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Committee on Financial Services

United States House of Representatives

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Testimony by Gale Cincotta
Executive Director, National Training and Information Center
Chairperson, National People’s Action
Committee on Banking and Financial Services
May 24, 2000


I want to thank Representative Leach and the House Banking Committee for holding these hearings and addressing the devastating issue of predatory mortgage lending.

I testify as executive director of the National Training and Information Center and chairperson of National People’s Action (NPA). NTIC is a training and research center for grassroots neighborhood organizations. NPA is a coalition of 302 community groups in 38 states working on issues that impact communities such as housing and banking, education, crime, jobs and youth. NPA is best known for spearheading passage of the Community Reinvestment Act in 1977. For twenty-nine years, NTIC and NPA have fought for investment in communities. Today, a new problem threatens to destroy the market in communities. Predatory lending is stripping equity and investment from communities and leading to a boom in foreclosures.

NTIC and NPA have been working to stop the high level of foreclosures in Chicago, Syracuse, Buffalo, Cleveland, Indianapolis caused by poor oversight of HUD’s FHA program. Over the last year we have fought for FHA reforms and won. Many of these reforms served as the basis for Secretary Cuomo’s Fraud Protection Plan, which he announced in Baltimore last week.

However, we still have foreclosures that are not caused by problems in the FHA program. In September, 1999, we conducted and released a study to explore the source of the explosion of foreclosures in Chicago and the surrounding suburbs. We found that subprime lenders are the problem.

The study, "Preying on Neighborhoods: Subprime Mortgage Lenders and Chicagoland Foreclosures," found that between 1993 and 1998, the Chicago area experienced a 52% increase in foreclosures completed—foreclosures where the homeowners certainly lost their homes. The study found "subprime lenders" are the engine behind the foreclosure explosion. Their share of Chicago foreclosures increased from 1% in 1993 to 38% in 1998. Foreclosures on loans made by subprime lenders increased from 131 foreclosures in 1993 to 4,958 foreclosures in 1999.

The first vital question to ask is how to define a predatory lender. In neighborhoods the impact of predatory lenders is devastating and we know a predatory loan when we see one. Predatory loans are subprime loans with fraudulent practices and flimsy underwriting that have led to an explosion of foreclosure in Chicago and other areas.

Predatory subprime loans are those that include predatory practices such as the following.

  • Bait and switch, offering a teaser rate and increasing that rate upon closing.
  • Charging excessive fees ranging anywhere from 5% to 20% of the total loan amount or requiring unnecessary credit life or credit disability insurance which is financed over the life of the loan.
  • Flipping, repeated refinancing without financial benefit to the borrower.
  • And improvident lending or basing a loan on the equity in the borrower’s home without regard to the ability to repay.

Last year 2,382 families in Chicago--and another 2,576 in the surrounding suburbs-- went into foreclosure because of subprime loans with such predatory practices and terms.

Another egregious practice of predatory lenders is steering by brokers and subprime lenders. Predators push borrowers into the subprime market when they could qualify for a conventional loan. Through aggressive advertising, predators are saturating the market in low- and moderate-income neighborhoods and capturing borrowers from legitimate lenders. Some 35% of subprime borrowers qualified for prime-rate loans even though they were sold high-interest, high-fee loans by subprime lenders, according to a study by the Federal Home Loan Mortgage Corporation, Freddie Mac, cited in The New York Times March 18, 1998. Similarly, the Illinois Attorney General found that 76% of borrowers from the subprime lender First Alliance belonged on the prime market and were steered into predatory loans.

Predatory lenders are stealing equity and resources from neighborhoods. NTIC’s partner, Neighborhood Housing Services of Chicago, Inc., reports that 25% of their time is spent on foreclosure intervention. Communities need all of their time and resources devoted to securing investment, building equity, bolstering the conventional market and underwriting sound loans.

We often call predatory lending "reverse redlining." Before the Community Reinvestment Act was passed in 1977, banks redlined – they refused to invest in inner-city, low- and moderate-income neighborhoods. Today, we’re experiencing reverse redlining – neighborhoods being destroyed by an excess of high-rate, high-fee loans that strip equity and reverse legitimate investment.

Mortgage brokers are the most common point of entry for borrowers on the subprime market and brokers are virtually unregulated. Subprime mortgage bankers are directly responsible for gouging, flipping, and improvident lending. They solicit aggressively over the phone, through the mail and on residents’ doorsteps. Brokers must be regulated effectively and be prohibited from taking kick-backs from subprime, predatory lenders.

The connection between banks and predatory mortgage lenders must also be brought to public attention. Banks are responsible when they have predatory, subprime subsidiaries and affiliates such as First Union’s The Money Store and BankAmerica’s EquiCredit. Banks must also be held accountable when banks and industry associations railroad proposed laws and regulations to restrict predatory practices. Investment banks are also responsible for funding predatory mortgage companies, for investing and securitizing predatory, subprime loans.

In Chicago, history has begun to repeat itself. In 1974, I testified before the Chicago City Council on an anti-redlining ordinance. Mayor Richard J. Daley supported the ordinance that neighborhood groups brought to him and it led to federal legislation, the Community Reinvestment Act.

Now it’s the year 2000, and Mayor Richard M. Daley has introduced an anti-predatory lending ordinance. The ordinance defines predatory lending and then prohibits city depositories, contractors, and their affiliates from doing predatory lending. If they do, they lose their status as a depository and their contracts with the City. The ordinance defines a category of high-cost "threshold loans" which are deemed predatory if they are coupled any of the defined abusive lending terms and practices. The definition of the ordinance’s threshold loans captures most of the subprime loans associated with predatory lending. The ordinance defines threshold loans as having an annual percentage rate (APR) of 5 percent plus the yield on the Treasury securities having comparable periods of maturity as the loan; or with points and fees in excess of 4% of the total loan amount (this includes fees which are mainly profit and does not include standard fees for appraisals, inspections, filing fees, etc.), The ordinance tracks these threshold loans.

The financial industry and trade associations are lobbying against the ordinance, even they should support it and clear their names.

Across Illinois, we have endorsed reforms that would create meaningful regulation and prohibitions against predatory lending. The key to these reforms is prohibiting lenders and brokers from financing points and fees on high-cost loans. The profitability of such fees spur unscrupulous lending and set homeowners up for foreclosure. We are now pushing for regulatory reform at state level. The financial industry and trade associations in Illinois have also lobbied against these reforms, calling for unfunded, mandatory counseling that would burden borrowers in the place of prohibitory reforms that would protect homeowners.

Congress and the regulators should stop predatory lending by doing four things. First, kill bogus reforms like H.R. 4213 introduced by Rep. Ney (Ohio). The Ney bill masquerades as consumer protection but will take away the rights of the states and Congress to pass real reforms.

Second, introduce real reforms in Congress to stop predatory lending. Such reforms should revise the definition of "high-cost loans" as determined by the Homeownership Equity Protection Act (HEOPA), set a meaningful definition of a high-cost loan, and prohibit certain loan terms and practices on high-cost loans. The definition outlined in Chicago Mayor Daley’s proposed ordinance (as of 5-15-00) accurately captures the interest rates, fees, and APR of subprime loans most heavily associated with predatory lending terms and practices. The reforms should prevent gouging by prohibiting the financing of points and fees on high-cost loans.

The reforms should prohibit flipping and "improvident lending," or making loans without regard to borrower’s ability to repay. A debt-to-income ratio of 45% should guide this prohibition against improvident lending.

Third, Congress and the regulators should modernize the Home Mortgage Disclosure Act (HMDA) to include disclosure of the points and fees, the interest rate, Annual Percentage Rate (APR), and credit score for all loans. This will help government and communities target the loans where abuse happens most often. It will also guard against steering, the abusive practice of making expensive, subprime loans to borrowers with good credit that deserve a prime-rate loan. As referenced earlier, Freddie Mac found that 35% of subprime borrowers actually qualified for prime rate loans. Clearly, this practice should be monitored and stopped.

Finally, Congress and the regulators should prevent financial institutions from getting CRA credit for subprime loans. Also as referenced First Union, a bank, owns The Money Store, a subprime lender known for using predatory practices and loan terms. While the bank doesn’t make many loans in Chicago, its subprime subsidiary floods the City with expensive loans, most of which are refinance and home improvement loans. BankAmerica and its subprime subsidiary, EquiCredit, have a similar record.

In conclusion, I urge you to take immediate action and implement these reforms so that our neighborhoods will be protected from unfair foreclosures caused by predatory lenders.


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