Testimony of Senator Charles E. Schumer
Hearing on Predatory Lending Practices
House Committee on Banking and Finance - May 24, 2000
Thank you Chairman Leach for allowing me the opportunity to testify at this morning's hearing on Mortgage Lending Abuse.
There can be no disputing the fact that there has been an enormous rise in the incidences of predatory lending. And this rise has paralleled the explosion of subprime lending in the past ten years, again most notably in our nations's minority and low-income neighborhoods. Subprime lending has grown from a $20 billion to $150 billion dollar industry between 1993 and 1998. There were 80,000 subprime loans made nationwide in 1993, that number increased nearly ten-fold by 1998, when 790,000 subprime refinance loans were made.
To be sure, not all subprime lending is predatory. But nearly all predatory lending is subrime. And not all predatory lending is in minority neighborhoods, but minority neighborhoods seem to be the target of much of the worst loan scam offenders.
Last month, I released the findings of a report which showed a troubling disparity in the patterns of mortgage lending taking place in New York City.
Using information contained in the Home Mortgage Disclosure Act, the report showed that as far as lending practices in New York City are concerned, blacks and whites may as well be living on different planets.
We found that blacks were twice as likely to be rejected for a mortgage from a conventional bank than whites. Even a black applicant with an income greater than $60,000 was more likely to be turned down for a loan from a conventional lender than a white applicant with income less than $40,000.
We also found that in solid, professional black neighborhoods, nearly half of all home and refinance loans were made by subprime lenders. In similar white neighborhoods, subprime lenders accounted for less than 10% of the home and refinance loan market.
We found that borrowers in black neighborhoods were six times more likely to rely on subprime lenders than those who reside in white neighborhoods.
And this disparity existed even in the instances where neighborhoods were separated by just a few blocks, and shared identical economic characteristics.
I chose twelve neighborhoods in different Boroughs of New York City - six black and six white. Half had average incomes well above the City median, half had average incomes just below the City median.
The loan denial rates from conventional banks in the six black neighborhoods were twice those of white neighborhoods. In the six black neighborhoods, 51% of the loans were issued by subprime lenders compared to 13% in the six white neighborhoods.
These neighborhoods should have had identical lending patterns. Instead they were polar opposites. And of course, we wouldn't be here today if this were simply a New York problem. There is vast evidence of a national credit divide between black and white which is both separate and unequal.
In seeking to solve this problem we must find ways to ensure that the residents of strong, economically sound, vibrant minority neighborhoods have the same access to credit as do those who reside in comparable white neighborhoods.
We must encourage brokers and realtors to work with traditional lending institutions and quality subprime lenders to ensure that borrowers are getting the best loan terms available considering factors such as income, credit history, and other important factors.
Conventional lenders must redouble their efforts to invest in minority communities with loans and loan counseling.
And we must ensure that those who seek to hijack the American Dream through usurious loans be held accountable.
Mr. Chairman, I recently introduced a bill in the Senate modeled largely after legislation which passed last year in North Carolina that would place significant restrictions on high cost home loans.
And I know that some of my Congressional colleagues, including Congresswoman Schakowsky, and the ranking members of this committee and the Senate Banking Committee, Congressman's LaFalce and Senator Sarbanes, have each introduced legislation aimed at ending the practice of predatory lending.
The provisions contained in each of the bills may differ, but the core of each are essentially the same in that they all seek to restrict the ability of predatory lenders from taking advantage of our most vulnerable communities.
Each would seek to lower current HOEPA thresholds, and prevent lenders from charging exorbitant fees to consumers. And they all also include what I believe are necessary provisions that must be included in any legislation that deal with high cost loans, among these are; restrictions or the total elimination of prepayment penalties, the financing of points and fees and credit insurance, balloon payments, and mandatory arbitration.
Mr. Chairman, I have heard the stories of people who have been victimized by predatory lenders first hand. It is both heartbreaking and maddening to hear of families who saved for decades to get a piece of the American dream only to be duped into a loan that will ruin their lives. We have the ability to help those people.
I want to thank you again Chairman Leach for allowing me the opportunity to testify before this committee today. I applaud you for taking the necessary leadership on this most important issue.