OCC Issues Predatory Lending Materials

The OCC issued two advisory letters providing guidance for national banks in guarding against "predatory" or "abusive" lending practices in their loan origination and purchasing operations. Concurrently, the OCC published a request for comments on a letter it had received urging it to decide that the Georgia Fair Lending Act (an anti-predatory lending law) was preempted as it might apply to national banks. The advisory letters and the request for comments cover overlapping but slightly different subjects:

Advisory Letter 2003-2, Guidelines to Guard Against Predatory and Abusive Lending Practices. The OCC emphasizes that national banks need to establish policies and procedures that deal with underwriting standards, the risk of abusive practices, and the appropriateness of transactions, in order to ensure that neither they nor their subsidiaries engage in any practices that could be considered predatory or abusive. Among those practices, the OCC characterizes that of extending credit to a consumer without due regard to the borrower's ability to pay the loan as the "heart of predatory lending." The OCC also identifies loan "flipping," using balloon payments to conceal the burden of financing, and other practices as being of concern. The OCC asserts that these practices threaten safety and soundness, may violate the FTC Act, and may adversely affect bank CRA evaluations and ratings.

Advisory Letter 2003-3, Guidelines on Avoiding Predatory and Abusive Lending Practices in Brokered and Purchased Loans. The OCC considers the risks to a national bank associated with predatory or abusive brokered or purchased loans to include both credit risk and legal risk primarily associated with violations of the Home Ownership and Equity Protection Act, the FTC Act and fair lending laws. The OCC recommends that national banks take affirmative steps that include establishment of purchase policies and procedures, thorough due diligence (including background checks), use of broker and originator agreements specifically addressing banks' lending policies, quality control reviews, the establishment of monitoring and management information systems, and prompt corrective action including termination of broker and originator agreements, if necessary. This guidance applies equally to traditional broker transactions, "table funded" loans, and loan purchase transactions where the loan is initially made and funded by a third party and sold to the bank in an arm's-length transaction.

Notice of Request for Preemption Determination. The OCC submitted for publication in the Federal Register a notice that National City Bank, N.A. ("National City") has requested a determination that the Georgia Fair Lending Act, which became effective October 1, 2002, is preempted in its application to national banks by the National Bank Act. The Georgia Fair Lending Act restricts the ability of creditors to charge certain fees and engage in certain practices for "home loans," "covered loans," and "hig h-cost home loans," all of which are characterized by the annual percentage rate and the amount of points and fees charged. National City takes issue with the Georgia law given that 12 U.S.C. 371 vests in the OCC comprehensive authority to...