Attorney General Takes Action

 
In June 1999, Delta Funding Corporation agreed to settle allegations by the New York Attorney General arising out of Delta’s home equity lending activities in minority neighborhoods. The Attorney General had generally alleged that Delta discriminated against minority (and especially elderly) borrowers by making home equity loans that Delta allegedly knew the borrowers could not repay. In addition, Delta allegedly charged high points and default interest rates on those loans, resulting in the borrowers’ loss of the equity in their homes.
 

Delta settled without admitting any of the Attorney General’s charges. In doing so, Delta agreed to provide $6 million to restructure loans and further agreed to allow independent monitoring of its lending practices. The Attorney General touted the settlement as setting forth lending practices, such as attempting to verify that a borrower could repay the loan, that the Attorney General expects the entire lending industry to meet.
 

The agreement with the Attorney General, however, was short-lived -- quickly becoming a casualty of a turf war between the Attorney General and the Department. On August 19, Delta reached a settlement agreement with the Banking Department relating to the same practices that were the subject of the Attorney General’s action. In this settlement, Delta agreed to provide $7.25 million in reduced loan payments and $4.75 million in additional funds for restitution and consumer education and counseling. The next day, the Attorney General reportedly accused Delta of reneging on its agreement with him, and announced the initiation of formal legal action against Delta in federal district court. Which agency will have the last word on this, and how Delta will fare, remains to be seen.

 
Department Forms Interdivisional Group

 
As the Attorney General pursued its aggressive enforcement initiative against Delta, the Acting Superintendent of Banks, Elizabeth McCaul, in May 1999, announced the formation of an interdivisional group to focus on subprime lending issues. The group comprises members of the Department’s legal, mortgage banking, consumer services and economic research divisions as well as the Department’s criminal investigations bureau. The focus of this group is on (1) education and community outreach, (2) review of current legislation, (3) increased examinations of subprime lenders and (4) increased criminal investigations. The formation of the group was prompted in part by the increasing number of complaints about subprime lending received by the Department.

 
Department Proposes New Regulation

 
Finally, on July 29, 1999, fresh on the heels of enactment in North Carolina of a law to stop so- called “predatory lending” abuses in the subprime lending industry, the Department announced a proposed regulation to comprehensively address abusive lending practices aimed at elderly and poor borrowers. The Department characterized the proposed regulation as the nation’s first comprehensive solution to protect borrowers from deceptive lenders, and scheduled a series of public hearings throughout New York State in August and September to receive input on the proposal.
 

The proposed regulation addresses practices such as loan flipping (expensive and frequent refinances), loan packing (combining other products with loan products without informed consent) and making loans without regard to the borrower s ability to repay. In general, the proposed regulation defines certain loans as high cost loans, and regulates practices with respect to such loans.

 
“High cost loans” are defined in the proposed regulation as residential (1-4 family) mortgage loans (excluding reverse mortgages) (1) which carry an APR more than (a) 8% above the yield on U.S. Treasury securities of comparable maturities, for first lien loans, or (b) 9%, for subordinate lien loans, or (2) on which the total points and fees payable by the borrower (excluding “bona fide discount points”) are more than 5% of the total loan amount. A point which in fact reduces by at least 35 basis points the interest rate the borrower has to pay is presumed to be a “bona fide discount point” under the proposal, provided all other loan terms are unchanged.

 
This definition of “high cost loans” (as well as the definition of “points and fees”) is both different from and in many cases more inclusive than the federal definition of a “high cost or “Section 32” loan found in the Truth-In-Lending Act (“TILA”) and Regulation Z. In addition, there is no exclusion in the proposed regulation, as there is in TILA’s definition of a Section 32 loan, for purchase money loans and open-end loans.

 
Not only does the proposed regulation thus appear to cover more loans than the federal “high cost” law, it is also far more restrictive. Briefly, in addition to the prohibitions and limitations found in federal law, the proposed regulation would: Prohibit balloon payments due less than seven years after the loan closing (TILA is five years); prohibit “oppressive mandatory arbitration clauses”; require pre-closing loan counseling; prohibit lending without due regard to repayment ability and establish a presumption of repayment ability based on scheduled monthly-payments equal to 50% or less of the borrower’s verified gross monthly income (TILA prohibits only a “pattern or practice” of such lending); prohibit borrowers from financing (a) more than 50% of points and fees, and (b) any prepayment fees payable in connection with a loan being refinanced; prohibit refinancings within three years after closing of the loan being refinanced unless the borrower’s interest rate is reduced by at least 2%; require lenders to report both favorable and unfavorable payment information to national consumer credit bureaus; require lenders to report to the Department their most frequent source of referrals; and require new pre-application disclosures designed to cause the borrower to consider not applying for the loan or to shop with other lenders, and new pre-closmg disclosures regarding credit insurance.