Predatory and Abusive Practices in Funding Non-Depository Lenders

AB

Sure, I'd be happy to provide a detailed explanation for you.

The term "CRCM" likely refers to the Certified Regulatory Compliance Manager certification, which is a professional certification for compliance professionals in the financial services industry. However, without additional context, it's difficult to say exactly what the question is asking.

Assuming the question is asking about predatory lending practices and the guidances issued by banking agencies, I can provide the following explanation:

Predatory lending refers to the practice of extending credit to borrowers who are unable to repay the loan, or who are likely to default, in order to generate high fees and interest charges. These practices often target low-income and minority borrowers, and can result in financial hardship and even bankruptcy for borrowers.

The banking agencies (likely referring to the Federal Reserve, FDIC, OCC, and NCUA) issued two guidances to caution depository institutions (i.e. banks and credit unions) about the risks involved in funding non-depository lenders (i.e. lenders that do not take deposits, such as payday lenders and auto title lenders) that engage in predatory lending.

The guidances highlight several predatory and abusive practices that lenders may engage in, including:

A. High-pressure sales: This refers to the use of aggressive sales tactics to pressure borrowers into taking out loans they may not need or cannot afford. Lenders may use high-pressure tactics such as telemarketing, door-to-door sales, or in-person solicitations to convince borrowers to take out loans.

B. Excessive fees and interest rates, including fees for unnecessary products: Predatory lenders often charge high fees and interest rates that are not justified by the risk of the loan. They may also charge additional fees for services or products that the borrower does not need or want, such as credit insurance or debt cancellation products.

C. Balloon payments that may cause foreclosure: Balloon payments are large lump-sum payments that are due at the end of a loan term. Predatory lenders may structure loans with balloon payments that are unlikely to be affordable for the borrower, leading to default and foreclosure.

D. Excessive refinancing with fees included in the new loan: Predatory lenders may encourage borrowers to refinance their loans repeatedly, even if it is not in the borrower's best interest. Each time the loan is refinanced, the lender may charge additional fees and increase the interest rate, resulting in a cycle of debt for the borrower.

The guidances issued by the banking agencies serve as a warning to depository institutions that funding non-depository lenders that engage in these practices can be risky and may expose the institution to reputational, legal, and financial risks. The guidances encourage depository institutions to implement policies and procedures to identify and manage these risks.