As is always the case, we Commissioners need to remind our audiences that our remarks at gatherings such as this are my own and do not necessarily reflect the views of the Commission or any of my fellow Commissioners.
Government Philosophy
Before I launch into the topic of the FTC and fair lending, I would like to share with you some personal observations and philosophy about government which guide my approach to decision making as a Commissioner at the FTC, as well as in my past executive roles in the federal government.
I believe government should play only a minimal role in our lives and definitely should not be intrusive or unreasonably burdensome. Unfortunately, as Thomas Jefferson observed, "The natural progress of things is for liberty to yield and government to gain ground." In a more modern era, America's great philosopher of the common man, Will Rogers, is reported to have observed a similarly troubling tendency - - - that, "All government programs have three things in common: a beginning, a middle and no end."
Given the insidious nature of these tendencies, I try to begin every day with the Hippocratic oath in mind -- "First, do no harm" -- in my government service. Before I make a decision, I ask myself the question, "Does this make sense?" Limited government allows Americans to make their own decisions, including economic decisions. When private markets are permitted to operate without government intervention or control, they generally produce more and better products and services at lower prices for all Americans. I want to emphasize, however, that markets work best when all participants have adequate information upon which to base their decisions. Unfortunately, there are times when the market forces fail, and even worse, there are those who seek to disrupt market forces through anti-competitive conduct and deceptive practices that cause great consumer harm. Dealing effectively, and as quickly as possible, with those failures and disruptions is the role of the FTC. We are a law enforcement agency charged with the task of protecting consumers, promoting competition and maximizing consumer welfare.
The Basic Lending Laws
The FTC enforces a number of laws specifically governing lending practices, including the Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601 et seq., and the Home Ownership and Equity Protection Act of 1994 ("HOEPA"), 15 U.S.C. § 1639, which is part of TILA. The Commission also enforces the Â鶹´«Ã½ Trade Commission Act, 15 U.S.C. § 41, et seq., which broadly prohibits unfair or deceptive acts or practices in or affecting commerce.
The Commission brings a law enforcement action only when it has reason to believe that the law is being violated and that it is in the public interest to act. Given the enormous benefits that typically flow from private markets operating without government involvement, I believe we should always be persuaded that government intervention is clearly required before we intervene in private decision making. The best solution is, most always, one that allows the free market to operate by permitting consumers to make informed choices and rewarding the companies that best meet their needs. Unfortunately, there are those who thrive on creating conditions where "informed choices" are not readily possible. Without the FTC, the target rich environment for fraud and deception would clearly be exploited even more blatantly.
I believe that lending laws should, and do, aid the operation of the free market by helping consumers make informed choices. Basically, TILA requires that a lender disclose the cost of credit to a consumer prior to the consummation of a loan transaction. The required disclosures must accurately reflect the terms of the transaction, including the identity of the lender, the annual percentage rate, the finance charge, the amount financed, and the total of the payments. In addition, disclosures must make it clear that the lender will have a security interest in the borrower's property.
Complete and accurate information disclosure facilitates the market which is, after all, merely a large collection of transactions by numerous individuals and entities. Providing complete information allows individual consumers to evaluate realistically the risks and benefits of their individual transactions. Encouraging informed decision making has been and should continue to be the guiding principle of FTC enforcement in the lending and financing industry.
TILA and HOEPA also recognize, however, that some consumers are more vulnerable than others and, arguably, need additional protections. Rather than trying to identify these vulnerable borrowers, HOEPA instead addresses certain types of subprime loans. HOEPA is limited to loans for personal, family, or household purposes that are secured by a consumer's principal dwelling. HOEPA does not cover the initial loan to purchase the dwelling and does not apply to business loans. The statute's extra protections are triggered when these kinds of loans have excessively high interest rates or fees --- that is, the annual percentage rate of the loan exceeds by more than 10% points the rate of a comparably termed (length of the loan) Treasury security or if it has fees which exceed 8% of the loan amount or more than $424.
HOEPA prohibits certain loan terms that Congress has identified as particularly problematic for vulnerable consumers. The prohibited terms include:
- asset-based lending, where loans are based not on the borrower's ability to repay but on the value of the equity in the homes;
- balloon payments in loans with terms shorter than 5 years;
- default interest rates higher than pre-default rates; and
- prepayment penalties.
HOEPA also mandates additional disclosures that emphasize to borrowers the nature of the transaction and their rights. The disclosures stress that
- the loan does not have to be closed just because the borrower signed the application, and
- the borrower could lose his or her home if he or she fails to meet the loan's obligations.
Nevertheless, while Congress may seek to protect vulnerable consumers through the extra restrictions on lenders embodied in HOEPA, this should not completely absolve those consumers of the need to act reasonably and responsibly in such loan transactions. Disclosures give consumers the tools to make an informed choice. It is up to the consumer, however, to use those tools to make a wise decision.
Â鶹´«Ã½ in Lending Matters
The FTC recognizes that it is important for all consumers, including those in lower-income communities or those with less-than-perfect credit, to have reasonable access to capital. The growth of the subprime mortgage industry has enabled many consumers to obtain loans, who previously had very limited access to credit. It is also important, however, that the consumers' increased access to capital not be burdened by deceptive or other unlawful lending practices. Such practices disrupt the proper functioning of the credit market and most likely violate the FTC Act, TILA, or HOEPA. Such violations must not be tolerated by consumers, the government and, I would suggest, your industry. The Commission has taken a variety of actions to address reported abuses in the subprime credit market. Capital City Mortgage Company
In one of our earliest subprime lending cases, the Commission filed a complaint against Capital City Mortgage Company, a Washington, DC-area mortgage lender, asserting that the defendants engaged in law violations that resulted in serious injury to borrowers, including the loss of their homes. The defendants also foreclosed on several churches in the Washington, DC area. The complaint alleged that the defendants, while making high-interest loans, often deceived borrowers about various loan terms representing, for example, that a loan was an amortizing loan when it was actually an interest-only balloon loan. The complaint also alleged that the defendants engaged in asset-based lending, withheld loan proceeds, improperly foreclosed on borrowers, and failed to release liens even after loans were fully paid. This case is still in litigation in the federal District Court for the District of Columbia. Operation Home Inequity
In mid-1999, the Commission conducted a sweep called Operation Home Inequity, in which it brought a number of cases alleging that various companies and their principals violated TILA, HOEPA, and the FTC Act while engaging in subprime lending. In the complaints, we alleged that the defendants made misrepresentations by both deceptively withholding information as well as providing false information to borrowers, such as interest rates, certain fees, or the presence of balloon payments.
The settlement orders provided consumer redress totaling $572,500. Two of the orders required defendants to post performance bonds before they can extend certain types of credit in the future, and another one included an outright ban on certain lending. All of the orders imposed significant injunctive relief designed to protect past and future borrowers.
I was troubled, however, that some of the complaints in these cases also alleged that, even without any deception, the practice of asset-based lending and the use of certain loan terms are not only HOEPA violations but also unfair acts or practices in violation of the FTC Act. Under the FTC Act, an unfair act or practice must be 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. I concluded that, if adequately informed about the loan terms and the monthly payments required, consumers should be able to 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. Consumers similarly can decline to take loans that have objectionable terms. I thus disagreed with the FTC Act unfairness allegation.(1)
Loan transactions that involve a security interest in one's home are serious business, and consumers must shoulder some responsibility to read loan documents and consider their financial situation before agreeing to the transaction. I am committed to stopping those who violate TILA and HOEPA and who engage in deceptive practices by failing to disclose material loan information. I thought it unnecessary, however, to stretch beyond these clear-cut violations to construct expansive theories of law violation based on the FTC's authority to prohibit unfairness.
Settlement with Fleet
In 1999, the Commission reached an administrative consent agreement with Fleet Finance, Inc., settling charges that it violated TILA and the FTC Act. As you probably know, Fleet Finance is a very large mortgage company that offers personal loans and loans secured by consumers' homes. Fleet also purchases consumer credit agreements. In 1993, Fleet received much negative publicity about its lending practices, such as high-cost mortgages. This, in part, lead to Congressional hearings which resulted in HOEPA being enacted in 1994.
The complaint against Fleet alleged that it had violated TILA and engaged in deceptive acts or practices by failing to provide consumers with the required disclosures about the costs and terms of credit and their right to rescind transactions. The consent order prohibits Fleet from misrepresenting important information about the terms or costs of the loan or the right to rescind. The settlement also required Fleet to pay the Commission $1.3 million as consumer redress.
Common Themes in Â鶹´«Ã½ Cases
As you can see from our recent enforcement actions in the subprime lending industry, the Â鶹´«Ã½ Trade Commission is committed to taking action against lenders who do not make complete and accurate disclosures to borrowers and thus violate the laws meant to help consumers make informed choices in the credit market. The settlements we have reached with defendants in these cases are aimed at providing redress to injured consumers and ensuring that future borrowers are not deprived of information necessary to understand the crucial elements of these important transactions and their obligations.
Consumer Education
Â鶹´«Ã½ is not the only way to promote a well-functioning credit market, however. Consumer education and industry self regulation can also help ensure that individual consumers have the information to evaluate the risks and benefits of their credit transactions and engage in informed decision making.
Where possible, we coordinate consumer education campaigns with our law enforcement actions to draw maximum public attention to the particular unlawful practices we are challenging. You can see some of our consumer education materials for yourself on the Commission's web site at www.ftc.gov as well as various Commission actions.
Available on the web site are brochures the FTC has developed on many topics of interest to business and consumers. A number of them focus on credit issues. Several of these brochures offer general information about refinancing, second mortgages, reverse mortgages, and the right to rescind when using a home as security for a loan. The Commission has also issued consumer alertswarning potential borrowers about equity stripping, hidden loan terms, loan flipping, credit insurance packing, and mortgage servicing abuses, and instructing them on how to protect themselves.
Recently, in conjunction with Operation Home Inequity, the Commission issued a consumer alert warning consumers to be wary about lenders who fail to provide required disclosures or who suggest that consumers falsify information on loan applications. The alert instructs consumers on how to protect themselves by shopping around and asking questions about interest rates, monthly payments, duration of the loan, and other terms such as balloon payments and prepayment penalties. Finally, the consumer alert tells consumers about HOEPA and their rights under the Act and warns that high-interest loans subject to HOEPA, while they may be right for some consumers, are very expensive ways to borrow money.
Self-regulation
In addition to government efforts to inform consumers about their responsibilities and rights, industry self-regulation can also help to ensure the smooth functioning of the credit market. For decades, the FTC has recognized the important role of effective self-regulation and has worked with many industry groups to develop sound self-regulatory initiatives. These programs complement the Commission's law enforcement effort, and the net effect is greater consumer protection in the marketplace.
Well-constructed industry self-regulatory efforts offer several advantages over government regulation or legislation. Self-regulation often can be more prompt, flexible, and effective than government regulation. It can bring into effective play the accumulated judgment and experience of an industry for issues that are sometimes difficult for the government to define with bright-line rules. I understand that the National Home Equity Mortgage Association is working on self-regulatory guidelines, and I applaud your efforts. Please press on!
To be effective, self-regulation must be comprehensive and cover the broad range of problems and concerns. It must be specific and give industry members clear steps to follow in improving their practices beyond the minimum required by law. It should give clear examples of prohibited conduct. In addition and most important, self-regulation should have an enforcement mechanism sufficient to ensure compliance with its requirements.
Providing consumers accurate and complete information is important enough that it ought to be a preeminent goal of your industry and on the minds of all within your ranks. Regulators, on both the state and federal levels, and consumers are concerned about abusive practices in the lending industry. You in the industry ought to be concerned as well. A failure on the part of home equity mortgage lenders to ensure compliance with the fair lending laws and ethical practices invites additional and more severe regulation of the industry.
Conclusion
The Â鶹´«Ã½ Trade Commission will continue to enforce the lending laws and the FTC Act to protect borrowers from unscrupulous or dishonest lending practices. Industry leaders and Members should continue their efforts to ensure that business is conducted in an ethical manner. I believe that, together, we can help the credit marketplace work efficiently by ensuring that consumers have complete and accurate information when making one of the most important financial decisions of their lives. Thank you.
1. Barry Cooper Properties, Inc., No. 982-3200 (July 29, 1999); Capitol Mortgage Corporation, No. 982-3202 (July 29, 1999).