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Committee on Financial Services

United States House of Representatives

Archive Press Releases

For Release Upon Delivery
May 24, 2000
9:30 A.M.

 

PREPARED TESTIMONY OF

JOHN E. TAYLOR

PRESIDENT AND CEO

NATIONAL COMMUNITY REINVESTMENT COALITION

BEFORE THE

COMMITTEE ON BANKING AND FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

MAY 24, 2000

 

These remarks represent the views of over 700 community reinvestment organizations that comprise the membership of NCRC.

 

Good morning Chairman Leach, Representative LaFalce, and members of the Committee. My name is John Taylor, and I am President and CEO of the National Community Reinvestment Coalition (NCRC). NCRC is a national trade association representing more than 700 community-based organizations and local public agencies who work daily to increase fair and equal access to credit, capital, and banking services to traditionally underserved populations in both urban and rural areas.

NCRC supports long-term solutions that provide resources, knowledge, and skills to build community and individual wealth. Over the years, NCRC has represented the community perspective on the Consumer Advisory Council of the Federal Reserve Board, Fannie Mae’s Housing Impact Advisory Council, Freddie Mac’s Affordable Housing Council, the Community Development Financial Institutions (CDFI) Advisory Board, before Congress, and most recently, as part of the HUD/Treasury Predatory Lending Task Force.

NCRC thanks you, Mr. Chairman, for the opportunity to testify today on the subject of predatory lending. We also wish to express our appreciation to you for calling this hearing to explore the threat that abusive and unscrupulous mortgage lending poses to the economic well-being of low- and moderate-income, minority, and elderly individuals, families, and communities.

In your letter inviting NCRC to come before the Committee this morning you said that "an essential element of the continued growth of the U.S. economy is the democratization of credit." NCRC could not agree with you more. Through sustained access to credit and capital, traditionally underserved neighborhoods are able to thrive and contribute significantly to the long-term strength of the domestic economy.

However, you went on to state in your letter that subprime lending is an important part of this "democratization of credit." NCRC would argue that, while subprime lending does play a role in expanding access to credit for those with blemished credit records, a growing portion of this industry is responsible for the "balkanization of credit," whereby vulnerable low- and moderate-income, minority, and elderly individuals are being targeted by predatory lenders whose only intent is to deceive and dispossess them of their property and wealth. Representatives LaFalce and Schakowsky have consistently and forcefully echoed this concern, and are to be commended for their leadership in proposing strong legislation to combat predatory practices.

Some industry observers maintain that subprime lending has been responsible for significant increases in lending to minorities and low- and moderate-income borrowers. NCRC believes that these claims are exaggerated. The largest increase in home mortgage lending for underserved borrowers occurred between 1993 and 1995, when lending increased 21 percent for low- and moderate-income borrowers, and 58 percent for Black and Hispanic families. During these years, subprime lending was in its infancy. The widespread introduction of affordable, but conventional, mortgage products drove most of the increase in lending for traditionally underserved borrowers in those years. Renewed attention on the Community Reinvestment Act (CRA) prodded lenders to work in partnership with community organizations and local public agencies to design and implement affordable mortgage products. Since 1995, lending levels to minorities and lower-income borrowers have not declined, but they have not surged nearly as much as during the 1993 to 1995 time period. Ironically, the post-1995 time period is the much-heralded era of credit scoring and subprime lending.

One of the most important components in building and maintaining healthy and vibrant communities is homeownership. Not only does a home provide shelter, but it also acts as the primary vehicle through which many individuals and families build wealth. Only through stepped-up enforcement of the Community Reinvestment Act and stronger fair lending provisions can we ensure that working class and minority neighborhoods will continue to have access to the American Dream of homeownership.

Unfortunately, recent evidence indicates that predatory mortgage lending practices are on the rise throughout the country. Such practices include charging borrowers exorbitant interest rates unrelated to their credit risk, packing loans with unnecessary and costly fees, refinancing frequently with no benefits to the borrowers, utilizing high-pressure, sometimes fraudulent, sales tactics, and many other abuses. For victims of these practices, the American dream of homeownership becomes a terrifying nightmare, destroying a lifetime spent building wealth and ultimately threatening the economic stability of our communities.

Mr. Chairman, there is no place for predatory lenders in our financial system, and both Congress and the Federal regulatory agencies must take strong action to curtail the unscrupulous activities of these lenders once and for all. With our testimony today, NCRC will first outline the problem of predatory lending, discussing our work in this area, and then provide the Committee with both regulatory and legislative policy recommendations that we believe will help to protect consumers and communities from further abuse.

Subprime vs. Predatory Lending

As I’ve touched upon, predatory mortgage lending involves unfair and usurious credit practices that harm borrowers by trapping them in loans with terms and conditions that they do not understand, are unable to satisfy, and that result in equity-stripping and/or foreclosure. These practices are targeted at vulnerable, unsuspecting, and unsophisticated borrowers—predominantly low- and moderate-income, minority, and elderly individuals—using questionable, pressure-laden, and sometimes fraudulent, sales tactics.

Consider the following cases submitted to NCRC from community-based organizations in North Carolina and Pennsylvania:

In investigating predatory lending complaints in its State, the Community Reinvestment Association of North Carolina (CRA*NC) found that the Alstons (not their real name), a minority family living in a moderate-income community in Durham County, North Carolina, were charged excessive fees on their mortgage when they refinanced to conduct some home improvements. In addition, the terms and conditions of the mortgage were not fully disclosed. The Alstons were not told that their mortgage had an adjustable rate until their interest rate jumped two percentage points at the end of the first year of payment. Learning they would pay thousands of dollars in prepayment penalties to refinance with another lender, the Alstons had few options but to refinance with the same lender for a fixed-rate mortgage. They were charged excessive fees again, which were included in the refinancing. This process stripped away $10,000 in equity that the Alstons had built into their home.

Habitat for Humanity in Bryan/College Station, Texas recently reported to NCRC that one of its clients was approached by a representative of Conseco Financial (formerly Green Tree Financial), a subprime manufactured home lender, about a"great deal" Conseco was offering to consolidate all her monthly payments, including a low-interest rate auto loan and 0 percent interest rate mortgage. This "great deal" involved a new loan with an interest rate of 12 percent! Luckily, this consumer contacted Habitat for Humanity, who advised against this transaction. When contacted by Habitat and asked why she would offer loan consolidation at such outrageous terms, the loan officer for Conseco had no explanation, saying that she was just following the sales script that she was given. While this particular consumer was fortunate enough to have avoided disaster, thousands of others, like the Alstons, have not been so fortunate.

These are just two instances of the type of outrageous and deceptive mortgage lending practices occurring throughout the country. As other consumer and community representatives here today will tell you, there are scores of victims out there who have experienced similar injustices, and the list grows daily.

Since predatory lending is a subset of subprime lending—which generally involves the extension of high-interest rate credit to those with less than perfect credit histories—it is important to take a closer look at the subprime market and its growth to better understand the growth of the predatory lending problem facing underserved communities today.

Recent Trends in Subprime Lending

Over the past several years, there has been a tremendous explosion in subprime lending. According to the Department of Housing and Urban Development’s (HUD) recent study, Unequal Burden: Income and Racial Disparities in Subprime Lending in America, subprime refinance lending, which constitutes 80 percent of all subprime lending, increased almost 1000 percent from 1993-1998. In 1993, there were 80,000 subprime refinance loans made, compared to 790,000 by 1998. In dollar volume, subprime refinance loans climbed from $20 billion to $150 billion over this period, a seven-fold increase.

NCRC has serious concerns about this exponential rise, especially given its disproportionate growth among both low-income and minority neighborhoods and borrowers. Again, HUD documents that individuals in low-income neighborhoods are three times more likely to receive subprime refinance loans than those living in high-income neighborhoods. In 1993, subprime refinance loans accounted for 26 percent of all refinance loans in low-income neighborhoods in 1998, up from 3 percent in 1993. Among high-income neighborhoods, subprime refinance loans were just 7 percent of all loans in 1998.

In black neighborhoods, HUD’s analysis shows that borrowers living there are five times more likely to receive subprime refinancing than those living in white neighborhoods. High-cost subprime refinance lending in black neighborhoods accounted for 51 percent of all refinance lending in 1998, up from 8 percent in 1993. In white neighborhoods, only 9 percent of all refinance lending in 1998 was done by subprime lenders.

Recent analysis conducted by NCRC supports HUD’s findings, indicating that the share of the mortgage market held by subprime lenders in minority and low-income neighborhoods in large cities continues to be significantly higher than the share of the mortgage market held by subprime lenders in white neighborhoods. Similarly, minority- and low-income borrowers are much more likely to be receive subprime, rather than prime, loans.

In preparation for this hearing, NCRC conducted analysis of subprime mortgage lending among the top twenty lenders in the New York Metropolitan Statistical Area (MSA) in 1998. For conventional home purchase lending, subprime lenders made 4 percent of all loans in substantially white census tracts compared to 25 percent of all such loans in substantially minority census tracts. For conventional home refinance lending, an even more disturbing picture emerges. In substantially white census tracts, subprime lenders made 8 percent of all loans, while making 79 percent of all such loans in substantially minority census tracts.

In Baltimore, Maryland, these patterns are just as stark. Again, NCRC analysis of subprime mortgage lending among the top twenty lenders in the Baltimore MSA shows that subprime lenders' market share for home refinance loans in substantially minority census tracts was nearly 39 percent, while their share in overwhelmingly white census tracts was 0 percent. Fourteen of the top twenty refinance lenders in minority census tracts were subprime lenders. For home improvement loans, subprime lenders held 27.5 percent of the market in minority census tracts versus just 6.5 percent in white tracts. Finally, in the home purchase market in Baltimore, subprime lenders controlled 28.7 percent of the market in minority census tracts, and again 0 percent in predominantly white tracts.

For the Los Angeles-Long Beach, California MSA, we again found disturbing trends. Looking at all lenders, NCRC’s analysis showed that black borrowers as a whole were three times more likely to receive subprime rather than prime loans, and low- and moderate-income blacks were three times more likely to receive subprime loans than low- and moderate-income whites.

What does all this mean? Clearly, such extreme disparities in subprime lending by race and income cannot be solely related to the credit history or risk of the borrower. In fact, as both Freddie Mac and Fannie Mae have estimated, anywhere between 30 and 50 percent of subprime borrowers could qualify for prime loans. So what is going on? As the New York Attorney General, HUD, the Federal Trade Commission (FTC), and the Department of Justice (DOJ) know all too well, there are loosely regulated lenders and brokers out there engaged not only in deception and fraud, but also discrimination. Delta Funding is a case in point.

Case Study of a Predator: Delta Funding

As you know, Mr. Chairman, last fall, Delta Funding of Woodbury, Long Island, New York, reached a $12 million settlement with New York State Attorney General Eliot Spitzer over its predatory lending practices. Delta was responsible for over 1,000 subprime loans to low-income minority residents in Brooklyn and Queens over a three-year period.

Mortgage loans issued by the company affixed interest rates as high as 14 percent. Delta applied excessive fees of more than 10 percent of the loan amount. These loans in effect drove borrowers with no realistic ability to repay their debt into poverty and home foreclosure. The Attorney General charged that many borrowers were forced to pay more than 50 percent of their monthly pre-tax income to make exorbitant payments on loans from Delta.

In Attorney General Spitzer’s complaint, he highlighted the fact that brokers for Delta loans routinely solicited low-income individuals in minority neighborhoods who had little formal education or financial experience for high-cost home equity loans. In fact, in many of these neighborhoods 40 percent or more of the residents did not even have high school diplomas. Delta brokers used this to their advantage to persuade unsuspecting, vulnerable, and unsophisticated borrowers to apply for Delta mortgages.

Even more telling, the Attorney General compared census tracts in Brooklyn and Queens in which 80 percent or more of the residents were minority with those tracts in these same boroughs in which Delta did significant business, finding almost a perfect overlap. While the median income level of all borrowers Delta served was about $34,000, they interestingly enough did little or no business in those predominantly white neighborhoods containing homeowners with incomes of $35,000 or less.

Not surprisingly, earlier this year, HUD, the FTC, and DOJ settled a civil suit of their own with Delta, accusing Delta of charging female, African American borrowers higher loan rates than white males in similar financial positions, and of paying kickbacks and unearned fees to mortgage brokers for referring loan applicants to Delta.

Fortunately, Delta was brought to justice, Mr. Chairman, through the diligent efforts of the Attorney General, community representatives, and others. Unfortunately, there are more of these predators out there who are engaging in similar practices, which may not necessarily be illegal or prohibited under the Home Ownership and Equity Protection Act (HOEPA), but certainly should be. Put simply, these lenders need to be legislated out of business. Later in my testimony, I will provide more detail regarding NCRC’s views on the various anti-predatory lending bills currently pending before the Committee.

CRA-Regulated Institutions and their Affiliates: Getting into the Game

While the case of Delta Funding is exemplary of the type of predatory activity being conducted by independent, loosely regulated subprime mortgage companies, NCRC analysis shows that there are other entities with their fingers in the subprime cookie jar, namely CRA-regulated depository institutions and their affiliates.

Turning back to our analysis of subprime mortgage lending among the top twenty lenders in the New York Metropolitan Statistical Area (MSA) in 1998, NCRC found that nearly 40 percent of all subprime home purchase loans made in substantially minority census tracts were made by CRA-regulated institutions or their affiliates. Twenty percent of all subprime refinance loans in these tracts were made by this same category of institution.

Broadening our scope to all single-family (owner-occupied) home lending in the New York MSA among the top twenty lenders, NCRC found that 27 percent of all subprime lending was made by CRA-regulated institutions or affiliates.

Nationally, according to a recent report in American Banker newspaper, eight of the top 10 subprime lenders are subsidiaries of large banks, including Bank of America, Wells Fargo, First Union, and Citigroup.

Mr. Chairman, when Federal Reserve Chairman Alan Greenspan and Comptroller of the Currency John Hawke spoke to the National Community Reinvestment Coalition’s Annual Conference exactly two months ago, they clearly acknowledged that predatory lending is on the rise nationwide. Since then, other regulators have joined the chorus. However, many of them have since equivocated about their authority to take action, while this problem continues to grow.

Sources of Financing for Subprime and Predatory Loans

As recent media reports have highlighted, the backing of Wall Street investment firms has helped fuel much of the explosion in subprime lending in recent years. A recent New York Times/ABC News investigation revealed that from 1995 to 1999, the amount of money raised on Wall Street for subprime lenders rose from $10 billion to nearly $80 billion annually.

National data analysis done by NCRC shows that 67 percent of all subprime refinance loans made in 1998 were sold to private investment firms and other financiers, compared to just 20 percent of all prime home refinance loans.

With such astronomical amounts of money providing liquidity to the subprime market, it is no wonder that we are facing a growth in predatory lending problems today.

This month, NCRC and the Rainbow/PUSH Coalition unveiled a national initiative to combat Wall Street financing of predatory lending. In the coming weeks, NCRC and Rainbow/PUSH will be meeting with top Wall Street investment firms to develop a set of standards governing loan purchases to ensure that these firms are not providing fuel for unscrupulous predators. We hope that this will be first step towards limiting the amount of capital flowing into the coffers of usurious lenders.

But there are further regulatory steps that can be taken today by the Federal banking agencies to combat predatory activities, particularly the Federal Reserve Board. The Board has direct jurisdiction over the practices of those subprime lenders that are bank holding company subsidiaries (such as those highlighted earlier in NCRC’s analysis of subprime lending in the New York MSA in 1998). In addition, the Board also has jurisdiction over many companies that underwrite, purchase, and service mortgage-backed securities based on subprime loans by non-bank lenders.

Regulatory Responses and Remedies

The issue of the Board’s jurisdiction was raised recently in a speech given by Chairman Greenspan’s colleague on the Federal Reserve Board, Governor Edward Gramlich. He stated that: "HUD compiles an annual list of the subprime lenders that report data under the Home Mortgage Disclosure Act (HMDA). For 1998, this list showed 239 subprime lenders, of which 168 were regulated only by the Federal Trade Commission (FTC). Thirty-six of these institutions were banks or subsidiaries of banks and savings and loans that were regulated, and the remaining thirty-five were banks or subsidiaries of bank holding companies, where the holding company was regulated but the subsidiary operated with some freedom from the holding company and its regulator."

Governor Gramlich’s presentation understated the portion of the subprime (and potentially predatory) lending industry that is under the jurisdiction of the Federal Reserve System.

The HUD study that Governor Gramlich cited makes clear that the list of 239 subprime lenders includes only those HMDA-reporters that "specialize" (or are limited to) subprime lending. The report, in the introduction to the list Governor Gramlich referred to, says that "since HMDA does not identify…subprime loans, we were unable to separate out the…subprime loans of lenders that do not specialize in those loans."

The HUD report goes on to name several large bank holding companies (Norwest/Wells Fargo, First Union, Bank of America, and Chase) which are "active" in subprime lending, but which, because they mix their prime and subprime HMDA data, are not included in HUD’s list. Accordingly, the Board’s jurisdiction over (and responsibility for) that part of subprime lending that is predatory is larger than Governor Gramlich presented it.

Governor Gramlich statement also reads, "the remaining thirty-five were banks or subsidiaries of bank holding companies, where the holding company was regulated but the subsidiary operated with some freedom from the holding company and its regulator."

This "freedom" from the regulators is one that the Board has itself decided to give. It can conduct examinations today, including fair lending examinations, of any bank holding company subsidiary, including subprime lenders—and it should start doing so.

In fact, late last year the General Accounting Office (GAO) released a report that urged the Board to begin doing such exams of bank holding company subprime lenders.

The Board, however, refused. In a letter to the GAO, responding to the GAO’s recommendation that "the [Federal Reserve] Board monitor the lending activities of non-bank mortgage subsidiaries of bank holding companies and reconsider [its] policy with respect to routine examination" the Board shot back that a "long-standing [Federal Reserve Board] policy of not routinely conducting consumer compliance examinations of non-bank subsidiaries was formally adopted in January 1998."

The decision not to examine subsidiaries of bank holding companies for consumer compliance limits beneficial scrutiny of the subprime lending units of bank holding companies that are playing a larger and larger role in the subprime industry. If the Fed really wants to take action against predatory lending, here is a clear opportunity.

Another important way the Board has jurisdiction over the portion of the subprime market that is abusive and/or predatory is through its supervision of companies which underwrite, purchase, and service mortgage-backed securities based on subprime loans by non-bank lenders.

Two non-bank lenders which have been the subject of much litigation and negative press attention are First Alliance, which has faced a host of lawsuits for its predatory activities and recently filed for bankruptcy, and Delta Funding, which I profiled earlier in my testimony.

While the Board does not have direct jurisdiction over these particular companies, it must be noted that a number of major bank holding companies have participated in First Alliance’s and Delta Funding’s lending activity as underwriters, trustees, custodians, even as end-purchasers of their mortgage-backed securities (MBS). For instance, Republic National Bank of New York (now HSBC) purchased Delta’s MBS, even after Delta was sued for discrimination by the New York State Attorney General. Bankers Trust, now Deutsche Bank, similarly continued doing business with Delta. Norwest Bank Minnesota, N.A. continued to do business with First Alliance, even as litigation by state attorneys general mounted.

Clearly, the Board can and should promulgate standards, as a matter of fair lending and CRA compliance, but also as a safety and soundness matter, for bank holding companies’ involvement with subprime and predatory lenders.

The Office of Thrift Supervision, the Federal savings and loan regulator, has recently requested public comment on this exact issue—and, hopefully, will be looking carefully at the likes of savings and loan holding company Lehman Brothers, which has done business with both Delta and First Alliance, as profiled by The New York Times in March of this year.

In addition, Mr. Chairman, enhanced data disclosure is a potent weapon in the fight against discriminatory and predatory lending practices that the Fed can and should employ.

Two years ago, the Fed issued an advanced request for comment on contemplated changes to Regulation C, implementing the Home Mortgage Disclosure Act. Part of the request for comment solicited views on enhancing HMDA data, including increasing the accuracy of refinance reporting and the reporting of appraised home values. The reporting of Annual Percentage Rates in HMDA data was also raised and supported by NCRC and other community-based organizations. Also, HMDA data reporting for applications taken over the phone and by other non-personal means such as the Internet must be improved. Analyzing this additional data by race, income, and gender of borrowers will improve the ability of federal agencies to identify and penalize discriminatory and predatory lending.

Another regulatory action that can be acted upon immediately is increased scrutiny of subprime lending during CRA exams and accompanying fair lending reviews. CRA has been instrumental in leveraging a tremendous increase in safe and sound lending to traditionally underserved communities. It is one of the most important means by which to stimulate conventional lending institutions to compete against predatory lenders in lower-income and minority communities. But for CRA to succeed in this endeavor, it must be enforced rigorously. Recently, disturbing evidence indicates that some CRA examiners are giving depository institutions CRA "credit" or points for payday lending and other suspect activities without scrutinizing the terms and conditions of this lending (for examples of this see the Office of the Comptroller of the Currency’s most recent CRA exams of Eagle National Bank and Corus Bank). The Federal Deposit Insurance Corporation has just publicly indicated that it will not count predatory loans for CRA credit. NCRC urges all of the Federal banking agencies to issue an immediate interagency advisory letter saying that predatory lending will not receive credit under CRA exams and will be penalized through lower CRA ratings and fair lending referrals to the Department of Justice.

When the Federal Reserve Board claims that it is limited in what it can do to fight predatory lending, it is mistaken. All the Federal Reserve needs to do is look at what the other banking agencies are doing. And while these actions will in no way put an end to predatory lending in the absence of strong Federal legislation further curbing abusive practices, they would certainly help to move towards that objective.

Regulating Fannie and Freddie’s Involvement in the Subprime Market

I would be remiss, Mr. Chairman, if I didn’t also elaborate on the key role that the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, play in influencing the flow of capital into the subprime market and the subprime purchasing practices of Wall Street firms.

As you know, Mr. Chairman, HUD recently proposed a significant increase in the number and percentage of home loans made to traditionally underserved populations that Fannie Mae and Freddie Mac are required to purchase. As part of its proposed rule, HUD is weighing how to count the purchase of subprime loans toward fulfillment of those goals.

HUD has specifically asked if the standards under the Home Ownership and Equity Protection Act (HOEPA) of 1994 are sufficient to protect against the purchase of predatory loans. The answer is no.

One of HOEPA’s main provisions is requiring additional disclosures to consumers for loans with fees exceeding 8 percent of the loan amount and interest rates 10 percentage points above comparable U.S. Treasury securities. This standard is much too high, and NCRC has commented to HUD that the GSEs should receive no credit under the goals for purchasing loans in which: fees are greater than 3 percent of the loan amount, prepayment penalties are applied if a borrower pays the loan before the end of the loan term or refinances with another lender, and prepaid single-premium credit insurance is required to be financed as part of the loan.

In addition, NCRC also believes that HUD should consider the protections in a model anti-predatory lending bill that NCRC has developed with the assistance of renowned fair lending experts and its member organizations. Among other things, NCRC’s model bill prohibits flipping (repeated refinancing that does not benefit the borrower), making loans without considering the borrowers’ ability to pay, making loans that are substantially larger than the appraised value of the properties, and the practice of encouraging default on existing loans before refinancing. For high cost loans, NCRC’s model bill prohibits the practices of negative amortization and accelerating indebtedness, charging fees to renew or modify loans, mandatory arbitration, and making high cost loans without homeownership counseling. HUD should prohibit the GSEs from counting loans with these abusive features toward their affordable housing goals.

The GSEs must also be required to conduct fair lending reviews of subprime loans before they purchase them. The fair lending reviews would rule out subprime loans made to minorities and/or lower income whites that are creditworthy for prime loans. As I’ve stated, the GSEs themselves estimate that between 30 to 50 percent of subprime loans are made to borrowers that can qualify for prime loans.

Part of the GSE fair lending reviews must establish that the lending institution is reporting payment history on a monthly basis to credit bureaus. The GSEs must not be allowed to count any loans towards the affordable housing goals if lenders prevent borrowers from establishing good credit histories by withholding payment history information from the credit bureaus.

HUD itself must conduct regular fair lending reviews of the GSE loan purchases to guard against predatory practices and discrimination. HUD should explicitly state that verifying the qualifications of loans for the affordable housing goals involves a fair lending review. HUD must penalize the GSEs and the financial institutions originating loans that are predatory and discriminatory.

NCRC also believes that HUD should not allow the GSEs to count B,C, and D subprime loans toward the goals. Subprime loans are grouped into so called A-, B, C, and D loans, with A- borrowers being slightly less creditworthy than borrowers of regular market rate loans and C and D borrowers having substantially worse credit histories. According to HUD, A- lending accounted for about 63 percent of the subprime loans in 1998, with B loans making up 24 percent and C and D loans making up the remaining 13 percent. Presently, not enough is known about the underwriting standards or the rigor of fair lending reviews on B, C, and D loans to declare them fit for traditionally underserved populations. Clearly, a segment of this lending is predatory. Allowing the GSEs to count B, C, and D lending as part of their goals will legitimate predatory practices before safeguards can be built into this type of lending.

Legislative Remedies

It is quite clear, Mr. Chairman, that while all of the regulatory action recommended by NCRC is necessary to combat predatory lending, it is not sufficient. To truly end this scourge, Congress must pass strong anti-predatory lending legislation that significantly strengthens and expands current consumer protection provisions under HOEPA.

Some observers will say that voluntary action by the lending industry and/or regulatory responses will be enough to eliminate predatory lending. NCRC does not subscribe to this view for the simple reason that the parties to a lending transaction are unequal in terms of power and knowledge. As I stated earlier, Delta and other predatory lenders make it a practice to prey upon vulnerable populations with limited education. A mortgage transaction is hard enough for a Ph.D. to understand, let alone a person without a high school diploma. In economic jargon, the subprime market is not yet efficient or equitable because of information "asymmetries".

In urging caution on moving too fast on the regulatory front, Federal Reserve Governor Edward Gramlich states that while some subprime lenders may be predatory "elephants," most subprime lending contains terms and conditions that are "beneficial" to most "consumers." Mr. Chairman, NCRC does not understand how exorbitant fees, stiff prepayment penalties, high balloon payments, clauses that accelerate indebtedness, negative amortization that results in increased principle and interest, and other exploitative terms and conditions really benefit most consumers. These terms and conditions were not widespread a few years ago when the largest lending increases occurred to underserved populations. We believe that minority and lower-income populations do not need such terms and conditions in order to receive loans. We believe that legislating away these terms and conditions is necessary. And we believe that to eliminate information "asymmetries," homeownership counseling and foreclosure prevention counseling on high-cost loans is necessary.

There are several problems with HOEPA as currently written. To begin with, the law’s triggers for what constitutes a high-cost loan—which provide greater consumer protections and disclosures—are set much too high at an annual percentage rate of 10% above current Treasury bill rates, or with total points and fees exceeding 8% of the loan amount. Also, HOEPA does not severely limit or prohibit certain lending practices that are clearly abusive and indicators of predatory tactics, including prepayment penalties, the financing of sizable points and fees, loan flipping, the up-front collection of single-premium credit insurance, encouragement of default, mandatory arbitration, and arbitrary call provisions. In addition, HOEPA does not apply to open-end credit transactions secured by a principal residence, thus allowing abusive home improvement loans that are structured as open-end lines of credit—a favorite of predatory lenders—to avoid regulation.

As I’ve mentioned and detailed earlier in my testimony, NCRC and its members, working with fair lending experts and its nationwide membership, have crafted a model anti-predatory lending bill as part of our efforts to fight unscrupulous lenders, which I’m including with my testimony today along with a summary of its provisions. This bill corrects the flaws I’ve just outlined, while providing additional protections against abusive lending.

NCRC is pleased that many of the provisions included in its model bill are also included in the various anti-predatory lending bills currently circulating in Congress. Representatives LaFalce and Schakowsky, as well as Senators Sarbanes and Schumer, are all to be commended for their efforts to craft strong anti-predatory lending legislation.

The bills introduced by Representatives LaFalce and Schakowsky lower current HOEPA interest rate and fee triggers to extend protections to a broader number of high-cost loans. Also, these bills contain provisions that: prohibit lenders from accelerating a borrower’s indebtedness, prevent lenders from charging fees to modify or renew high-cost loans, outlaw lenders from requiring mandatory arbitration, prohibit lenders from making high-cost loans unless the borrower has received, or at least strongly been advised to seek, homeownership or credit counseling, require lenders to consider a borrower’s ability to repay the loan, limit or strictly prohibit prepayment penalties, prevent lenders from encouraging default on an existing loan, bar or limit the financing of points and fees, limit balloon payments, and prohibit the financing of credit insurance.

Importantly, Representative Schakowsky’s bill would require HMDA (Home Mortgage Disclosure Act) data to contain the Annual Percentage Rate (APR). Disclosures of APRs will be vital for fair lending enforcement to ensure that minorities and/or women of similar income levels and buying homes of similar values (or refinancing similar dollar amounts) are not charged significantly higher amounts that whites and/or males. Senator Schumer’s legislation would also prevent banks and thrifts from making high-cost loans as a means to satisfy their Community Reinvestment Act obligations. Under CRA, lenders should be encouraged to make affordable loans to low- and moderate-income populations and should be discouraged from using their subprime affiliates to make high-cost loans to these populations. The recent Treasury study shows that CRA-covered lenders dominate the market for making prime loans to low- and moderate-income borrowers, but also shows a sizeable increase in subprime lending by these same institutions—a point that I highlighted earlier.

Unfortunately, Mr. Chairman, Representative Ney’s bill is significantly less community- and consumer-oriented, despite its "Consumer Mortgage Protection Act" moniker. In fact, his legislation would roll back not only current federal consumer protections associated with high-cost loans but also strong state anti-predatory lending laws such as the one passed recently in North Carolina. As far as NCRC and its members are concerned, this legislation is a nonstarter in the fight against predatory lending.

Conclusion

The Community Reinvestment Act and fair lending laws have been responsible for leveraging tremendous increases in loans and investments for underserved communities. Vigorous enforcement of CRA and fair lending laws are key to encouraging depository institutions to compete against predatory lenders in minority and lower-income communities. In addition, however, new anti-predatory lending legislation is needed because too many non-depository lending institutions and affiliates of depository institutions escape the scrutiny of regular CRA and fair lending reviews. While regulatory enforcement is critical, it often occurs after lending has occurred. By itself, regulatory enforcement cannot ensure that the millions of annual lending transactions are free of abusive and predatory terms and conditions.

Mr. Chairman, under the law, if a person holds someone up at gunpoint and robs them of their possessions, that person goes to jail. However, if a lender uses deception, high-pressure sales tactics, and other abusive means to steal another person’s home—their most prized possession, the lender profits. Predatory lending is no different than robbery at gunpoint, and our laws and regulations must adequately reflect that fact.

Both Congress and the Federal regulatory agencies must act now to curtail this problem once and for all. Left unchecked, predatory lenders will continue to devastate low- and moderate-income, minority, and elderly individuals, families and communities nationwide.

NCRC once again thanks you for the opportunity to testify here today, and I would be happy to answer any questions you or other Committee members may have.



 

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