SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 6070 words

COMMITTEE: SENATE BANKING, HOUSING & URBAN AFFAIRS

HEADLINE: PREDATORY MORTGAGE LENDING

TESTIMONY-BY: DAVID BERENBAUM, SENIOR VICE PRESIDENT, PROGRAM & DIRECTOR OF CIVIL RIGHTS

AFFILIATION: NATIONAL COMMUNITY REINVESTMENT COALITION

BODY:
July 27, 2001

Hearing on

"Predatory Mortgage Lending: The Problem, Impact and Responses." Second Hearing in a Series

Prepared Testimony of

Mr. David Berenbaum Senior Vice President, Program & Director of Civil Rights National Community Reinvestment Coalition

Good morning Chairman Sarbanes, Senator Gramm, and members of the Committee. My name is David Berenbaum, and I am Senior Vice- President - Program and Director of Civil Rights of the National Community Reinvestment Coalition (NCRC). NCRC is a national trade association representing more than 800 community-based organizations and local public agencies who work daily to promote economic justice in America and to increase fair and equal access to credit, capital, and banking services to traditionally under- served populations in both urban and rural areas.

NCRC thanks you for the opportunity to testify today on the subject of predatory lending. In particular, I will focus our testimony on:

Defining predatory lending; Identifying why existing statutory and regulatory consumer protections are inadequate; and Strongly endorsing new public policy legislation and private sector initiatives to eliminate the practices that perpetuate the dual lending market in our nation. With all due respect to the representatives from the sub-prime lending industry who are testifying in these series of hearings, it is important to "cut to the chase" and to challenge the myths associated with sub-prime lending. First, sub-prime lending is not responsible for the all time high levels of home ownership in the United States. Second, sub-prime lending is not responsible for ending redlining in our communities. Third, responsible sub- prime lenders will not stop underwriting mortgage loans in our neighborhoods simply because new legislation prompts industry "best practices" to replace "predatory practices" in our cities and counties. And fourth, unfortunately existing law - and certainly industry suggestions of consumer education alone - are not adequate to foster greater compliance on a voluntary, statutory or regulatory level.

The Community Reinvestment Act and fair lending laws have been responsible for leveraging tremendous increases in loans and investments for under-served communities. For example, vigorous enforcement of existing CRA and fair lending laws encourage depository institutions to compete for business in minority and lower-income communities - precise areas predatory lenders target. Unfortunately, financial modernization legislation has opened the doors for too many non-depository lending institutions and affiliates of depository institutions escape the scrutiny of regular CRA and fair lending reviews. One of the unintended consequences of financial modernization has been to allow some lenders to operate in an unregulated environment, fearless of oversight and in a predatory manner. By itself, regulatory enforcement cannot ensure that the millions of annual lending transactions are free of abusive and predatory terms and conditions.

Mr. Chairman, Senator Gramm, there are lenders and brokers in the marketplace engaged today, not only in deception and fraud, but also discrimination. They need to be held accountable. While they masquerade as good neighbors, bankers, brokers and legitimate business people, these "predators" systematically defraud innocent individuals out of their money and property. They accomplish their illicit purposes by means of fraudulent loans and high-pressure, unscrupulous methods. Using these loans, predatory lenders extract unconscionable and unjust fees from their victims until there is no money left to extract; then they expropriate their victims' homes through foreclosures which, in many cases, the loans were specifically designed to facilitate. Predatory sub-prime lenders intentionally misuse and exploit the weaknesses in existing laws and regulations to their benefit and injure our communities every day. This was powerfully addressed by the victims of predatory lending who testified at yesterday's hearing.

The collective efforts of the advocates at this table and others around the nation are responsible for 2001 heralding the death of single premium credit life - Citigroup, Household, American General and several other companies and their respective trade associations have abandoned the product.

It is our hope that 2001 will also be the year that Congress and the President, in cooperation with the GSE's, the industry and community organizations, will enact protections to ensure equal professional service, fair lending and equal access to credit based upon risk, not race and community demographics, in the sub- prime lending market. New law is needed to cover both loan origination and purchases made in the secondary market. In partnership with the GSE's and responsible lenders we can create funds to refinance predatory loans and realize sensible and profitable market corrections. Freddie Mac's and Fannie Mae's recent entry into the sub-prime market is prompting sub-prime loan originators to review problematic products and policies, i.e., credit life, through monitoring of portfolios and clear sub- prime underwriting guidelines. Through new legislation, reinvigorated use of existing laws, enlightened regulatory oversight, and consumer empowerment and sunshine concerning the issues of credit scoring in loan origination and automated underwriting, we can make 2001 truly a remarkable year.

Definitions

A sub-prime loan is defined as a loan to a borrower with less than perfect credit. In order to compensate for the added risk associated with sub-prime loans, lending institutions charge higher interest rates. In contrast, a prime loan is a loan made to a creditworthy borrower at prevailing interest rates. Loans are classified as A, A-, B, C and D loans. "A" loans are prime loans that are made at the going rate while A- loans are loans made at slightly higher interest rates to borrowers with only a few blemishes on their credit report. The so-called B, C, and D loans are made to borrowers with significant imperfections in their credit history. "D" loans carry the highest interest rate because they are made to borrowers with the worst credit histories that include bankruptcies.

In contrast, a predatory loan is defined as an unsuitable loan designed to exploit vulnerable and unsophisticated borrowers. Predatory loans are a subset of sub-prime loans. They charge more in interest and fees than is required to cover the added risk of lending to borrowers with credit imperfections. They contain abusive terms and conditions that trap borrowers and lead to increased indebtedness. They pack fees and products onto loan transactions that consumers cannot afford. They do not take into account the borrower's ability to repay the loan. They prey upon unsophisticated borrowers who rely in good faith on the expertise of the loan originator or their agent. Ultimately, predatory loans strip equity and wealth from communities.

Recent Trends in Sub-prime Lending

Since predatory lending is a subset of sub-prime lending, it is important to take a closer look at the sub-prime market and its growth to better understand the growth of the predatory lending problem facing under-served communities today. Increasingly, sub- prime lending is becoming the only option of all too many low- income and minority borrowers. This reality sadly documents the continued existence of the race line in America and the continued existence of the dual lending market in the United States. Whereas before, African Americans were openly denied access to credit, today the "race tax" is more sophisticated, more costly - and equally exploitative. Where once redlining undermined communities, today "reverse redlining" has become the norm and threatens to undermine our communities' economies, social services, and tax base. On an individual level, the emotional and financial cost of predatory lending cannot even be calculated, and endangers every family's investment in their home and future. If, for example, an African American female head of household who lives in Baltimore, Maryland, with good credit refinances a $150,000 loan at 6.75 percent for 30 years, the cost to the consumer in interest is $200,240. If, however, this same African American female is pressured or coerced into refinancing with a sub-prime loan at 14.75 percent for 30 years, the total interest paid over the life of the loan will be $522,015 - a difference of $321,775. These are funds that the mortgage holder could have used for home improvements, a college education, to start a small business or for financial security. This is how the dual lending market imposes a "race tax" upon our communities. In fact, predators have made the "race tax" situation worse for our victim by charging her closing costs in excess of 4 points, tying in a high interest credit card, and including an exorbitant prepayment penalty fee - all standard predatory practices.

Sadly, an analogy to racial profiling is appropriate here. We have all become familiar with the term "Driving While Black." Sub- prime predatory lending has become the equivalent of "Borrowing While Black."

The attached exhibits, which map sub-prime and conventional lending patterns using census data, vividly reveal lending disparities in predominantly white and predominantly minority census tracts. For example, the map of Trenton, New Jersey shows that minority neighborhoods in 1999 were 4 times more likely to receive subprime refinance loans. Sub-prime lenders made more than 43 percent of loans in Trenton minority census tracts but only 11 percent in predominantly white tracts. The disparity in sub-prime market share by minority level of neighborhood in Austin, Texas and Baltimore, Maryland was also very large. In Austin, subprime lenders' market share in minority neighborhoods was about 3.5 times greater than their market share in predominantly white neighborhoods. And in Baltimore, subprime lenders issued approximately 50 percent of all the conventional refinance loans issued in minority neighborhoods in 1999. When sub-prime lenders dominate the refinance market in minority and low-income neighborhoods, they are apt to take advantage of their dominance and make abusive loans. Stronger anti-predatory laws combined with stepped up CRA enforcement of prime lenders is necessary to eliminate abuses and increase competition and choices of loan products in these neighborhoods. The appendix to the NCRC testimony provides data tables and maps showing lending disparities across states including New Jersey, New York, Texas, and Maryland. These maps easily could represent disparities in any urban community in the United States today. The practices which gave rise to these lending patterns undermine our nations commitment to fair lending, CRA and corporate responsibility and best practices.

A national poll conducted for NCRC in 2000 by the bi-partisan team of Jennifer Laszlo and Frank Luntz found that Americans overwhelmingly support fairness in lending. Of those surveyed, 92 percent said they believed that every creditworthy person should, by law, be given information about the best loan rate for which they qualify. With abusive sub-prime and predatory lending, this is not the practice.

NCRC, and our members, have documented over 30 widespread lending practices that despite existing legal protections have contributed to the problem of predatory lending. These predatory practices, which I will now identify, include issues relevant to the marketing, sale, underwriting and maintenance of sub-prime loans:

Marketing:

- Aggressive solicitations to targeted neighborhoods

- Home improvement scams

- Kickbacks to mortgage brokers (Yield Spread Premiums)

- Racial steering to high rate lenders

Sales:

- Purposely structuring loans with payments the borrower can not afford

- Falsifying loan applications (particularly income level)

- Adding insincere co-signers

- Making loans to mentally incapacitated homeowners

- Forging signatures on loan documents (i.e., required disclosure)

- Paying off lower cost mortgages

- Shifting unsecured debt into mortgages

- Loans in excess of 100 percent LTV

- Changing the loan terms at closing

The loan itself:

- High annual interest rates

- Product Packing

- High points or padded closing costs

- Balloon payments

- Negative amortization

- Inflated appraisal costs

- Padded recording fees

- Bogus broker fees

- Unbundling (itemizing duplicate services and charging separately for them)

- Required credit insurance

- Falsely identifying loans as lines of credit or open end mortgages

- Forced placed homeowners insurance

- Mandatory arbitration clauses

After closing:

- Flipping (repeated refinancing, often after high-pressure sales)

- Daily interest when loan payments are late

- Abusive collection practices

- Excessive prepayment penalties

- Foreclosure abuses

- Failure to report good payment on borrower's credit reports

- Failure to provide accurate loan balance and payoff amount

Congress, therefore, on a bi-partisan basis, should pass the strongest legislation possible to end these practices and establish law that the industry, regulators, state attorneys general, advocates and consumers can use to safeguard the public interest. In 2001 to date, 31 states have introduced over 60 legislative measures attempting to combat predatory lending practices. Additionally, 9 major metropolitan cities and counties have introduced local ordinances to deal with predatory lending. Surely, a meaningful national standard is preferable.

Keeping in mind our definition of a predatory loan - an unsuitable loan designed to exploit vulnerable and unsophisticated borrowers - enacting relevant consumer protections becomes a straightforward legislative policy exercise which clarifies and complements existing civil rights, consumer protection and disclosure laws.

The Truth Behind The Statistics

Over the past several years, there has been a tremendous explosion in sub-prime lending. According to the Department of Housing and Urban Development (HUD), sub-prime refinance lending increased almost 1000 percent from 1993-1998. The backing of Wall Street investment firms has helped fuel much of the explosion in sub-prime lending in recent years. As a relevant New York Times/ABC News investigation revealed, from 1995 to 1999 the amount of money raised on Wall Street for sub-prime lenders rose from $10 billion to nearly $80 billion annually.

NCRC has serious concerns about this exponential rise, especially given its disproportionate growth among low-income and minority neighborhoods. Again, HUD documents that individuals in low- income neighborhoods are three times more likely to receive sub- prime refinance loans than those living in high-income neighborhoods. In African American neighborhoods, HUD's analysis shows that borrowers living there are five times more likely to receive sub-prime refinancing than those living in white neighborhoods.

National data analysis done by NCRC shows that 67 percent of all sub-prime 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. The most recent manifestation of this widespread practice is financial service corporations that only purchase sub-prime loans on the secondary market in order to avoid complying with the Community Reinvestment Act, minimize HOEPA and related consumer protections - such as the Truth In Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) - and to avoid compliance with our nation's civil rights protections.

Thus, while some maintain that sub-prime lending has been responsible for the surge in homeownership among minorities and low- and moderate-income borrowers, NCRC believes that increased prime lending by CRA-covered banks has played the major role in the increase in homeownership. Proponents of sub-prime lending caution against aggressive anti-predatory lending regulation and legislation, saying that such efforts will choke off credit in under-served communities. NCRC, in contrast, asserts that anti- predatory legislation and regulation will not constrain home mortgage lending to traditionally under-served communities and is needed to protect communities from unscrupulous actors.

These extreme disparities in sub-prime lending by race and income cannot be solely related to the credit history or risk of the borrower. In fact, as Freddie Mac and Fannie Mae have estimated, anywhere between 30 and 50 percent of sub-prime borrowers could qualify for prime loans. This is product steering or "reverse redlining" at its worst. Mr. Chairman, there are lenders and brokers out there engaged not only in deception and fraud, but also discrimination, who need to be held accountable. However, with the exception of a handful of actions brought by the Federal Trade Commission, the recommendations of recent HUD/Treasury Report go unfulfilled. Over the past 5 years thousands of seniors, African Americans, Latinos and women have been victimized by predatory lending practices. As a result, public opinion has developed into consensus. Predatory lending, payday lending, predatory insurance and credit cards are all receiving "strict scrutiny" from public and private sector "attorneys general."

A recent study by the Research Institute for Housing America (RIHA) concludes that minority borrowers are more likely to receive sub-prime loans after controlling for credit risk factors. RIHA cautions against a conclusion that price discrimination alone explains this since minority borrowers may have different techniques of searching for lenders - or access to credit limited only to sub-prime lenders. However, when one considers the totality of the research by NCRC, HUD, Fannie Mae, Freddie Mac, RIHA, and others, it seems fair to say that the burden of proof lies with those who assert that discrimination and predatory lending is the exception to the rule and not the norm in the sub-prime market.

In late October of 2000, the incoming chairman of America's Community Bankers told an American Banker reporter that "We need to be very careful that sub-prime lending, which has a useful place, does not get confused with predatory lending . . . because lending to borrowers with imperfect credit history. . .is one of the reasons we've increased homeownership to record levels in the U.S."

The home mortgage lending data do not support the contention that sub-prime lending has driven the surge in homeownership for traditionally under-served populations. In 1990, low- and moderate-income borrowers (LMI borrowers have up to 80 percent of area median income) received 18.5 percent of all home mortgage loans made in the country (loans to borrowers with unknown incomes were excluded from the calculations). By 1995, LMI borrowers received 26.9 percent of all home mortgage loans, or 8.4 percentage points more than they had in 1990. By 1999, LMI loan share had increased to 30.7 percent or only 3.8 more percentage points than in 1995. The surge in sub-prime lending occurred from 1995 to 1999, yet LMI borrowers experienced the largest gains in home mortgage lending from 1990 to 1995. The first part of the decade witnessed a tremendous increase in conventional and affordable prime loans as depository institutions worked in partnership with community organizations to make CRA-related home mortgage loans.

The story is similar for home mortgage lending trends to African Americans and Latinos. African Americans and Latinos received 10.1 percent of the home mortgage loans in 1990 made to African Americans, Latinos, and Whites. The African American and Latino loan share climbed to 14.4 percent in 1995 and to 16.1 percent in 1999. The share of home mortgage loans made to African Americans and Latinos increased by 4.3 percentage points from 1990 to 1995, but only 1.7 percentage points from 1995 to 1999. Pundits and proponents of sub-prime lending talk about how it has made homeownership accessible, but the statistics show the biggest gains for minorities occurred in the first part of the decade when CRA-related lending surged - as opposed to the second part of the decade when sub-prime lending soared.

The RIHA study cited earlier concludes, "Yet there is little evidence to support the idea that sub-prime lending (primarily) serves lower-income households or households with little wealth to use as a down payment." And RIHA should know what it is talking about, since it is a research institute founded by mortgage banks and their trade association, the Mortgage Bankers Association of America.

NCRC acknowledges that responsible sub-prime lenders play a role in the marketplace. However, most predatory lenders are primarily consumer lenders and should not be confused with CRA-covered lenders that have done the most work in making the American Dream of home ownership possible. Despite this, even a portion of CRA covered loans has become predatory since the onset of financial modernization. In particular, price discrimination, or charging higher interest rates than is necessary to cover risk, by sub- prime mortgage divisions of banks has become all too common.

Next, opponents of tighter control of sub-prime lending suggest that improved disclosure of terms and conditions of loans will provide the needed protections against predatory lending. Loan transactions, particularly mortgages, can be the most complex transaction in a typical consumers lifetime, making it difficult for the average American to understand loan terms, choice of products, and that counseling or consumer protections may be available. I offer that consumers not only need the disclosures, but also need assistance in understanding what the disclosures really mean and the safety net of new legislative protections.

Legislative Remedies

NCRC believes that current law and regulation are weak and err on the side of allowing exploitative practices that are not economically justified in terms of being necessary to make loans profitable. Steep prepayment penalties on high interest loans, high balloon payments, repeated flipping, credit insurance, and fee and product packing were not necessary for profitable home mortgage loans made to first time homebuyers during the tremendous homeownership expansion in the 1990's, especially in the first half of the decade. These products and practices remain inappropriate today in the current economy of supercharged loan origination, refinance and home improvement. Instead, these abusive terms and conditions trap and exploit unsophisticated borrowers. Their unsuitability to the borrower and lender is demonstrated by higher foreclosures associated with predatory lending. Indeed, the FDIC has found that although sub-prime lenders constitute about 1 percent of all insured financial institutions, they account for 20 percent of depository institutions that have safety and soundness problems.

In order to protect consumers and the lending industry from unsafe and predatory practices, NCRC favors federal anti- predatory legislation that builds and expands the Homeownership and Equity Protection Act of 1994 (HOEPA). HOEPA defines loans that exceed a certain interest rate and fee threshold as high interest loans. It then outlaws various terms and conditions on high interest loans. The shortcoming with HOEPA is not its structure but its high interest rate and fee thresholds. The current interest rate threshold, for example, is 10 percentage points above Treasury bill rates which currently translates into interest rates of 16 percent and higher. The HUD/Treasury Task Force on Predatory Lending estimates that the current HOEPA interest rate threshold covers only about 1 percent of sub-prime loans.

NCRC strongly supports the Predatory Lending Consumer Protection Act of 2001 (H.R. 1051) introduced by Representative LaFalce and soon to be introduced by Senator Sarbanes. Many of the provisions and protections included in the legislation are what NCRC has been advocating for - tighten up HOEPA. NCRC believes that HOEPA should be amended in the following manner:

Coverage - HOEPA should be expanded to cover home mortgage lending, reverse mortgage lending, and open-ended transactions secured by real estate. Currently, HOEPA applies only to closed- ended consumer transactions secured by a borrower's home. In order for HOEPA's protections to be comprehensive, it is time to extend it to all lending secured by a borrower's principal dwelling.

Interest Rate Threshold - The interest rate threshold should be lowered from 10 percentage points above Treasury bill rates to 4 percentage points above Treasury rates. Using the figures in the HUD/Treasury report, NCRC estimates that this would cover about 70 percent of all sub-prime lending, or the percentage of sub- prime lending which is estimated to contain prepayment penalties.

Fees - NCRC believes that the fee threshold should be lowered from 8 percent of the loan amount to 3 percent of the loan amount. Fannie Mae has indicated that it will not purchase loans with fees exceeding five percent of the loan amount. This is a significant policy statement from a major secondary market player indicating that Fannie Mae does not believe that fees above 5 percent are economically justified from a profitability point of view. In addition, NCRC maintains that "yield-spread" premiums should be included in the calculation of the fee threshold. NCRC also agrees with the HUD/Treasury recommendation that for high interest rate loans, a ceiling should be established on the percentage of fees that are financed and added to the loan amount instead of being paid up-front. The HUD/Treasury recommendation is that fees exceeding more than 3 percent of the loan amount must not be financed.

Flipping - NCRC agrees with the HUD/Treasury recommendation that refinances of high interest rate loans that occur within 18 months of the original loan should be prohibited unless a tangible net benefit accrues to the borrower. Such a benefit should include a reduction in the loan interest rate of 1.5 percentage points.

Prepayment penalties - HOEPA currently allows prepayment penalties in the first 5 years. HOEPA must be changed to either eliminate prepayment penalties altogether on loans that exceed the interest rate and fee threshold or at least prohibit prepayment penalties beyond the first year after the origination of a high interest loan.

Balloon payments - HOEPA prohibits balloon payments on high interest loans within the first 5 years of origination. NCRC agrees with the HUD/Treasury recommendation that balloon loans must be prohibited until 15 years after the issuance of high interest rate loans. A shorter time frame invites flipping as predatory lenders convince borrowers facing steep balloon payments to refinance, usually at higher interest rates and added fees.

Single premium credit insurance - This is an abuse that must be ended on all loans. Fannie Mae and Freddie Mac have indicated that they will not purchase loans with single premium credit insurance. Congress should follow their lead and prohibit single premium insurance. If financial institutions wish to sell credit insurance, it should be on a monthly basis and must allow the borrower to cancel it at any time.

Additional HOEPA reforms should outlaw mandatory arbitration clauses and prohibit high interest rate loans with negative amortization and/or which exceed 50 percent of the borrower's income. With such changes, public policy will respond to the pervasive abuses occurring in the marketplace that cannot be addressed solely through improved disclosures or more extensive financial literacy and pre-purchase counseling.

Further, NCRC recommends that this Committee strongly consider amending the Home Mortgage Disclosure Act (HMDA) to include loan terms and conditions, and the CRA and fair lending exams should be improved to help stamp out predatory lending. Disclosures of annual percentage rates (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 than whites and/or males.

The Senate Banking Committee should also strongly consider the Community Reinvestment Modernization Act of 2001 (H.R. 865), introduced by Representatives Barrett and Gutierrez with 34 co- sponsors. This legislation will allow the Community Reinvestment Act to keep pace with the tremendous changes taking place in the financial industry by extending CRA to all lending affiliates of financial holding companies. Mortgage companies, insurance agents and other non-traditional lending affiliates of holding companies would be required to comply with CRA. Lenders would be penalized on CRA exams for making predatory loans. In addition, the bill would extend CRA-like requirements to insurance companies and securities firms. Insurance companies would be required to publicly disclose data on the race, income and gender of their customers. Mergers between depository and non-depository institutions would be subject to public comment periods with regulatory agency decisions based on CRA, fair lending, safety and soundness and anti-trust factors.

Regulatory Responses and Remedies

There are regulatory steps that can be taken today by the federal banking agencies, particularly the Federal Reserve Board, to combat predatory activities. The Board has direct jurisdiction over the practices of those sub-prime lenders that are bank holding company subsidiaries. In addition, the Board also has jurisdiction over many companies that underwrite, purchase, and service mortgage-backed securities based on sub-prime loans by non-bank lenders.

The Federal Reserve Board can conduct examinations, including fair lending examinations, of any bank holding company subsidiary, including sub-prime lenders - and it should start doing so. It should be noted that the Federal Reserve, in its July 2, 2001 approval order concerning the Citigroup - European American Bank merger, did commit to conduct a thorough examination of CitiFinancial. However, the Board still refuses to routinely conduct such examinations. The General Accounting Office (GAO) and the HUD/Treasury Report have both recommended that the Federal Reserve Board conduct such examinations. Another important way the Board has jurisdiction over the portion of the sub-prime market that is predatory is through its supervision of companies which underwrite, purchase, and service mortgage-backed securities based on sub-prime loans by non-bank lenders and companies that make warehouse loans to, or do underwriting, servicing or trustee /custodian work for, other sub-prime lenders.

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. Even if the Federal Reserve adopted its Regulation Z proposal to lower the HOEPA interest rate threshold to 8 percentage points above Treasury securities, only 5 percent of sub-prime loans would be covered under the Federal Reserve's own admission. Congress alone can change the HOEPA statute to make the interest rate threshold lower. The Predatory Lending Consumer Protection Act of 2001 would lower it to 6 percentage points above Treasury securities, and cover about 25 percent of sub-prime loans as estimated by HUD. In addition, the Federal Reserve does not believe that it has the power to eliminate credit insurance on sub-prime loans. The current predatory lending bill includes such provisions, which are needed to prohibit these practices.

Federal banking regulators must also increase their scrutiny of sub-prime 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 under-served 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. The Federal Deposit Insurance Corporation has just publicly indicated that it will not count predatory loans for CRA credit. The Office of Thrift Supervision recently failed a thrift that was making abusive payday loans. NCRC is also pleased that the federal banking agencies just updated their interagency CRA Question and Answer document to indicate that bank CRA ratings will be downgraded if they make predatory loans in violation of the Truth-in-Lending Act, the Real Estate Settlement Procedures Act, and HOEPA. We urge the federal banking agencies to codify this during the CRA regulation review that is just starting. Too many other questionable sub-prime and payday lenders have passed their CRA exams - and NCRC can provide examples upon request. There are signs that this will be changing; increased scrutiny from Capitol Hill will help make sure that unscrupulous lenders will fail their CRA and fair lending exams.

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 eliminate the problem. It is attached as an exhibit to this testimony. 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.

Conclusion

NCRC acknowledges the fact that sub-prime lending does play a role in expanding access to credit for those with blemished credit records. However, 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. Senators Sarbanes, Schumer, and 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. Representatives Barrett and Gutierrez should also be applauded for their sponsorship of the Community Reinvestment Modernization Act of 2001 in the House.

Stronger legislation and regulation are needed to end the scourge of predatory lending. Noble attempts have been made at the state and local level to implement legislative and regulatory protections against predatory lending. NCRC applauds these initiatives and supports them. However, a comprehensive HOEPA statute, accompanied by stronger regulations, is needed to establish uniformity and prevent predators from preying upon borrowers in states with weak laws. A uniform national framework will promote competition from prime lenders and responsible sub- prime lenders. It will benefit communities and lenders alike by prohibiting unsafe and unsound lending that is designed to exploit borrowers and neighborhoods and strip them of their wealth. It will empower federal and state regulators and enforcement agencies to use the law effectively to stem the tide of predatory lending.

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 both our laws and regulations must adequately reflect that fact.



LOAD-DATE: July 31, 2001