OCC ADVISORY LETTER
AL 2000-7 
Date: July 25, 2000

Subject: Abusive Lending Practices
TO: Chief Executive Officers and Compliance Officers 
of All National Banks, Department and Division Heads, 
nd All Examining Personnel

PURPOSE

This advisory is to alert you to abusive lending practices 
that may involve violations of fair lending and other 
consumer protection laws and regulations.

DISCUSSION

Objective, fairly-applied subprime and risk-based lending 
have been important tools in expanding access to credit. 
by non-bank entities -- have come under intense scrutiny 
recently.  Most of these practices involve the setting of
 
prices, fees, and other terms and conditions in a manner 
that drastically departs from those used by more 
traditional and responsible prime and subprime lenders.  

These practices may involve violations of fair lending 
statutes and other consumer protection provisions.  They 
may also lead to increased credit, legal, and reputation 
risk.  For this reason, national banks and their direct 
subsidiaries should review their direct and indirect 
in activities that may be considered abusive or predatory, 
and should take corrective action where needed.

This advisory does not attempt to define what constitutes 
abusive or predatory lending, and many of the indicators 
of such lending may not be readily available to examiners.  
However, examiners should be alert for the following 
indications that an institution may be engaging in 
abusive lending practices:

. Collateral or Equity "Stripping" - loans made in reliance 
  on the liquidation value of the borrower's home or other 
  collateral, rather than the borrower's independent ability 
  to repay, with the possible or even intended result of 
  foreclosure or the need to refinance under duress; 

. Pricing and terms, whether interest rates or fees, that 
  far exceed the true risk and cost of making the loan;
. Targeting persons, such as the elderly, women, minorities, 
  and persons living in low- or moderate-income areas, 
  who are perceived to be less financially sophisticated or 
  otherwise vulnerable to abusive loan practices;
. Inadequate disclosure of the true costs and risks of 
  loan transactions;
. Lending practices that are fraudulent, coercive, 
  unfair, deceptive or otherwise illegal;
. Loan terms and structures, such as negative 
  amortization, when designed to make it more difficult 
  or impossible for borrowers to reduce their indebtedness;
. Aggressive marketing tactics that amount to deceptive 
  or coercive conduct;
. Padding/Packing - charging customers unearned, 
  concealed or unwarranted fees;
. "Balloon" payment loans that may conceal the true burden 
  of the loan financing and may force borrowers into costly 
  refinancing or foreclosure situations;
. Flipping - frequent and multiple refinancings, usually 
  of mortgage loans, requiring additional fees which strip 
  equity from the borrower; and/or
. Collection of up-front single-premium credit insurance - 
  life, disability, or unemployment, when the consumer does 
  not receive a net tangible financial benefit.

Repeated violations of certain consumer protection laws may 
also be indications of abusive lending practices.  These include 
patterns of violations of the Truth in Lending Act, Real Estate 
Settlement Procedures Act, the Home Ownership and Equity 
Protection Act, the Federal Trade Commission Act, and state 
consumer protection laws.

In addition, the following practices may suggest the 
potential for fair lending violations: 

. One-way referrals, i.e., a prime lender refers subprime 
  applicants to its subprime subsidiary but the subprime 
  subsidiary does not refer prime applicants to the prime lender;
. Significant differences in the proportion of minority or 
  female applicants between a prime lender and its 
  subprime subsidiary; or
. Significant differences in the proportion of loans 
  made in predominantly minority geographic areas between 
  a prime lender and its subprime subsidiary.

When examiners identify circumstances that may lead to a 
conclusion that a bank is engaged in predatory lending, 
they should inform both the supervisory office deputy 
comptroller and the deputy comptroller for Compliance 
Operations, who will determine the appropriate course 
of action. 

Information developed by examiners suggesting the possibility 
of fair lending violations or other abusive lending practices 
will be used to identify institutions presenting a higher 
than normal risk of illegal discrimination.  Where appropriate, 
these institutions will be targeted for examinations that 
will focus on the specific high risk activity.

For further information, contact:

Ralph E. Sharpe, Deputy Comptroller for Community and 
Consumer Policy, at (202) 874-5216.



__________________________
John D. Hawke, Jr.
Comptroller of the Currency