As predatory lending and the subprime market become negatively associated with each other, legitimate subprime practices are left to suffer. However, the Office of Thrift Supervision is beginning to take steps to help regulate the subprime industry by stifling predatory lending practices without harming the subprime market.
In an advanced notice of proposed rulemaking (ANPR) published by the OTS, the office has set up a public comment period in which it will be looking into what they call alternative mortgage lending. "Part of it is all of us trying to get a handle on what's the most effective way of dealing with predatory lending while not unnecessarily chilling legitimate subprime lending," said Deborah Dakin, deputy chief counsel for regulations and legislation for the OTS. "It may turn out that what one needs is not regulatory, but a legislative change, or that it could be that some things may be best done through consumer education or examination."
The OTS has set six goals it wishes to accomplish through the ANPR: to encourage safe and sound lending; to encourage innovation in identifying potential customers and meeting customers' needs; to discourage lending practices that prey upon customers' lack of knowledge or options; to enable thrifts to compete with other lenders; to have federal savings associations operate under a uniform system of regulation; and to minimize regulatory burden on savings associations.
Is the Parity Act Still Useful?
To help determine how to tackle such predatory practices, the OTS is looking at how it should deal with the Parity Act, the 1982 legislation that in essence created the subprime market. As new types of mortgage product were created to ease the burden of high interest rates, the Parity Act allowed lenders in states which prohibited alternative lending-anything that wasn't a fixed-rate 30-year mortgage-to use federal guidelines that superceded state law in a narrow field.
As the OTS reviewed its regulations over the years, it has since lifted or changed many of them. The most recent change was the 1996 decision that state housing creditors could comply with a prepayment penalty regulation, creating a subprime securitization market. "Whatever forces were leading to that, coupled with the change in our regulations, seems to have gotten some people perhaps into the market who may not have been there before," Dakin said.
Ellen Seidman, the director of OTS, issued a statement saying that "egregious lending practices" have been created due to the increase of high-risk loans. "If helping to curb such tactics means changing the agency's lending regulations, then we need to ascertain how best to do that without handicapping responsible lending, including safe and sound lending programs reaching out to underserved populations and communities," she said.
A Step in the Right Direction
Some are applauding the OTS for the task it has taken on. "It doesn't surprise me that it came out of OTS because Ellen Seidman is a wonderfully well-qualified person to deal with these issues," said Owen Carney, president of Bank Capital Markets Consulting. "She's probably the most qualified regulator in Washington to deal with these issues."
OTS wants as much comment as possible to avoid "inadvertent side effects."
"There have been some things that have worked very well in the traditional mortgage market for years, and for us to say no, you can't use that any more just because it's causing a problem in another market, that may not be the best way of dealing with it," said the OTS' Dakin. She noted that comments would be used to see if changes in OTS regulations could help with those problems.
Getting the Whole Picture
To get a broad scope of what's going on with subprime and predatory lending, the OTS will be working with other banking agencies, the Federal Trade Commission, the U.S. Department of Housing and Urban Development, the Department of Justice, and the National Credit Union Association (NCUA). "Each of us may have bits and pieces of the market and there may be some things, for example disclosure issues, that are not regs that we write here," Dakin said.
"Given the direction [Seidman] is taking, they'll have a more intelligent approach," added Bank Capital's Carney. "It seemed to me that a number of the earlier stories that came out that the regulators were looking at subprime, they appeared to run with it before they really understood it, and it's clear from what she's doing that she's attempting to really understand what's going on."
The OTS will be taking comments on the issue until July 5. "Hopefully people will give us suggestions that we hadn't thought of before," Dakin said.