Markets Wired

The Federal Trade Commission today told the U.S. House Financial Services Committee, Subcommittee on Oversight and Investigations, that the agency is conducting several fair lending investigations of mortgage lending companies while continuing its work with other agencies to enforce laws against lending discrimination and predatory lending.

“The current fair lending investigations are part of a broad and aggressive law enforcement and consumer education program to protect consumers from deceptive, unfair, and otherwise illegal credit practices, particularly in the subprime mortgage market,” said Lydia Parnes, Director of the FTC’s Bureau of Consumer Protection.

The testimony addressed the FTC’s legal authority and interagency coordination, its use of Home Mortgage Disclosure Act (HMDA) data, and its lending enforcement program and consumer education efforts.

Legal Authority

According to the testimony, the Commission enforces the Equal Credit Opportunity Act (ECOA), which prohibits discrimination against credit applicants on the basis of race, national origin, sex, marital status, age, or other prohibited factors; the Truth in Lending Act (TILA), which provides disclosure and other requirements concerning consumer credit transactions; and the Home Ownership and Equity Protection Act, which, as part of TILA, provides special protections for consumers with certain high-cost refinance loans secured by their homes. The Commission also enforces Section 5 of the FTC Act, which broadly prohibits deceptive or unfair acts or practices in or affecting commerce.

With jurisdiction over nonbank financial companies, including mortgage companies, mortgage brokers, finance companies, and units of bank holding companies, the Commission generally conducts law enforcement investigations, but not regular examinations of these entities, the testimony noted. Banks, savings and loan institutions, and federal credit unions are exempt
from FTC enforcement authority.

HMDA and Its Use in FTC Enforcement

According to the testimony, to enhance law enforcement and public understanding of national trends, since 1975 HMDA has required certain mortgage lenders in metropolitan areas to report mortgage and loan application data. Following the growth of subprime lending in the 1990s and concerns about whether lenders were engaged in illegal pricing discrimination based on race or national origin, the Federal Reserve Board broadened the reporting requirements under HMDA to include specific pricing information in the higher-priced segment of the home loan market, which has been particularly susceptible to illegal lending practices.

The FTC uses HMDA data in its current fair lending investigations, but the data is insufficient to establish a law violation because it lacks other criteria lenders typically use to evaluate the risk of a loan, such as loan type, length of the loan, borrower credit scores, and loan-to-value and debt-to-income ratios, the testimony stated. The Commission uses HMDA data to identify lenders with differences in outcomes for protected classes, and in particular for minorities compared to non-minorities. To determine whether or not the differences in the outcomes persist after legitimate underwriting criteria are considered, the FTC carefully assesses the lender’s underwriting data using rigorous statistical protocols. The agency also interviews witnesses and obtains other relevant information, including whether the lender engages in fair lending compliance monitoring.

Enforcement and Consumer Education

As stated in the testimony, the Commission has brought more than two dozen cases enforcing the ECOA’s fair lending mandates against large subprime lenders, major non-mortgage creditors, and smaller finance companies. In addition, during the past decade the agency has focused on the most egregious lending practices of nonbank lenders, particularly in the subprime market, bringing 21 actions against companies in the mortgage lending industry, several of which collectively have returned more than $320 million to consumers.

The Commission’s extensive consumer education programs about financial literacy and subprime borrowing have included “Mortgage Discrimination,” a brochure describing consumers rights under fair lending laws, and an alert with steps consumers can take to avoid foreclosure, the testimony noted. The FTC regularly partners with other enforcers in these efforts, including publication of brochures such as “Looking for the Best Mortgage? Shop, Compare, and Negotiate.” In addition, through its participation in the Financial Literacy and Education Commission, the agency provided expertise that led to the creation of MyMoney.gov and “Taking Ownership of the Future: The National Strategy for Financial Literacy.”

The testimony concluded that the Commission will continue to take aggressive and concerted action to halt illegal lending practices in the marketplace, while being mindful of the benefits to consumers from increased access to credit.

The Commission vote authorizing the presentation of the testimony and its inclusion in
the formal record was 5-0.

Copies of the testimony are available from the FTC’s Web site at http://www.ftc.gov and from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint in English or Spanish or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form at http://www.ftc.gov/ftc/complaint.shtm. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to more than 1,600 civil and criminal law enforcement agencies in the U.S. and abroad.