How to avoid being attacked as a predatory lender.

Regulators have made it very clear that they are prepared to condemn a wide variety of lending practices, not just fraudulent high-rate high-fee loans in low-income areas. While residential mortgage lenders are the most directly affected by predatory lending laws, other lenders who are engaged primarily in commercial lending, but from time to time take a home as additional collateral, may be vulnerable to being attacked as a predatory lender.

In addition, investment banks and other parties to the secondary market need to know those loan terms that may cause a residential loan (or a commercial loan with a home as additional security) to be deemed to be a "predatory loan" and therefore disqualified from the securitization pool.

The following guidelines, issued by the U.S. Comptroller of the Currency (OCC), are a helpful summary of the types of loan terms that regulators will condemn as "predatory." These OCC guidelines therefore are a road map for the types of loan terms to avoid, as a general rule, in the case of certain loans secured by a home. Technically, these guidelines are applicable only to national banks. However, these OCC regulations will be influential in the continuing evolution of predatory lending statutes and cases, and will help loan officers to see more clearly what loan terms will be red-flagged.

"A. Avoidance of Particular Loan Terms, Conditions, and Features. A bank should not become involved, directly or indirectly in residential mortgage lending activities involving abusive, predatory, unfair or deceptive lending practices, including, but not limited to:

1. Equity Stripping and Fee Packing. Repeat refinancings where a borrower's equity is depleted as a result of financing excessive fees for the loan or ancillary products.

2. Loan Flipping. Repeat refinancings under circumstances where the relative terms of the new and refinanced loan and the cost of the new loan do not provide a tangible economic benefit to the borrower.

3. Refinancing of Special Mortgages. Refinancing of a special

subsidized mortgage that contains terms favorable to the borrower with a loan that does not provide a tangible economic benefit to the borrower relative to the refinanced loan.

4. Encouragement of Default. Encouraging a borrower to breach a contract and default on an existing loan prior to and in connection with the consummation of a loan that refinances all or part of the existing loan.

B. Prudent Consideration of Certain Loan Terms ... Certain loan terms ... may, under particular circumstances, be susceptible to abusive, predatory, unfair or deceptive practices, yet may be appropriate ... under other circumstances. A bank should prudently consider the circumstances ... under which the bank will engage directly or indirectly in making residential mortgage loans with the following loan terms:

1. Financing single premium credit life, disability or unemployment insurance.

2. Negative amortization, involving a payment schedule in which regular periodic payments cause the principal balance to increase.

3. Balloon payments in short-term transactions.

4. Prepayment penalties that are not limited to the early years of the loan, particularly in subprime loans.

5. Interest rate increases upon default at a level not commensurate with risk mitigation.

6. Call provisions permitting the bank to accelerate payment of the loan under circumstances other than the borrower's default under the credit agreement or to mitigate the bank's exposure to loss.

7. Absence of an appropriate assessment and documentation of the consumer's ability to repay the loan in accordance with its terms, commensurate with the type of loan, as required by [12 C.F.R. Pt. 30, App. A].

8. Mandatory arbitration clauses or agreements, particularly if the eligibility of the loan for purchase in the secondary market is thereby impaired.

9. Pricing terms that result in the loan's being subject to the provisions of the Home Ownership and Equity Protection Act. 15 U.S.C. [section]1639 et seq.

10. Original principal balance of the loan in excess of appraised value.

11. Payment schedules that consolidate more than two periodic payments and pay them in advance from the loan proceeds.

12. Payments to home improvement contractors under a home improvement contract from the proceeds of a residential mortgage loan other than by an instrument payable to the consumer, jointly to the consumer and the contractor, or through an independent third party escrow agent. C. Enhanced Care to Avoid Abusive Loan Terms, Conditions, and Features in Certain Mortgages. A bank may face heightened risks when it solicits or offers loans to consumers who are not financially sophisticated, have language barriers, or are elderly, or have limited or poor credit histories, are substantially indebted, or have other characteristics that limit their credit choices. In connection with such consumers, a bank should exercise enhanced care if it employs the residential mortgage loan terms, conditions, and features described in paragraph B [above]."

See 12 C.F.R. Pt. 30, App. C, published in 70 Fed. Reg. 6329-6334 (Feb. 7, 2005). For more details about predatory lending, see B. Boyd, Real Estate Financing [subsection] 14.05[13] and14.06[4] (Law Journal Press/American Lawyer Media 2005), available at www.lawcatalog.com.