Mortgage Daily

Published On: July 22, 2004
Plan to Prevent Predatory Practices

AppIntell executive promotes preventive predatory procedures

July 22, 2004


Predatory lending can happen right under your nose at your own organization. Some lenders are so large that its difficult to know if and where abusive lending might be occurring, and they need a strategy to battle predatory lending inside their own companies.

Anti-predatory lending legislation is continuing its determined march across the country. Last year, 16 states enacted anti-predatory legislation, and in 2004, four states have either signed anti-predatory bills into law (Wisconsin and Indiana) or gone back to revise laws already on the books (like New Jersey and New Mexico). A number of other states such as Rhode Island and Tennessee have bills pending in their state legislatures today that will impose new anti-predatory lending rules if they are passed.

At this pace, it won’t be long before every state in the country has some form of anti-predatory lending legislation in place. In fact, even though local jurisdictions like Detroit were thwarted when their states preempted their anti-predatory laws, other cities like Chicago have successfully passed and enacted their own provisions.

Nonetheless, many believe both state and local initiatives will eventually be preempted if federal legislation is passed to enact a national anti-predatory lending standard. But at least one state and 10 cities, including Boston, Philadelphia and Washington, D.C., have already passed resolutions opposing federal preemption. And New York’s attorney general Elliot Spitzer has publicly announced his intention to sue the federal government to block enforcement of a preemptive federal law. Needless to say, any federal legislation designed to implement a national anti-predatory lending law has some serious challenges ahead, which will likely delay enactment until late 2005 or beyond.

The headlines are littered with accusations, lawsuits and multimillion dollar settlements as a result of predatory lending issues. Lenders — especially those engaged in subprime lending — are constantly at risk, not because they haven’t enacted the proper policies, but in some cases, because their organizations are so vast. For example, in late June, Wells Fargo vice president Mark Oman said that with “23 million customers and 143,000 team members,” the company is bound to make occasional mistakes. Even though Mr. Oman says Wells is committed to corrective action anytime a mistake is discovered, his company and other large organizations are easy targets for predatory lending allegations.

In other cases, originators and lenders may not have the staff expertise needed to analyze the nuances of constantly changing anti-predatory laws across multiple jurisdictions. Depending on the type of loan and the jurisdiction, specialized tests must be conducted which may include analysis of APR and points and fees, prepayment penalties, financing of fees, balloon terms and negative amortization among others. And while the plethora of anti-predatory lending laws were enacted to end unscrupulous lending practices, they have also created a nightmarish maze of provisions — some specific and some not — that have made it possible for even the most compliant lenders to get into trouble.

Under these circumstances, many institutions large and small are turning to outsourcing compliance partners to help reduce the risks associated with high cost loans that slip through their internal safeguards. Sophisticated technology that incorporates expert legal analysis and powerful rules logic allows lenders to conduct comprehensive loan evaluations within seconds. Since the best solutions constantly scan all jurisdictions (including local ordinances) for changes in the anti-predatory lending laws, lenders can receive detailed explanations and recommendations whenever questionable loans are identified.

It is important to note that in addition to an outsourced solution, lenders must also enact policies that make it clear to everyone within their organization, and to any external origination sources, that predatory lending practices will not be tolerated. While utilizing a third party compliance partner can help lenders prove their intention to abide by the law, a widely distributed and well executed anti-predatory lending policy is essential to protecting lenders and the consumers they serve.

Most industry executives are very concerned about the impact anti-predatory lending laws are having, both in terms of liability and revenue; however, lenders are still struggling to balance their need to reduce liability, while also increasing profitability. To achieve both goals, many of the nation’s top lenders have found that outsourced anti-predatory lending compliance is a successful and economical solution.

Roger Fendelman is a compliance consumer finance law attorney with 8 years in residential mortgage lending. He is also compliance director at AppIntell, Inc., a provider of fraud prevention and anti-predatory lending compliance solutions. email Roger at [email protected]

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