STATEMENT ON BEHALF OF THE American Land Title Association® ON "PREDATORY LENDING PRACTICES" May 26, 2000
May 26, 2000
The American Land Title Association membership is composed of more than 2,000 title insurance companies, their agents, independent abstracters and attorneys who search, examine, and insure land titles to protect owners and mortgage lenders against losses from defects in titles. These firms and individuals employ nearly 100,000 individuals and operate in every county in the country.
ALTA appreciates the concerns that have prompted the introduction of the Predatory Lending Consumer Protection Act of 2000 (H.R. 4250; S. 2415) and other legislation. As noted below, predatory lending practices are a source of substantial claims loss to title insurers. In general, we support reasonable legislative and regulatory action to address the problems and abuses that may exist with regard to "predatory" lending practices targeted at vulnerable consumers. We recognize that there is a fine line between subprime and predatory lending . We are therefor concerned that Congress, in reducing the thresholds for determining when loans are subject to the additional limitations and restrictions imposed by the HOEPA (Homeownership and Equity Protection Act) amendments to the Truth-in-Lending Act (TILA) and in eliminating the current exclusion for "residential mortgage transactions," does not inadvertently reduce the availability of legitimate financing to low-income or less-than-prime borrowers.
Predatory lending practices are a source of claims loss to title insurers. For example, we are aware of an instance in the District of Columbia where a claim was made in which the company involved, First American Title Insurance Company, a community oriented corporation, developed a solution that let the homeowner stay in his home. This claim arose as a plea of title due to Mr. Watson, the mortgagor?s claimed incapacity at the time of his execution of the mortgage. In this situtaion, First American, took a deed of property from the foreclosing lender, in consideration of policy limits. The company reached an agreement with Mr. Watson under which he will remain in the property for six years as a tenant, at a rent which covers basic maintenance only. He will also pay $500.00 per month into an escrow fund. If he should die before the six year period ends, the escrowed funds will go to the company. Otherwise, he will be able to take an "annuity" from the funds until they are exhausted, or until his death. This agreement serves the individual in allowing him to continue to live in his home, which is his first concern, and affords some recovery to the title insurer. This story demonstrates not only the type of problem this creates for the industry. It also demonstrates the time and financial resources this particular company gave to this individual to allow him to stay in his home and the community.
We hope that the Congress, the agencies, and the lending industry develop a fair, reasonable, solution to these problems. Because we are clearly not central to the lending decisions, and only see the results of these loans at closing, or in limited situations, where claims arise, we are limiting our comments to those provisions of the bills which directly affect the title insurance industry.
If the Committee ultimately concludes that legislation is needed, we would like to draw your attention to three aspects of the Predatory Lending Consumer Protection Act of 2000( H. R. 4250) and one aspect of H.R. 3901, the "Anti-Predatory Lending Act of 2000," which cause concern.
First, we do not believe that the current exclusion for "residential mortgage transactions" ? transactions in which the loan is being used to acquire or construct the dwelling ? contained in the current language of TILA § 103(aa)(1) should be eliminated. The concerns raised about predatory lending practices have related to refinance and second mortgage transactions. There is simply no reason to extend HOEPA to potentially millions of purchase money mortgage transactions in which there has been no evidence of the kind of abuses to which HOEPA is addressed.
Second, the bill eliminates a current provision of HOEPA that we believe should be retained. Under the current law, a second mortgage or loan refinance is subject to the HOEPA requirements if it bears a high annual percentage rate (i.e., more than 10 percentage points higher than the yield on Treasury securities having a comparable maturity) or if "the total points and fees payable by the consumer at or before closing will exceed the greater of (i) 8 percent of the total loan amount; or (ii) $400."/1 In determining what constitutes "points and fees" for purposes of this provision, HOEPA provides that certain settlement charges, including "[f]ees or premiums for title examination, title insurance, or similar purposes" are not included if: the charge is reasonable the creditor receives no direct or indirect compensation and the charge is paid to a third party unaffiliated with the creditor. /2
ALTA believes that this current exclusion is both reasonable and appropriate. Some ALTA members do participate in both affiliated business arrangements, and we do understand the policy rationale behind the inclusion of affiliated business arrangement fees under current law. As the Senate Banking Committee report on the 1994 HOEPA legislation made clear, the purpose of imposing a trigger based on points and fees charged in the transaction was to "prevent unscrupulous creditors from using grossly inflated fees and charges to take advantage of unwitting customers." /3 On the other hand, if the lender is not benefitting from the charge, the charge is made by an unaffiliated third party, and the charge is reasonable, the charge does not affect in any way whether the loan is "predatory," and, as Congress correctly concluded in 1994, there is no reason why such charges should be included in determining the trigger for HOEPA coverage. We hope that the Committee keeps in mind that title insurance fees are regulated in most states, and that these fees are based on costs and risk, and that adherence is required to ensure solvency and consumer protection.
Unfortunately, H.R. 4250, unlike the other bills that have been introduced on this subject, eliminates this aspect of HOEPA. In fact, the rationale for maintaining the current language is even stronger in light of the other changes made to HOEPA by H.R. 4250. H.R. 4250 would modify the total amount of points and fees that triggers HOEPA coverage from 8% of the loan, or $400, whichever is higher, to 5% of the total loan amount, or $1,000, whichever is higher. The reduction from 8% to 5% would mean that, on a $50,000 refinance loan or second mortgage (for example), total fees and points of $2,500 would trigger HOEPA coverage, whereas under current law the total points and fees would have to exceed $4,000 before the loan would be deemed a "high-cost" loan triggering HOEPA coverage.
While Congress may conclude that this reduction is justified where the lender is pocketing the $2,500 in points and fees (and therefore may have an incentive to engage in equity stripping and repetitive refinancings), there is no justification in also eliminating the current exclusion for reasonable third-party charges in which the lender does not participate. Indeed, by reducing the trigger amount and eliminating that exclusion, H.R. 4250 risks converting many non-predatory, non-abusive loans into HOEPA-covered loans. This prospect could adversely affect the availability of financing to higher-risk borrowers. Accordingly, we recommend that § 2(b)(3) of the bill, to the extent that it eliminates the third-party charge exemption from the current language of § 103(aa)(4)(C) of TILA, be changed so as to leave in place the current language of § 103(aa)(4)(C).
Our third concern relates to new § 129(k) of TILA that would be added by section 4(a) of H.R. 4250. The new provision would prohibit a creditor, in connection with a HOEPA-covered mortgage loan, from charging a borrower for credit insurance or a debt cancellation contract on a single premium basis through an up-front charge paid by the borrower at the outset of the loan. We express no views on whether such a prohibition is desirable or appropriate. What we are concerned about is that the language of new §129(k)(1) states that "no creditor or other person may require or allow" the collection of such premiums. The "no . . . other person may . . . allow" language is unnecessary, ambiguous, and would set a questionable legislative precedent.
The language is unnecessary because the provision, without the additional words, would still prohibit lenders from collecting single premiums for credit insurance. The language is ambiguous, because it imposes obligations on unidentified "other persons" not to "allow" ? whatever that means ? lenders to collect such premiums. Finally, it would set an unfortunate precedent for Congress, when it imposes direct obligations or requirements on particular parties (in this context, on lenders), to extend such obligations to "other persons" who may be deemed to have "allowed" an action to take place.
Our members are involved in the closing of mortgage loans. Accordingly, we are concerned about impractical obligations being imposed on us because title companies who close loans or who issue title insurance policies to lenders might be viewed as "other persons" who have "allowed" the lender to obtain the single premium in connection with the transaction. Neither TILA, nor indeed other comparable consumer protection statutes, have sought to impose such obligations on third parties, and Congress should not start down that road in this bill. Further, in some states, mortgage loans are "net funded" and checks are not written for the lender items. In addition, in many instances, there may not be enough detail for a closing agent to determine that there is a single premium credit insurance premium. There is no need for this additional language and we urge the Committee to delete the reference to "or other person" on page 15, line 3, of the bill.
Finally, we note that HR 3901 contains a provision referencing "conforming home loans (currently 240,000 or less)." That provision states that "a conforming home loan document in which blanks are left to be filled in after the contract is signed shall not be enforceable under Federal law or the law of any State." We believe this exclusion is overly broad. There should be room for correction of scrivenors errors in a Deed of Trust or Mortgage, and for filling in the recording information of a document referenced on an instrument which is not yet recorded, but will be recorded at or before the recording of the Deed of Trust/Mortgage.
We thank the Chairman and the Committee for the opportunity to submit this statement.
1/ TILA, § 103(aa)(1).
2/ TILA, §§ 103(aa)(4)(C) and 106(e).
3/ S. Rep. 103-169 at 24 (1993).