have access to relevant information on which to make informed policy decisions. While data required to be reported under the Home Mortgage Disclosure Act have served a crucial role in helping us to understand mortgage lending patterns, additional data not now collected would help to more completely describe the mortgage market - the subprime market, in particular.

In our June report, we asked the Fed to consider making a series of revisions to its Regulation C, which implements the Act. Chief among these was a recommendation that the Fed collect new information on loan price. There is little-to-no publicly available information in this area. Requiring lenders to report information on APR and the up-front cost of credit would enable policymakers to assess the size and character of the subprime market, and to identify areas for potential concern in that market. We also urged the Fed to consider repealing its "10 percent" rule, which may be exempting some of the fastest-growing subprime mortgage lenders in the nation from reporting under Reg C.

Empirical information on the credit market alone, however, will not tell the entire story. Information on developments in this market need to be shared between those at the federal level with a "broad-brush" view, and those at the state level who monitor the actual practices of lenders within their borders. The federal government, for instance, has little access to information about the thousands of lightly regulated payday lenders operating in the US today.

The federal agencies and the state Attorneys General have built a solid, collaborative relationship around enforcing our nation's fair lending laws. I believe that there is a great deal that we could learn from you on the policy side as well, and probably much that you could learn from one another. I would hope that this summit represents the first of many discussions that the federal agencies and the state AG's will have on policies to combat predatory lending. I look forward to your reactions and input, because the right solutions today can create a healthier consumer credit market for tomorrow, one where abusive practices cannot flourish.