FTC Testifies on Predatory Lending

While acknowledging that many honest lenders exist, the FTC highlighted that the dramatic increase in subprime lending in recent years — 2003 subprime volume of $332 billion was almost triple the total in 1997– has also generated lenders and loan servicers who have acted to the detriment of borrowers.

“The damage to consumers that dishonest and unscrupulous lenders can cause — the loss of one’s life savings or even one’s home — is potentially catastrophic,” said Howard Beales, director of FTC’s consumer protection division, who delivered the testimony Tuesday to the Senior Special Committee on Aging.

“For the subprime market to operate efficiently for the benefit of consumers, it is critical that it be free of deception and other illegal practices,” he said. “The many settlements that the FTC has obtained from subprime lenders provide a deterrent to others who might consider engaging in this type of conduct,” he added.

During recent years, the agency has settled or prosecuted cases against 20 subprime lending companies involved in numerous illegal practices, Beales said. Cases include the FTC record-setting $215 million consumer redress it settled with Citigroup; the agreement reached with First Alliance Mortgage Co., which will redress funds of about $65 million fro nearly 20,000 borrowers; the $40 million settlement with Fairbanks, in which the owner had to pay an additional $400,000; a jointly settled case requiring Mercantile Mortgage Co. and mortgage broker agent Mark Diamond to pay a combined $520,000 to deceived consumers; a filed lawsuit with Capital City Mortgage Corp. which is scheduled for trial next month.

Among the efforts the Commission says it conducts to increase the effectiveness of its law enforcement and halting predatory lending, is routine sharing of information and ideas about potential targets and enforcement techniques with representatives of federal and state agencies.

Beales said that issues facing elderly consumers are a priority for the agency after pointing out that a recent study found that more than a quarter of subprime borrowers are 55 years of age or older, compared to only 14% of prime borrowers. The FTC has reacted by launching education materials specifically designed for elderly consumers, the director said, but it also provides educational materials and programs to increase other sectors of consumers’ financial literacy, and knowledge about mortgages, the risks involved and how to avoid the risks.

Beales added the FTC is conducting a research program designed to “learn more about how consumers search for mortgages, what consumers understand about mortgage agreements, and how changes in the disclosure process might improve consumers’ ability to avoid deception.”

“We will continue our vigorous efforts,” he concluded.