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June 24, 2002
Regulation Comments
Chief Counsel?s Office
Office of Thrift Supervision
1700 G Street, NW
Washington, DC 20552
Attention: Docket No. 2002-17
RE: Alternative Mortgage Transactions Parity Act; Advance Notice
of Proposed Rulemaking
Dear Sir or Madam:
The Conference of State Bank Supervisors (CSBS) is pleased to have
the opportunity to comment on the Office of Thrift Supervision?s
(OTS) notice of proposed rulemaking regarding proposed changes
affecting state chartered and licensed housing creditors, including
state chartered savings associations[1].
The Alternative Mortgage Transactions Parity Act (AMTPA) adopted in
1982, authorizes state chartered and licensed housing creditors to
make, purchase, and enforce alternative mortgage transactions
notwithstanding prohibitions in state laws, regulations or
constitutions. AMTPA provides that the OTS?s authorized regulations
preempt conflicting state laws in states that did not opt out of
AMTPA by October 1985. Therefore, currently, AMTPA allows state
licensed housing creditors that make alternative mortgages to follow
rules designated by the OTS[2].
The OTS proposes to revise its rule that identifies the OTS
regulations that apply to state licensed housing creditors.
Specifically, the OTS proposes to eliminate regulations on
prepayment penalties and late charges from the list of OTS rules
that state licensed housing creditors may follow as they conduct
business in one or more states. The result would be that state
licensed housing creditors would no longer be permitted to follow
OTS uniform mortgage rules governing late fees and prepayment
penalties in the jurisdictions where they lend. The OTS has proposed
no corresponding changes to affect the lending practices or
operations of federal savings associations or their operating
subsidiaries engaged in the mortgage business.
The OTS is also proposing to revise existing limitations on the
amount of late charges that may be assessed on loans secured by
first liens on residential manufactured homes. Additionally, the OTS
is recommending that Congress reconsider the continued need for the
Parity Act and has suggested that Congress should consider providing
the states with another opportunity to opt out of the uniform
lending environment provided by AMPTA. In addition, the OTS suggests
that Congress should require state housing creditors lending under
the Parity Act to identify themselves to the states to improve the
ability of state regulatory agencies to monitor the housing
creditors? compliance with AMPTA.
Proposed Approach
CSBS commends the OTS for its apparent efforts to address abusive
lending practices that may occur through AMTPA. CSBS strongly
supports efforts to expand supervisory and legal tools available to
combat unfair lending practices that have devastated many of our
nation?s communities.
Predatory lending, as the term has come to be known, is an issue and
challenge that state banking departments have invested significant
resources to address. States across the country have pursued a
variety of approaches, including developing and participating in
financial education initiatives, conducting robust examinations to
uncover fraud and abusive practices, and carrying out enforcement
actions including unprecedented fines and license revocations. We
have attached a summary of state initiatives in these areas for your
review.
The OTS proposal appears to conclude that late fees and prepayment
penalties are loan terms that are ?predatory? or abusive per se. As
we?ve indicated in previous comment letters to the OTS regarding
AMPTA, CSBS believes that unscrupulous practices must also be
considered when crafting approaches designed to address predatory
lending.
Examples of such fraudulent and deceptive practices include:
extending credit without regard for the borrower?s ability to repay
in an apparent effort to seize collateral; structuring loans that
feature substantial negative amortization, high prepayment penalties
that often prevent the borrower from terminating the loan; interest
rates significantly higher than the risk profile of the borrower
justifies, and financing fees for potentially unnecessary products
such as single premium credit insurance. In and of themselves, some
of these provisions may not constitute predatory lending behavior,
but in combination with high-pressure deceptive sales practices or
fraud, the results can be devastating to financially unsophisticated
consumers.
In instances in which disreputable lenders have utilized prepayment
penalties as a mechanism to trap borrowers in predatory loans, the
ability for states to enforce prohibitions or limitations on
prepayment penalties is clearly a positive outcome. Absent a
comprehensive, nationwide approach to protect consumers from abusive
lending practices, a growing number of states have acted by passing
anti-predatory lending laws and regulations. CSBS supports the
ability of states to enact measures to protect their consumers from
abusive lending practices.
However, CSBS notes that the OTS is suggesting that this methodology
should apply only to state licensed housing creditors, including
state depository savings institutions. CSBS suggests that sound,
effective approaches to combat predatory lending should apply more
broadly in order to avoid consumer confusion and to afford consumers
comprehensive protections. At a minimum, CSBS is concerned about a
change that eliminates parity in uniform operating rules for state
savings associations as opposed to other classes of depository
institutions[3].
Potential Impact of the Proposal
Under the current proposal, federal thrifts would not be subject to
the proposed changes affecting late fees and prepayment penalties.
Similarly, the OTS has determined that state laws generally do not
apply to operating subsidiaries of federal savings associations.
Therefore, operating subsidiaries of federal savings associations
engaged in the mortgage business would continue to be free to charge
late charges and prepayment penalties without restriction. CSBS also
notes that given risk focused examination procedures, operating
subsidiaries of federal thrifts may not necessarily receive an
examination by OTS examiners, even for compliance with federal
consumer protection laws deemed to apply to their operations by the
OTS, unless the operating subsidiary is considered to be a material
component of the institution?s overall operation and is thought to
represent material risk to the overall institution.
The promotion of different standards for various types of
institutions leaves gaps through which some consumers are likely to
fall. CSBS would suggest that truly sound policies designed to
combat predatory lending should apply broadly across the range of
lenders in the marketplace.
Additionally, CSBS questions whether removing prepayment penalties
and late fees from the list of loan terms that are subject to
uniformity through the OTS preemptive mortgage rules is the most
effective approach to combat predatory lending. Although CSBS
believes that where there is no economic justification, creditors
should not be able to evade state anti-predatory lending laws by
asserting that loans are ?alternative mortgages? simply because they
contain a late fee or prepayment penalty, we note that the ability
to charge late fees and prepayment penalties is generally considered
a standard business practice that legitimate lenders routinely
utilize within an overall program based on sound risk management
principles. The approach suggested by the OTS does not distinguish
legitimate lenders from those that engage in abusive or unfair
lending practices.
CSBS notes that when the Federal Reserve Board sought to address
abusive lending practices governed by Regulation Z which implements
the Home Owners Equity Protection Act, (HOEPA) the Board identified
abusive practices such as ?loan flipping? and equity-based lending
without regard to the borrower?s ability to repay. Similarly, the
Board sought to adjust the interest rate triggers that determine
coverage and to expand the fee-based triggers to include optional
insurance premiums and similar credit protection products due to
reported abuses in this area.
CSBS supported the Board?s changes because the proposal expanded the
tools regulators could use in the battle to halt predatory lending
practices, expanded the disclosures required by HOEPA that are
intended to educate consumers regarding the terms and cost of loans,
and significantly, because of the uniform application of the
proposed changes to all lenders that make loans covered by HOEPA.
Conclusion
Reducing instances of predatory lending will take ongoing vigilance
by regulators and demands a more informed base of consumers that are
educated and aware of abusive practices in order to prevent falling
prey to them. In that regard, we applaud efforts by the state
banking agencies and federal banking agencies to expand consumer
education initiatives while continuing to expand the scope of
statutory and supervisory tools available to combat abusive lending
practices.
Thank you for the opportunity to comment. Please feel free to call
on us if we can provide assistance in this extremely important area.
Best Personal Regards,
Neil Milner, CAE
President and CEO
________________________________
[1] CSBS is the national
organization of state officials responsible for chartering,
regulating and supervising the nation?s 6,868 state chartered
commercial and savings banks and 419 state licensed branches and
agencies of foreign banks.
[2] AMTPA generally
defines alternative mortgages as loans with payment features such as
variable rates or balloon payments, which vary from conventional
fixed-rate, fixed term mortgage loans.
[3] Under AMTPA, state
charted banks that make alternative mortgages would continue to
follow OCC designated mortgage rules; state chartered credit unions
would continue to follow NCUA mortgage rules.
[4] 65 Fed. Reg. 81438,
(Dec. 26, 2000) |
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