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Congressional Testimony
July 27, 2001, Friday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 4326 words
COMMITTEE:
SENATE BANKING, HOUSING & URBAN AFFAIRS
HEADLINE: PREDATORY MORTGAGE LENDING
TESTIMONY-BY: WADE HENDERSON, EXECUTIVE DIRECTOR,
AFFILIATION: LEADERSHIP CONFERENCE ON CIVIL RIGHTS
BODY: JULY 27, 2001
TESTIMONY OF
WADE HENDERSON EXECUTIVE DIRECTOR, LEADERSHIP CONFERENCE ON CIVIL RIGHTS
ON
PREDATORY LENDING AND ABUSIVE MORTGAGE LENDING
PRACTICES
BEFORE THE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
UNITED STATES SENATE
Mr. Chairman and members of the Committee,
I am Wade Henderson, Executive Director of the Leadership Conference on Civil
Rights. I am pleased to appear before you today on behalf of the Leadership
Conference to discuss the very pressing issue of
predatory
lending in America.
The Leadership Conference on Civil Rights
(LCCR) is the nation's oldest and most diverse coalition of civil rights
organizations. Founded in 1950 by Arnold Aronson, A. Philip Randolph, and Roy
Wilkins, LCCR works in support of policies that further the goal of equality
under law. To that end, we promote the passage of, and monitor the
implementation of, the nation's landmark civil rights laws. Today the LCCR
consists of over 180 organizations representing persons of color, women,
children, organized labor, persons with disabilities, the elderly, gays and
lesbians, and major religious groups. It is a privilege to represent the civil
rights community in addressing the Committee today.
Predatory
Lending is a Civil Rights Issue
Some may wonder why the issue
of
predatory lending raises civil rights issues, but I think
the answer is quite clear.
Shelter, of course, is a basic human need -
and homeownership is a basic key to financial viability. While more Americans
own their homes today than any time in our history, minorities and others who
historically have been under-served by the lending industry still suffer from a
significant homeownership gap.
The minority homeownership rate climbed
to a record-high 48.8 percent in the second quarter of 2001, Housing and Urban
Development Secretary Mel Martinez said yesterday. About 13.2 million minority
families owned homes in this period, up from 47.6 percent in the same quarter
last year, HUD said. However, the rate for minorities still lagged behind the
overall homeownership rate in the second quarter this year, which, at 67.7
percent, tied a high first set in the third quarter of 2000. Nationally, 72.3
million American families owned their homes.
Unequal homeownership rates
cause disparities in wealth since renters have significantly less wealth than
homeowners at the same income level. To address wealth disparities in the United
States and make opportunities more widespread, it is clear that homeownership
rates of minority and low-income families must rise. Increasing homeownership
opportunities for these populations is, therefore, central to the civil rights
agenda of this country.
Increasingly, however, hard-earned wealth
accumulated through owning a home is at significant risk for many Americans. The
past several years have witnessed a dramatic rise in harmful home equity lending
practices that strip equity from families' homes and wealth from their
communities. These
predatory lending practices include a broad
range of strategies that can target and disproportionately affect vulnerable
populations, particularly minority and low-income borrowers, female
single-headed households and the elderly. These practices too often lead
minority families to foreclosure and minority neighborhoods to ruin.
Today,
predatory lending is one of the greatest threats
to families working to achieve financial security. These tactics call for an
immediate response to weed out those who engage in or facilitate predatory
practices, while allowing legitimate and responsible lenders to continue to
provide necessary credit.
As the Committee is aware, however, subprime
lending is not synonymous with
predatory lending. Moreover, I
would ask you to remain mindful of the need for legitimate "subprime" lending.
We should be careful that it is not adversely impacted by efforts directed at
predators.
The subprime lending market has rapidly grown from a $20
billion business in 1993 to a $150 billion business in 1998, and all indications
are that it will continue to expand. The enormous growth of subprime lending has
created a valuable new source of loans for credit strapped borrowers. Although
these loans have helped many in an underserved market, the outcome for an
increasing number of consumers has been negative.
On a scale where "A"
represents prime, or the best credit rating, the subprime category ranges
downward from A-minus to B, C and D. Borrowers pay more for subprime mortgages
in the form of higher interest rates and fees.Lenders claim this higher consumer
price tag is justified because the risk of default is greater than for prime
mortgages.Yet even with an increased risk, the industry continues to ring up
hefty profits and the number of lenders offering subprime products is growing.
Some have suggested that subprime lending is unnecessary.They contend
that if an individual does not have good credit then the individual should not
borrow more money. But as we all know, life is never that simple. Even hard
working, good people can have impaired credit, and even individuals with
impaired credit have financial needs. They should not be doomed to a financial
caste system, one that both stigmatizes and permanently defines their financial
status as less than "A."
Until a decade ago, consumers with blemishes on
their credit record faced little hope of finding a new mortgage or refinancing
an existing one at reasonable rates. Without legitimate subprime loans, those
experiencing temporary financial difficulties could lose their homes and even
sink further into red ink or even bankruptcy.
Moreover, too many
communities continue to be left behind despite the record economic boom. Many
communities were "red-lined," when the nation's leading financial institutions
either ignored or abandoned inner city and rural neighborhoods. And,
regrettably, as I discussed earlier, predators are filling that void - the
payday loan sharks; the check-cashing outlets; and the infamous finance
companies.
Clearly there is a need for better access to credit at
reasonable rates, and legitimate subprime lending serves this market. I feel
strongly that legitimate subprime lending must continue.I am concerned that if
subprime lending is eliminated, we will go back to the days when the only source
of money available to many inner- city residents was from finance companies,
whose rates are often higher than even predatory mortgage lenders. It was not
long ago that these loan sharks walked through neighborhoods on Fridays and
Saturdays collecting their payments on a weekly basis and raising havoc for many
families. We do not want to see this again. However,
predatory
lending is never acceptable, and it must be eradicated at all costs.
Believing that there may have been an opportunity for a voluntary
response to the
predatory lending crisis, several national
leaders within the prime and subprime lending industry, as well as the secondary
market, came together last year with civil rights, housing, and community
advocates in an attempt to synthesize a common set of "best practices" and
selfpolicing guidelines. Although the group achieved consensus on a number of
the guidelines, several tough issues remained unresolved. These points of
controversy surrounded such issues as prepayment penalties, credit life
insurance, and loan terms and fees, which go to the very essence of the practice
by contributing to the equity stripping that can cause homeowners to lose the
wealth they spend a lifetime building. In the end, we failed to achieve a
consensus within our working group largely because industry representatives
believed they could be insulated politically from mandatory compliance of
federal legislation.
Given the industry's general reluctance to grapple
with these tough issues on a voluntary basis, it seems clear that only a
mandatory approach will result in a significant reduction in
predatory
lending practices.
Direct Action Has Led to Changes, But More
is Needed
At the outset, I think it is important to recognize that many
persons and organizations have been actively combating
predatory
lending practices, and with some success. I give credit to Maude Hurd
and her colleagues at ACORN who have been able to persuade certain lenders to
eliminate products like single premium credit life insurance. I think Martin
Eakes of Self Help, who testified before the committee yesterday, should also be
recognized for his efforts in crafting a comprehensive legislative package in
North Carolina, the first such measure among the states.
These groups,
including the National Community Reinvestment Coalition and others you have
heard from in these hearings have forced real change. But they need help.
Recent investigations by federal and state regulatory enforcement
agencies, as well as a series of lawsuits, indicate that lending abuses are both
widespread and increasing in number. LCCR is therefore pleased to see that
regulators are increasingly targeting their efforts against predatory practices.
For example, we note that the Federal Trade Commission (FTC) has taken several
actions aimed at predatory actions. These include a lawsuit filed against First
Alliance Mortgage that alleges a series of deceptive marketing practices by the
company, including a marketing script designed to hide the trust cost of loans
to the borrower.
More recently, the FTC filed a comprehensive complaint
against the Associates First Capital alleging violations of a variety of laws
including the FTC Act, the Truth in Lending Act, and the Equal Credit
Opportunity Act. Among other things, the suit claims that Associates made false
payment savings claims, packed loans with credit insurance, and engaged in
unfair collection activities.
In addition to the activity at the federal
level, various states Attorneys General have also been active in this area and I
know the issue is of great concern to them.
Many have observed that
certain practices cited as predatory are already prohibited by existing law. I
agree, and therefore urge regulatory agencies to step up their efforts to
identify and take action against predatory practices. At a minimum, this should
include increased efforts
to ensure lenders are fully in compliance with
HOEPA requirements, particularly the prohibition on lending without regard to
repayment ability. In addition, we strongly support continued efforts to combat
unfair and deceptive acts and practices by predatory lenders.
State
Legislation Has Addressed Some Practices
I think much can be learned
from the actions of state legislators and regulatory agencies. At last count,
roughly 30 measures to address
predatory lending have been
proposed and more than a dozen have been enacted. The first of these was the
North Carolina statute enacted in July of 1999, that Martin Eakes has described
to the Committee. . Following this statute, a number of other statutes,
regulations and ordinances have been adopted, several of which are summarized
below.
... Connecticut
Connecticut H.B. 6131 was signed into law
in May of 2001 and is effective on October 1, 2000. The new statute addresses a
variety of
predatory lending concerns by prohibiting the
following provisions in high cost loans agreements: (i) balloon payments in
mortgages with a term of less than seven years, (ii) negative amortization,
(iii) a payment schedule that consolidates more than two periodic payments and
pays them in advance from the proceeds; (iv) an increase in the interest rate
after default or default charges that are more than five percent of the amount
in default; (v) unfavorable interest rebate methods; (vi) certain prepayment
penalties; (vii) mandatory arbitration clauses or waivers of participation in a
class action, and (viii) a call provision allowing the lender, in its sole
discretion, to accelerate the indebtedness.
In addition to these
prohibitions, the statute addresses certain lending practices by prohibiting:
(i) payment to a home improvement contractor from the proceeds of the loan
except under certain conditions; (ii) sale or assignment of the loan without
notice to the purchaser or assignee that the loan is subject to the act; (iii)
prepaid finance charges (which may include charges on earlier loans by the same
lender) that exceed the greater of five percent of the principal amount of the
loan or $2,000; (iv) certain modification or renewal fees; (v) lending without
regard to repayment ability; (vi) advertising payment reductions without also
disclosing that a loan may increase the number of monthly debt payments and the
aggregate amount paid by the borrower over the term of the loan; (vii)
recommending or encouraging default on an existing loan prior; (viii)
refinancings that do not provide a benefit to the borrower; (ix) making a loan
with an interest rate that is unconscionable, and (x) charging the borrower fees
for services that are not actually performed or which are not bona fide and
reasonable.
... City of Chicago
Chicago's
predatory
lending ordinance was effective November 13, 2000. It requires an
institution wishing to hold city funds to submit a pledge affirming that neither
it nor any of its affiliates is or will become a predatory lender, and provides
that institutions determined by Chicago chief financial officer or city
comptroller to be predatory lenders are prohibited from
being designated
as a depository for city funds and from being awarded city contracts. Cook
County also has enacted an ordinance closely modeled to the one in Chicago.
Under the Chicago ordinance, a loan is predatory if its meets an APR or
points and fees threshold and contains any of the following: (i) fraudulent or
deceptive marketing and sales efforts to sell threshold loans (loan that meets
the APR or points and fees threshold to be predatory but does not contain one of
the enumerated triggering criteria); (ii) certain prepayment penalties; (iii)
certain balloon payments; (iv) loan flipping, i.e. the refinancing and charging
of additional points, charges or other costs within a 24-month period after the
refinanced loan was made, unless such refinancing results in a tangible net
benefit to the borrower; (v) negative amortization; (vi) financing points and
fees in excess of 6% of the loan amount; (vii) Financing single premium credit
life, credit disability, credit unemployment, or any other life or health
insurance, without providing certain disclosures; (viii) lending without due
regard for repayment ability; (ix) payment by a lender to a home improvement
contractor from the loan proceeds, unless the payment instrument is payable to
the borrower or jointly to the borrower and the contractor, or a third-party
escrow; (x) payments to home improvement contractors that have been adjudged to
have engaged in deceptive practices.
... District of Columbia
The District of Columbia has amended its foreclosure law, effective
August 31, 2001 or 60 days after the effective date of rules promulgated by the
mayor, to address predatory practices. In summary, the amendment prohibits: (1)
making "home loans" unless lenders "reasonably believe" the obligors have the
ability to repay the loan; (ii) financing single premium credit insurance; (iii)
refinancings that do not have a reasonable, tangible net benefit to the
borrower; (iv) recommending or encouraging default , on any existing debt that
is being refinanced; (v) making, brokering or arranging a "home loan" that is
based on the inaccurate or improper use of a borrower's credit score and thereby
results in a loan with higher fees or interest rates than are usual and
customary; (vi) charging unconscionable points, fees and finance charges on a
"home loan; (vii) post- default interest; (viii) charging fees for services not
actually performed or which are otherwise "unconscionable;" (ix) failing to
provide certain disclosures; (x) requiring waivers of the protections of the
Predatory Lending Law; (x) financing certain points and fees on
certain refinancings; and (xi) certain balloon payments.
... Illinois
The State of Illinois has enacted a
predatory lending
law that was effective on May 17, 2001. The Illinois law prohibits: (i) certain
balloon payments; (ii) negative amortization; (iii) disbursements directly to
home improvement contractors; (iv) financing "points and fees," in excess of 6%
of the total loan amount; (v) charging points and fees on certain refinancings
unless the refinancing results in a financial benefit to the borrower; (vi) loan
amounts that exceed the value of the property securing the loan plus reasonable
closing costs; (vii) certain prepayment penalties; (viii) accepting a fee or
charge for a residential mortgage loan application unless there is a reasonable
likelihood that a loan commitment will be issued for such loan for the amount,
term, rate charges, or other conditions set forth in the loan application and
applicable disclosures and documentation, and that the loan has a reasonable
likelihood of being repaid by the applicant based on his/her ability to repay;
(ix) lending based on unverified income; (x) financing of single premium credit
life, credit disability, credit unemployment, or any other credit life or health
insurance; and (xi) fraudulent or deceptive acts or practices in the making of a
loan, including deceptive marketing and sales efforts.
In addition, the
statute requires lenders to: (i) provide notices regarding homeownership
counseling and to forbear from foreclosure when certain counseling steps have
been taken; and (ii) report default and foreclosure data to regulators.
... Massachusetts
Massachusetts adopted regulations that were
effective on March 22, 2001. Those regulations prohibit the following in high
cost loans: (i) certain balloon payments; (ii) negative amortization; (iii)
certain advance payments; (iv) post-default interest rates; (v) unfavorable
interest rebate calculations; (vi) certain prepayment penalties; (vii) financing
points and fees in an amount that exceeds five percent (5%) of the principal
amount of a loan, or of additional proceeds received by the borrower in
connection with the refinancing; (viii) charging points and fees on some
refinancings; (ix) "packing" of certain insurance products or unrelated goods or
services; (x) recommending or encouraging default or further default on loans
that are being refinanced; (xi) advertising payment savings without also noting
that the "high cost home loan" will increase both a borrower's aggregate number
of monthly debt payments and the aggregate amount paid by a borrower over the
term of the "high cost home loan;" (xii) unconscionable rates and terms; (xiii)
charging for services that are not actually performed, or which bear no
reasonable relationship to the value of the services actually performed; (xiv)
requiring a mandatory arbitration clause or waiver of participation in class
actions that is oppressive, unfair, unconscionable, or substantially in
derogation of the rights of consumers; (xv) failing to report both favorable and
unfavorable payment history of the borrower to a nationally recognized consumer
credit bureau at least annually if the creditor regularly reports information to
a credit bureau; (xvi) single premium credit insurance, including credit life,
debt cancellation; (xvii) call provisions; and (xviii) modification or deferral
fees.
Massachusetts also requires credit counseling for any borrower 60
years of age or more. The counseling must include instruction on high cost home
loans. Other borrowers must receive a notice that credit counseling is
available.
... New York
In June of 2000, the New York State
Banking Department adopted Part 41 of the General Regulations of the Banking
Board. This regulation, which was effective in the fall of 2000, was designed to
protect consumers and the equity they have invested in their homes by
prohibiting abusive practices and requiring additional disclosures to consumers.
Part 41 sets lower thresholds than the federal HOEPA statute, covering loans
where the APR is greater than eight or nine percentage points over US Treasury
securities, depending on lien priority, or where the total points and fees
exceed either five percent of the loan amount.
The regulations prohibit
lending without regard to repayment ability and establish a safe harbor for
loans where the borrower's total debt to income ratio does not exceed 50%. The
regulations address "flipping" by only allowing a lender to charge points and
fees if two years have passed since the last refinancing or on new money that is
advanced. The regulations also limit financing of points and fees to a total of
5 percent and require reporting of borrower's credit history. The regulations
prohibit (i) "packing" of credit insurance or other products without the
informed consent of the borrower; (ii) call provisions that allow lenders to
unilaterally terminate loans absent default, sale or bankruptcy; (iii) negative
amortization; (iv) balloon payments within the first seven years; and (v)
oppressive mandatory arbitration clauses.
Finally, Part 41 requires
additional disclosures to borrowers, including the statement "The loan which
will be offered to you is not necessarily the least expensive loan available to
you and you are advised to shop around to determine comparative interest rates,
points and other fees and charges."
... Pennsylvania
Pennsylvania has recently enacted
predatory lending
legislation that prohibits a variety of practices. These include: (i) fraudulent
or deceptive acts or practices, including fraudulent or deceptive marketing and
sales effort; (ii) refinancings that do not provide designated benefits to
borrowers (iii) certain balloon payments; (iv) call provisions; (v) post-default
interest rates; (vi) negative amortization; (vii) excessive points and fees;
(viii) certain advance payments; (ix) modification or deferral fees; (x) certain
prepayment penalties; (xi) certain arbitration clauses; (xii) modification or
deferral fees; (xiii) certain prepayment penalties; (xiv) lending without home
loan counseling; and (xv) lending without due regard to repayment ability.
... Texas
Texas has enacted
predatory lending
prohibitions that are effective on September 1, 2001. Among other things, the
Texas law prohibits: (i) certain refinancings that do not result in a lower
interest rate and a lower amount of points and fees than the original loan or is
a restructure to avoid foreclosure; (ii) certain credit insurance products
unless informed consent is obtained from the borrower; (iii) certain balloon
payments; (iv) negative amortization; (v) lending without regard to repayment
ability; and (vi) certain prepayment penalties.
For certain home loans,
the lender must also provide disclosures concerning the availability of credit
counseling.
... Virginia
Virginia has enacted provisions that
are effective July 1, 2001. These provisions prohibit (i) certain refinancings
that do not result in any benefit to the borrower; and (ii) recommending or
encouraging a person to default on an existing loan or other debt that is being
refinanced.
Federal Legislation is Necessary
While LCCR commends
state and local initiatives in this area, we believe they are clearly not
enough. First, state legislation may not be sufficiently comprehensive to reach
the full range of objectionable practices. For example, while some state and
local initiatives impose restrictions on single-premium credit life insurance,
others do not. This, of course, leaves gaps in protection even for citizens in
some states that have enacted legislation. Second, while measures have been
enacted in some states, the majority of states have not enacted
predatory lending legislation. For this reason, LCCR supports
the enactment of federal legislation, of the sort that has been proposed by the
Chairman, to fill these gaps.
The
Predatory Lending
Consumer Protection Act of 2001 contains key protections against the types of
abusive practices that have been so devastating to minority and low-income
homeowners. They include the following:i) Restrictions on financing of points
and fees for HOEPA loans. The bill restricts a creditor from directly or
indirectly financing any portion of the points, fees or other charges greater
than 3% of the total sum of the loan, or $600; ii) Limitation on the payment of
prepayment penalties for HOEPA loans. The bill prohibits the lender from
imposing prepayment penalties after the initial 24 month period of the loan.
During the first 24 months of a loan, prepayment penalties are limited to the
difference in the amount of closing costs and fees financed and 3% of the total
loan amount; and iii) Limitation on single premium credit insurance for HOEPA
loans. The bill would prohibit the up-front payment or financing of credit life,
credit disability or credit unemployment insurance on a single premium basis.
However, borrowers are free to purchase such insurance with the regular mortgage
payment on a periodic basis, provided that it is a separate transaction that can
be canceled at any time.
The Leadership Conference strongly supports the
Predatory Lending Consumer Protection Act of 2001 and urges its
swift enactment.
Conclusion
Let me finish where I began. "Why is
subprime lending -- why is
predatory lending -- a civil rights
issue?" The answer can be found in America's ongoing search for equal
opportunity. After many years of difficult and sometimes bloody struggle, our
nation and the first generation of America's civil rights movement ended legal
segregation.However, our work is far from finished. Today's struggle involves
making equal opportunity a reality for all.
Predatory lending
is a cancer on the financial health of our communities. It must be stopped.
Thank you.
LOAD-DATE: July 31, 2001