Fair Lending Principles
Fair Lending Principles for Banks, Thrifts and Subprime Lenders1. Stop targeting minorities, low-income, and the elderly for sub-prime lending.
• Provide separate HMDA data on subprime lending to the public, whether subprime lending occurs through bank, thrift, subprime subsidiary or affiliate.
• Adapt marketing and retail location of parent bank and subsidiaries/affiliates to balance targeting to minorities.
• Support credit and mortgage counseling programs.
• Conduct periodic review of applications taken, originations and denials by neighborhood and borrower race and income to ensure credit is being made available in a balanced fashion.
2. Offer borrowers the best product for which they qualify.
• Agree to offer a full-spectrum of loan products, including A-paper loans.
• Develop a referral system to match the consumer to the most appropriate product.
• Compensate loan personnel and management on a basis that furthers the above goals.
• Ensure adequate representation of wholesale staff and retail facilities to make prime credit available to underserved communities.
• Establish a rescue fund to compensate victims of predatory lending.
3. Stop onerous prepayment penalties:
• Offer every borrower the option of a loan without prepayment penalty. Prepayment penalties provisions must result in a bona fide benefit to the borrower, such as a truly lower interest rate.
• Limit prepayment penalties to the first 3 years of the loan
• Prohibit prepayment penalties after a change in the initial interest rate of the loan
• Charge no more in prepayment penalties than the following: 3% of the loan amount if paid within the first year of the loan; 2% of the loan amount within the first two years of the loan; and 1% of the loan amount within the first three years of the loan. • Lenders refinancing a note they hold should not assess a prepayment penalty.
4. End flipping.
• Stop refinancing loans when not in the “best interest of the borrower,” considering lower monthly payments, lower blended interest rates, assistance in avoiding foreclosure, and cash out to the borrower.
• Do not encourage borrowers to refinance unsecured debt into the new loan as a means of increasing the loan size and related points, fees, and commissions.
• Develop a second mortgage product for owners with special low or no cost mortgages that wish to access the wealth in their homes without losing the benefit of their first mortgage.
5. End the sale of single premium credit insurance products as part of the home loan.
• Offer insurance product only if payments are made monthly and if sale of product occurs at least one week after a home loan closing
6. End mandatory arbitration provisions.
7. Ensure borrowers are able to repay the loan.
• Underwriting should screen out borrower with 50% or greater debt to income ratios, unless lender can document why lender reasonably believes borrower will be in a better position to afford the loan in the future.
8. End excessive points and fees
• Points and fees should not exceed 3% of the loan amount
9. Stop predatory practices of brokers
• Commit to testing and loan reviews of brokers that consider customer complaints.
• Compensate loan personnel and management on a basis that does not reward predatory practices and places penalties on those that do.
• Place a cap on fees to brokers.
• Require fair lending training of all brokers.
• Mandate a broker code of conduct agreement.
• End yield spread premium payments or other compensation that rewards brokers for steering borrowers to higher cost products and larger loans.
10. Agree not to purchase or invest in predatory loans
• Develop due diligence to ensure no predatory loans are purchased or invested in as part of a mortgage backed security. Ensure all affiliated institutions, including securities firms, are not underwriting, securitizing, or otherwise facilitating the financing of lending that violates these principles.
• Make borrowers whole when presented with evidence that these principles have been violated.
