February 12, 2001
William A. Darr, Commissioner
Office of Banks and Real Estate
500 East Monroe Street
Springfield, Illinois 62701
Re: Proposed Rulemaking; Title 38, Part 345: High Risk Home Loans
Dear Commissioner Darr and Assistant Commissioners Stevenson and Clarke:
On behalf of the Community Bankers Association of Illinois ("CBAI"), I am submitting this comment letter concerning the Office of Banks and Real Estate's ("OBRE's") proposed rule titled "High Risk Home Loans."
First, CBAI renews the issue that we raised in response to the emergency rules regarding whether the Illinois Banking Act empowers OBRE to promulgate a rule such as this. Section 48(6) authorizes OBRE to promulgate rules relating to "administering the provisions of this Act." We have neither seen nor heard anything that persuades us that the Illinois Banking Act contains provisions specifying under what terms, conditions, underwriting standards, etc. a mortgage lender must or should do business. If such provisions are to be found in the Illinois Banking Act and we have merely overlooked them, please direct us to those provisions and we will reconsider our objection on this point. If such provisions are absent from the Illinois Banking Act, then it is difficult to accept that these rules are authorized by Section 48(6). This is consistent with CBAI's position all along that predatory lending should be addressed by Illinois lawmakers and regulators through reasonably targeted legislation that receives thorough consideration, rather than trying to address this significant societal ill with tools (i.e., current statutes and rulemaking authority) that have not contemplated and were not designed to address this problem.
Comments on the text of the proposed rule follow in section-by-section format.
Section 345.10 Definitions
The definition of "high risk home loan" illustrates the vulnerability of a rule that is not grounded in statutory guidance or direction. OBRE has created a definition of a term never before contemplated under the Illinois Banking Act, and has used administrative discretion to impose definitive numbers (i.e., APR percentage points) that will affect the manner in which and extent to which a mortgage lender/servicer will be regulated in Illinois.
The definition of "servicer," being limited to "any entity chartered under the Act," makes clear that state-chartered banks will be treated differently than their counterparts and competitors that were not chartered under the relevant State law. Furthermore, that definition refers to entities that collect or remit payments "on a residential mortgage loan in accordance with the terms of the residential mortgage loan." If this rule is aimed at regulating "high cost home loans," should the term "high cost home loan" be used in the definition of "servicer" rather than the much broader term of "residential mortgage loan?"
In the definitions of "points and fees" and "total loan amount," are the citations (i.e., 12 CFR 226.5 and 12 CFR 26.32, respectively) correct? Also, in paragraph (c) of the definition of "points and fees," there is a reference to "paragraph (1) of this subsection." I do not see a paragraph (1) to which that reference would apply.
Section 345.20 Ability to Repay; and Section 345.30 Verification of Ability to Pay Loan
CBAI will not argue with the premise that sound underwriting practices would include the lender ascertaining, in the lender's judgment, the ability of the borrower to service the debt. However, making that self-serving and self-evident business practice a part of a statute or regulation could invite lender liability litigation down the road. A debtor's attorney may argue, in virtually any case where the borrower has defaulted, that the very fact of default is some evidence that the debtor was not able to service the debt over the term of the loan at the time of origination. We are not suggesting that the proposed rule was intended to incite lender liability litigation, but it is a foreseeable consequence when a desperate and disgruntled borrower goes into default and seeks a legal way to avoid his or her obligation or to place blame on the lender for "irresponsibly" loaning him or her funds that eventually ruined a business, a credit report, etc.
Section 345.45 Prepayment Penalties
The first line of this section refers to a "subject loan." Is this a reference to a "high risk home loan?" It also refers to "a prepayment penalty made (i) after the expiration of the 36 month period...." Should that reference be to the making of a prepayment penalty, or to the making of a prepayment?
Sections 345.50 through 345.100
Again, each of these sections impose new, substantive restrictions on lenders when the Illinois Banking Act does not address underwriting standards or financing/refinancing terms and conditions. These are additional illustrations of where this proposed administrative rule would be legislating standards and limits that were never approved by, or delegated to OBRE from, the General Assembly.
Of particular interest is Section 345.80 ("Payments to Contractors"). This section takes the undelegated regulatory discretion to a new level, restricting the transactions not just between a lender and its borrower but now also between a lender and a home improvement contractor. Furthermore, Section 345.80 is not limited to transactions involving "high cost home loans."
Section 345.110 Counseling Prior to Perfecting Foreclosure Proceedings
In subsection (c), is it sufficient that the borrower must only demonstrate that he or she is "seeking" credit counseling in order to warrant forbearance. CBAI would prefer something more verifiable, such as the fact that the borrower is "undergoing" or "attending" credit counseling sessions. Again, at the end of subsection (c), is "subject loan" the same as "high risk home loan?"
Section 345.130 Report of Default and Foreclosure Rates on Conventional Loans
In subsection (a), the term "conventional loan" is undefined. Subsection (b) asks for some data that might not be readily available to the lender and may add cost and administrative burden to the lending and reporting process. Also, do state banks have comfort that disclosure of these borrowers' names and loan data will not create a violation of the state or federal customer privacy statutes and regulations?
Section 345.140 Commissioner's Authority – Unusually High Rate on Conventional Loans
The focal point of this section is OBRE's ability to sanction a lender that has a higher-than-average foreclosure and default rate when compared to other lenders in a given "area." Two defects with this proposition are that: (1) it is essential for purposes of due process to know what a given "area" is; and (2) the average of defaults and foreclosures in a given "area" will be impacted by the lack of data from similarly situated national banks and federal savings associations.
Due process would require that a bank be put on adequate notice as to the rules and standards that will be applied to it before it becomes eligible for sanctions. No bank can feel secure that it has adequate notice or direction as to its "permissible" rate of foreclosures or defaults if it is going to be compared to other lenders in an undefined "area." Does this mean that a bank is going to be compared to the averages in its county? Will it be compared to averages in a SMSA? Will it be compared to averages in some other geographic or commercial grouping of institutions known only to OBRE "on a case-by-case basis" as suggested by the proposed rule?
Also, national banks and federal thrifts will not have to supply the foreclosure and default data. What happens when a state bank's rate slightly exceeds the "average" reported by state banks in OBRE's undefined "area," but the state bank wants to argue that federally-chartered institutions in that "area" had disproportionately high foreclosure and default rates that would have (if duly taken into consideration) caused the state bank's rate to fall "below average?" Would this be an affirmative defense against OBRE's sanctions? How would or could the state bank make its case on this point, given the fact that OBRE cannot compel the federally-chartered institutions to provide the data that might "exonerate" the state bank in question?
Section 345.150 Commissioner's Action – Unusually High Rate on Conventional Loans
Under subsection (a)(1) of this rule and Section 48(3)(a) of the Illinois Banking Act, would the expense of OBRE's examination under these circumstances be borne by the state bank?
In subsection (a), CBAI suggests that the regulatory consequences of the above-average rate of foreclosures and defaults should be subject to a lack of an apparent explanation that is unrelated to abusive lending practices. For example, a bank may encounter a high number of foreclosures and defaults in a given period of time due to a plant closing that causes a number of local borrowers to experience loss of income. If the default and foreclosure rates were tied to a cause that was beyond the bank's control, the bank should be able to assert such cause as a valid basis for avoiding the regulatory requirements envisioned by this proposed rule.
In subsection (3)(C), does OBRE really mean that all prospective borrowers would have loan applications submitted to OBRE for third party review? Would this include credit card applications, car loan applicants, only high risk home loan candidates, or any borrower who pledges real estate as collateral for any type of borrowing?
Section 345.160 Third Party Review of High Risk Home Loans
Is OBRE exposing itself to any liability through this process? For example, if OBRE "approves" a high risk home loan application scenario and two years later it turns out to be detrimental to the borrower, would OBRE be subject to any liability? If OBRE-approved loan applications result in a higher-than-average rate of foreclosures and defaults when compared to the averages established by a group of banks (on a case-by-case basis), would OBRE be subject to regulatory or industry sanctions? When would OBRE determine that a "high risk home loan," at several percentage points above the applicable Treasury rate or with extremely high points and fees, "makes economic sense to the borrower?"
Once again, CBAI is not a defender or supporter of predatory lending tactics. We suspect that predatory lending is primarily engaged in by certain entities and in certain geographic areas, and that properly focused legislation could go a long way toward addressing this problem. While community bankers are not the source of the predatory lending dilemma, we do have a stake in protecting our ability to make mortgage loans to our customers without facing unnecessary burdens or costs. This includes objecting to regulations that CBAI believes to be unauthorized by the law, overly broad for their intended purpose, lacking in notice or direction to the entities that might be penalized under the regulations, and not conducive to a level playing field given the fact that the regulations would place burdens and threaten sanctions on only certain state-chartered lenders.
Thank you for your consideration of these comments. If you have any questions or seek any additional information, please feel free to contact me.
Jerry D. Cavanaugh