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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
This guidance applied only to regulated banks and thrifts, and even for them it would
not be binding but merely laid out the criteria underlying regulators’ bank examina-
tions. It explained that “recent turmoil in the equity and asset-backed securities mar-
ket has caused some non-bank subprime specialists to exit the market, thus creating
increased opportunities for financial institutions to enter, or expand their participa-
tion in, the subprime lending business.”
The agencies then identified key features of subprime lending programs and the
need for increased capital, risk management, and board and senior management
oversight. They further noted concerns about various accounting issues, notably the
valuation of any residual tranches held by the securitizing firm. The guidance went
on to warn, “Institutions that originate or purchase subprime loans must take special
care to avoid violating fair lending and consumer protection laws and regulations.
Higher fees and interest rates combined with compensation incentives can foster
predatory pricing. . . . An adequate compliance management program must identify,
monitor and control the consumer protection hazards associated with subprime
lending.”
In spring , in response to growing complaints about lending practices, and at
the urging of members of Congress, HUD Secretary Andrew Cuomo and Treasury
Secretary Lawrence Summers convened the joint National Predatory Lending Task
Force. It included members of consumer advocacy groups; industry trade associa-
tions representing mortgage lenders, brokers, and appraisers; local and state officials;
and academics. As the Fed had done three years earlier, this new entity took to the
field, conducting hearings in Atlanta, Los Angeles, New York, Baltimore, and
Chicago. The task force found “patterns” of abusive practices, reporting “substantial
evidence of too-frequent abuses in the subprime lending market.” Questionable prac-
tices included loan flipping (repeated refinancing of borrowers’ loans in a short
time), high fees and prepayment penalties that resulted in borrowers’ losing the eq-
uity in their homes, and outright fraud and abuse involving deceptive or high-pres-
sure sales tactics. The report cited testimony regarding incidents of forged signatures,
falsification of incomes and appraisals, illegitimate fees, and bait-and-switch tactics.
The investigation confirmed that subprime lenders often preyed on the elderly, mi-
norities, and borrowers with lower incomes and less education, frequently targeting
individuals who had “limited access to the mainstream financial sector”—meaning
the banks, thrifts, and credit unions, which it viewed as subject to more extensive
government oversight.
Consumer protection groups took the same message to public officials. In inter-
views with and testimony to the FCIC, representatives of the National Consumer
Law Center (NCLC), Nevada Fair Housing Center, Inc., and California Reinvestment
Coalition each said they had contacted Congress and the four bank regulatory agen-
cies multiple times about their concerns over unfair and deceptive lending prac-
tices. “It was apparent on the ground as early as ’ or ’ . . . that the market for
low-income consumers was being flooded with inappropriate products,” Diane
Thompson of the NCLC told the Commission.
The HUD-Treasury task force recommended a set of reforms aimed at protecting
