STATEMENT OF COMMISSIONER ORSON SWINDLE
CONCURRING IN PART AND DISSENTING IN PART

In the Matters of

Granite Mortgage, LLC, File No. 982-3167
LAP Financial Services, Inc., File No. 982-3169
CLS Mortgage Incorporated, File No. 982-3171
Wasatch Credit Corporation, File No. 982-3191

In these complaints, the Commission alleges that Granite Mortgage, LLC, LAP Financial Services, Inc., CLS Mortgage Incorporated, Wasatch Credit Corporation, and their principals violated the Truth In Lending Act ("TILA"), 15 U.S.C. § §  1601-1666j, the Home Ownership and Equity Protection Act of 1994 ("HOEPA"), 15 U.S.C. § 1639, and Section 5 of the FTC Act, 15 U.S.C. § 45, while engaging in subprime lending. I agree with my colleagues that there is strong support for the allegations that the corporate defendants violated TILA, HOEPA, and Section 5's prohibition on deceptive acts or practices and that most of the relief contained in the orders is necessary and appropriate.⁽¹⁾

The complaints also allege, however, that defendants engaged in three unfair practices within the meaning of Section 5 of the FTC Act: (1) asset-based lending;⁽²⁾ (2) using loan provisions prohibited by HOEPA;⁽³⁾ and (3) denying borrowers a three-day waiting period between receipt of disclosures required by HOEPA and closing on the loan. I dissent from these allegations, as I did from those in Barry Cooper Properties, Inc., File No. 982-3200 and Capitol Mortgage Corporation, File No. 982-3203, because the statutory requirements for unfairness are not met. An unfair act or practice is one that is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers themselves and is not outweighed by countervailing benefits to consumers or competition. 15 U.S.C. § 45(n). Consumers can reasonably avoid being injured by asset-based lending by the simple step of not taking loans that obligate them to make monthly payments in excess of their incomes. Likewise, consumers can reasonably avoid being injured by loan terms prohibited by HOEPA by simply not accepting a loan with such terms. Finally, there is no evidence that borrowers have been substantially injured by the denial of the HOEPA three-day pre-closing waiting period since, under TILA, these borrowers also have three days after closing to rescind the loan agreement.⁽⁴⁾ 15 U.S.C. § 1635(a); 12 C.F.R. § 226.23.

These unfairness allegations are based on the theory that although these actions, standing alone without HOEPA, do not meet the test for unfairness, factoring in HOEPA as evidence of "established public polic[y]," 15 U.S.C. 45(n), tips the balance toward establishing unfairness. As I stated in Barry Cooper Properties, Inc., factoring in HOEPA does not overcome the failure to meet the primary statutory requirements that the likely harm be substantial and not reasonably avoidable by consumers.

Even if I were to accept this theory, however, it still does not provide a basis for alleging that those defendants who are not bound by HOEPA engaged in unfair acts or practices in violation of Section 5, where the unfairness determination relies on the fact that the underlying actions were HOEPA violations. TILA, of which HOEPA is a part, binds only creditors. TILA states: "The term 'creditor' refers only to a person who both (1) regularly extends . . . consumer credit . . . and (2) is the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness." 15 U.S.C. § 1602(f) (emphasis added); see also 12 C.F.R. § 226.2(a)(17). Thus, while the public policy embodied in HOEPA may disfavor certain actions, the same policy clearly states that only "creditors" are bound by its restrictions.

The complaints contain allegations against individuals who are not creditors under TILA, charging them with unfairness based on HOEPA violations committed by the companies they control. If the underlying actions do not independently violate Section 5 without the inclusion of HOEPA's "public policy," I do not see how the Commission can rely on HOEPA's policy to establish that the creditors' actions are unfair but then disregard the clear limits on HOEPA's applicability by stretching that policy to cover entities that are not creditors. By doing this, the majority creates a mechanism to strip a statute of its explicit jurisdictional limits and extend its reach -- as well as that of the Commission -- to those whom Congress has explicitly excluded.

The allegations that defendants violated TILA and HOEPA, and engaged in deceptive practices by failing to disclose material loan information, are well supported. It is unnecessary to stretch beyond these solid allegations to construct expansive unfairness theories that do not satisfy statutory requirements. Moreover, it is objectionable to use the public policy that Congress embodied in a statute to expand our reach but then abandon it when it would constrain us.

Accordingly, I dissent to the extent that each of these complaints alleges that the defendants engaged in unfair acts or practices by engaging in asset-based lending, by including loan provisions prohibited by HOEPA, and by denying borrowers a three-day waiting period between receipt of disclosures required by HOEPA and closing on the loan. I further dissent from the allegations that non-creditor defendants engaged in unfair acts or practices by controlling creditors that engaged in practices violative of HOEPA.

Endnotes:

1. The complaint against Wasatch Credit Corp., its related companies, and their principals alleges that defendants engaged in both unfair and deceptive acts or practices in violation of Section 5 by directing or requiring consumers to falsely state that loans are for business purposes; by failing to disclose that by falsely characterizing the loans as being for business purposes, consumers may lose important protections under the law; and by completing or altering consumers' loan applications to falsely state that the loans are for business purposes. I agree that all of these practices are deceptive. I also agree that by altering the loan applications without the borrower's knowledge -- thus rendering the borrower unable to avoid the harm of losing the protections TILA and HOEPA provide for consumer (as opposed to business) credit -- defendants engaged in unfair acts or practices.

2. Asset-based lending occurs when credit is extended based not on the borrower's projected future income but on the amount of equity in his or her home or other asset.

3. HOEPA prohibits certain loan terms, including a balloon payment in a loan with a term shorter than five years, an increased interest rate after default, and some prepayment penalties. 15 U.S.C. § 1639; 12 C.F.R. § 226.32(d).

4. Moreover, if borrowers are not provided notice of the TILA three-day post-closing rescission period by the lender, they then have up to three years to rescind the loan agreement. 15 U.S.C. § 1635(f); 12 C.F.R. § 226.23(a)(3).