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CREDIT EXPANSION
vestigation of CitiFinancial, which now contained Associates First. “The manner in
which [Citigroup] approached that transaction invited regulatory scrutiny,” former
Fed Governor Mark Olson told the FCIC. “They bought a passel of problems for
themselves and it was at least a two-year [issue].” The Fed eventually accused Citi -
Financial of converting unsecured personal loans (usually for borrowers in financial
trouble) into home equity loans without properly assessing the borrower’s ability to
repay. Reviewing lending practices from and , the Fed also accused the unit
of selling credit insurance to borrowers without checking if they would qualify for a
mortgage without it. For these violations and for impeding its investigation, the Fed
in assessed million in penalties. The company said it expected to pay an-
other million in restitution to borrowers.
FEDERAL RULES:
“INTENDED TO CURB UNFAIR OR ABUSIVE LENDING”
As Citigroup was buying Associates First in , the Federal Reserve revisited the
rules protecting borrowers from predatory conduct. It conducted its second round of
hearings on the Home Ownership and Equity Protection Act (HOEPA), and subse-
quently the staff offered two reform proposals. The first would have effectively barred
lenders from granting any mortgage—not just the limited set of high-cost loans defined
by HOEPA—solely on the value of the collateral and without regard to the borrower’s
ability to repay. For high-cost loans, the lender would have to verify and document the
borrower’s income and debt; for other loans, the documentation standard was weaker,
as the lender could rely on the borrower’s payment history and the like. The staff memo
explained this would mainly “affect lenders who make no-documentation loans.” The
second proposal addressed practices such as deceptive advertisements, misrepresenting
loan terms, and having consumers sign blank documents—acts that involve fraud, de-
ception, or misrepresentations.
Despite evidence of predatory tactics from their own hearings and from the re-
cently released HUD-Treasury report, Fed officials remained divided on how aggres-
sively to strengthen borrower protections. They grappled with the same trade-off that
the HUD-Treasury report had recently noted. “We want to encourage the growth in
the subprime lending market,” Fed Governor Edward Gramlich remarked at the Fi-
nancial Services Roundtable in early . “But we also don’t want to encourage the
abuses; indeed, we want to do what we can to stop these abuses.” Fed General Coun-
sel Scott Alvarez told the FCIC, “There was concern that if you put out a broad rule,
you would stop things that were not unfair and deceptive because you were trying to
get at the bad practices and you just couldn’t think of all of the details you would
need. And if you did think of all of the details, you’d end up writing a rule that people
could get around very easily.”
Greenspan, too, later said that to prohibit certain products might be harmful.
“These and other kinds of loan products, when made to borrowers meeting appro-
priate underwriting standards, should not necessarily be regarded as improper,” he
said, “and on the contrary facilitated the national policy of making homeownership
