Statement of Norman E. D’Amours

Chairman, National Credit Union Administration

Presented at the

Predatory Lending Forum Sponsored by Rep. Stephanie Tubbs Jones

Cleveland, Ohio
July 6, 2000

Thank you, Congresswoman Tubbs Jones, not only for inviting me to be here tonight, but also for taking such an active and strong role in the Congress in seeking ways to combat the financial piranha we have come to call predatory lending.  The topic of predatory lending makes fair-minded people both deeply angry and profoundly sad.  I share your anger that financial predators are allowed to prosper by taking advantage of vulnerable people with limited access to financial counseling or to fairly priced financial alternatives.  And, I share your concern for those victimized by predatory lending tactics, some of whom have lost houses, cars and life savings to the predatory lenders. 

But I have to say, I am also hopeful that with the effort and attention you and others are bringing to this subject, and by working with responsible, mainstream financial institutions, particularly credit unions, we can begin to turn the tide and put the abusive rent-to-own stores, payday lenders, pawnshops and high-interest predatory home equity lenders out of business.   I thank you for your leadership and your commitment to the financial well-being of all segments of American society. 

I am proud to be here this evening representing the National Credit Union Administration, and proud to be supervising an industry where the American values of financial empowerment, cooperation and volunteerism are still deeply embedded.  In today’s free-market economy where unregulated and unlicensed predatory lenders, pawn shops, check-chasing outlets and rent-to-own stores charging usurious rates are growing exponentially, the credit union option remains a critically important alternative that has the power to even the playing field for low-income and underserved people.  

Through their statutory social mission to bring financial services to those of modest means, credit unions have the opportunity to make an enormous impact on the daily financial lives of American consumers.  This was true in 1908 in the highly industrialized city of Manchester, New Hampshire – when the first US credit union was established and which city I am proud to have represented in the U.S. Congress.  This is also true in parts of Cleveland in 2000 – as well as Appalachia, Watts, Bedford Stuyvesant and hundreds of low-income communities.  Credit unions can provide fairly priced financial services to those who are underserved by other conventional financial institutions.  Unfortunately, far too many low-income communities still do not have access to credit union services.

Congresswoman Tubbs Jones, there are several ways credit unions and other mainstream financial institutions can help address this problem.  First, I am hopeful that credit unions will do even more than they already are doing to reach out to low- and moderate-income families.  While credit unions comprise only a small part of the financial landscape, I believe they are well positioned to make an important contribution to reducing the role played by predatory lenders.  As NCUA Chairman, I take every opportunity to encourage credit unions to increase their services to low-income members in their existing fields of membership and to reach out to potential members in underserved areas.

In addition to serving more low-income and underserved members and customers, credit unions and traditional financial institutions can play an important role in consumer education.  The Clinton/Gore Administration’s First Account Act is a step in that direction.  Consumers who truly understand the risks and costs inherent in payday loans and predatory home equity loans will be unlikely to patronize these lenders if a fair alternative were available.  Most consumers would benefit from basic financial and budgeting information, and traditionally many credit unions have considered consumer education an important part of their mission.  I believe that credit unions and other financial institutions can and should expand their education and outreach activities in order to give consumers the information and tools they need to avoid abusive lending practices.          

In addition to using the regulator’s “bully pulpit” to urge credit unions to become more involved in service and education to low-income Americans, NCUA has also worked to learn more about the problem of predatory lending and how our direct actions might address these problems. 

Credit unions are extremely unlikely to engage directly in predatory lending.  Moreover most predatory lenders are not subject to regulation by any of the federal financial regulators.  Therefore, options for action are somewhat limited.  However, we are working with the other federal financial regulator agencies in an interagency working group to identify areas of common concern.   The group includes representatives from the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Department of Justice, the Federal Trade Commission, the Department of Housing and Urban Development, the Federal Housing Finance Board, and the Office of Federal Housing Enterprise Oversight.  We expect to continue our involvement in this working group to learn more about the issue of predatory lending and to identify steps that can be taken to combat this blight. 

The NCUA Board unanimously adopted a resolution in December 1999 establishing the agency’s support of efforts by the National Association of State Credit Union Supervisors (NASCUS) on the issue of predatory mortgage lending practices.  The resolution further stated the NCUA’s willingness to work on a cooperative basis with NASCUS to review issues of mutual interest related to effective regulation of predatory mortgage lending.  NCUA senior staff are meeting periodically with the NASCUS Task Force on predatory mortgage lending to discuss NASCUS data gathering efforts, the means for raising credit union awareness of the issue, and coordination of state and federal regulatory efforts. 

Additionally, NCUA has acted to encourage credit unions to serve their members with less than perfect credit histories by authorizing and recommending risk-based lending.  Risk-based lending encourages credit unions to make loans to members with a blemished or non-existent credit history by pricing the loans consistent with the higher implied risks.  Through risk-based lending, credit unions can expand the availability of credit to underserved elements of their membership and these borrowers pay a reasonably higher rate than would a prime borrower for their loans.  Even with higher pricing, risk-based lending provides a fair and reasonable alternative to the vastly higher, confiscatory interest rates and fees charged by alternative financial services providers, such as payday lenders, pawnshops, and rent-to-own stores.   That is because such lenders do not base their pricing on risks but on the highest profit the market will bear.

Finally, there may be some additional steps that could be taken on the regulatory front to address the predatory lending problem.  NCUA will very soon consider a proposal I have advanced to greatly increase the number of our Economic Development Specialists in order to help the smaller and low-income designated credit unions that are uniquely suited to reaching those primarily targeted by predatory lenders.  Moreover, as Chairman of NCUA, I have directed our staff to prepare detailed regulatory steps we might consider to ensure that credit unions do not directly or indirectly engage in unfair or predatory lending.  We could, in particular, look at the actions taken in the area of mortgage lending by North Carolina and other states that have already passed laws specifically designed to combat predatory mortgage lending.

Without increased efforts by credit unions, traditional financial institutions and regulators, millions of American will continue to be victimized by fringe lenders. I believe credit unions could make a substantial difference through their cooperative, non-profit, educational approach, if they were willing to sharpen and intensify their focus on reaching out to low-income Americans and doing even more to provide a fairer alternative to gougers.   

Let me conclude by again thanking you for your leadership and commitment on this important subject.  Forums such as you are hosting tonight can play an extremely important role in educating consumers, mainstream financial institutions and regulators about the danger of payday lenders, pawn shops, check cashing outlets, rent-to-own stores, and other predatory lenders.  I know firsthand from working with you in Washington that you take this problem very seriously and that you will continue to fight to make affordable financial services available to all Americans.