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Loan Pricing on Regulators’ Radars


Loan Pricing on Regulators’ RadarsMBA nonprime panel discusses servicing, pricing

June 1, 2006

WASHINGTON correspondent for

WASHINGTON — Government regulators and class-action lawyers are on the prowl for mortgage lenders that use unfair pricing tactics. And lenders that want to be prepared for government scrutiny of their servicing practices should look to two prior servicer settlements.

Speaking as a panelist at last week’s Mortgage Bankers Association Non-Prime Lending and Alternative Products ConferenceAndrew L. Sandler said both the Department of Justice and the Federal Trade Commission are focusing on fairness in loan pricing which will lead to more enforcement in the area.

photo of MBA nonprime panelists
MBA Panelists

Sandler, a partner with Skadden, Arps, Slate, Meagher & Flom LLP, said he also expects to see an increase in class action lawsuits centering around loan pricing and protected classes. A protected class is a legal standard that applies to categories of people who, for the purpose of certain types of lawsuits, are judged to need special protection under the law. Women and minorities are often judged to be protected classes.Peggy Twohig, the Associate Director for the FTC’s Division of Financial Practices, confirmed Sandler’s statement, telling attendees that the federal agency has an active fair lending enforcement effort underway.

Sandler said that while cases brought by New York Attorney General Eliot Spitzer regarding loan pricing against operating subsidiaries of national banks have been overturned on the basis of federal preemption, he is apparently undaunted and starting investigations of some lenders who cannot claim the preemption defense.

Other state attorney generals are also taking a look at loan pricing as are state and banking regulators.

Sandler said a recent organizational split by the FTC appears to have freed up the federal agency’s attorneys to investigate HMDA and loan pricing issues.

The FTC’s Division of Consumer Practices formerly covered predatory lending, traditional financial services and privacy issues, but, because the combination of responsibilities was tough to maintain, the division split earlier this year into a division of privacy and a division of financial practices.

Freed of the responsibility of dealing with privacy issues, the reorganization allows the financial services division to “re-focus” on core financial services issues, Twohig said. She said the FTC is very interested in newly available HMDA data on pricing because it provides more information than has been available in the past and helps the agency’s attorneys to understand where to target their efforts.

Sandler said that when investigators find disparities in pricing, they are looking at broker points and fees, discretionary pricing parameters, how the institution handles price discretion, the type of self-monitoring related to the issue as well as statistical data. One of the particular problems has been small loans with short amortization periods, he said.

Sandler told conference attendees that they need to have policies and procedures in place to make sure their discretionary pricing is not unfair for protected classes. Focus on disparities, know where they are, do everything you can to make sure those disparities are based on truly objective risk factors, he said. What can be done to reduce risk, he asked. Many in the industry are focusing on capital growth of points and fees while others have examined not making the loans at all, he said.

State attorneys general are also examining mortgage servicing. Sandler said he has eight subpoenas on his desk from state attorney generals. He said the FTC is also very active and aggressive in terms of looking at these issues.

Sandler explained that the issues being examined are the same as those sketched out in the Ocwen and Fairbanks consent decrees achieved with the FTC.

Look at those two consent decrees, he told the audience. The issues are the same: loan hoarding, payoff process, forced place insurance, collection practices, foreclosure process and fees, escrow accounts.

He said that, reading between the lines of the documents he has seen, the FTC and state attorney generals view the industry as “not getting it.” The federal and state regulators seem to be saying that the industry does not understand the expectations of fair practice for loan servicing and that, as a result, there is a need for another round of enforcement activity, he said.

Because most of the investigations are complaint driven, he suggested that reducing the risk of FTC and state action could be attained by taking each complaint seriously. Determine if the complaint suggests a wider problem in the way servicing is being handled, he said. The industry will be seeing loan servicing consent decrees and enforcement activity over the next several years, he said.

Sandler predicted that non-traditional mortgage products will be the “800-lb weight” around the industry’s neck over the next three to five years if mortgage bankers do not put the right compliance mechanisms into place. “You really need to think about this issue,” he warned.

He told the audience to read and become familiar with an interagency statement on non-traditional mortgage products because it provides important data on the issues that the state and federal enforcement agencies will be examining. The statement discusses interest only, payment option features, “no doc” loans, high loan-to-value lending, the need for clear and conspicuous notice of terms and risk and includes a recommendation of a suitability analysis, he said.

Lisa D. Burden is a legal analyst for and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record.

e-mail Lisa at:

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