Copyright 2001 eMediaMillWorks, Inc.
(f/k/a Federal
Document Clearing House, Inc.)
Federal Document Clearing House
Congressional Testimony
July 27, 2001, Friday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 1477 words
COMMITTEE:
SENATE BANKING, HOUSING & URBAN AFFAIRS
HEADLINE: PREDATORY MORTGAGE LENDING
TESTIMONY-BY: JUDITH A. KENNEDY, PRESIDENT,
AFFILIATION: NATIONAL ASSOCIATION OF AFFORDABLE HOUSING
LENDERS
BODY: July 27, 2001
Hearing on
"Predatory Mortgage Lending: The Problem, Impact and Responses." Second
Hearing in a Series
Prepared Testimony of
Ms. Judith A. Kennedy
President, National Association of Affordable Housing Lenders
Good
morning. Thank you for the chance to appear before you today. My name is Judith
Kennedy. I am President of the National Association of Affordable Housing
Lenders, or NAAHL, the national association devoted to supporting private
capital investment in low- and moderate-income communities. NAAHL represents 200
organizations, including 85 insured depository institutions and more than 800
individuals. Formed more than eleven years ago, NAAHL's members are the
pioneering practitioners of community investment. They include banks,
corporations, loan consortia, financial intermediaries, pension funds,
foundations, local and national nonprofits, public agencies and allied
professionals. Ever since NAAHL's 1999 Chicago conference, where we heard about
predators' activities in that city, we have been convinced that if we are not
part of the solution to
predatory lending, we are a part of the
problem. It is clear that while we remain committed to increasing the flow of
capital into underserved communities, we must be equally concerned about access
to capital on appropriate terms.
In March we sponsored a symposium that
brought together experts on this issue: regulators, researchers, advocates,
for-profit and non-profit lenders and secondary market participants. We were
pleased to include as speakers Martin Eakes of Self Help, who testified before
you yesterday, and Margot Saunders of the National Consumer Law Center. NAAHL's
goal was to accelerate progress in stopping the victimization that strips equity
from peoples' homes and, all too often, triggers foreclosures. This
victimization is not only wrong in itself, but as the Mayor of Chicago
succinctly put it: "It's all down the drain if we can't stabilize the
communities that were stable until these foreclosures started to happen."
The symposium was very productive, and today we are releasing the
summary of these proceedings which is attached to my statement. Our findings are
as follows.
First, a profile of
predatory lending
emerged. Loan flipping, home improvement scams, asset-based and unaffordable
mortgage loans, repetitive financings with no borrower benefit, packing single
premium credit life insurance and other products into the loan amount, all of
these can strip equity and trigger foreclosures.
Second, more needs to
be done at the federal level. More is, of course, being done, and as New York
State Banking Commissioner Elizabeth McCaul and Chairman Sarbanes have both
emphasized, it is critical to balance the need for credit with the need to end
abuses. NAAHL, like many others, has commented on the Federal Reserve's
proposals in this area. But as the Federal Reserve has pointed out, a
significant amount of mortgage lending is not covered by a federal framework.
For example, Governor Gramlich reported that only about 30% of all subprime
loans are made by depository institutions that have periodic exams. Even if the
Fed were to do periodic compliance exams of the subsidiaries of financial
holding companies, that would only increase the percentage to about 40%.
It is not surprising, then, that of the 21 completed Federal Trade
Commission investigations into fair lending and consumer compliance violations,
19 involved independent mortgage companies and 2 involved subsidiaries of
financial holding companies. None were Federally examined.
If the Fed's
recent proposal to expand reporting under the Home Mortgage Disclosure Act to
more lenders is adopted, it will encompass only those whose mortgage lending
exceeds $50 million per year. Many of the proposed changes to HMDA will only
create a more uneven playing field by putting additional burden and costs on
responsible lenders while the worst lenders go unexamined.
To stop the
predators, we need to close the barn doors on examination and reporting. A level
playing field in oversight and enforcement is key. Insured Depository
Institutions (IDI) engaging in the best practices in the subprime lending market
do extensive due diligence of their brokers to ensure fair lending practices.
They maintain data on their loans and are rigorously examined by the bank
regulatory agencies.
But the majority of lenders are not subject to the
same regulatory oversight, do not have the same level of compliance management,
and often do not even file HMDA reports. If they do file, there is very little
oversight of their disclosure. In a town with no sheriff, the bandits are in
charge. Unscrupulous brokers who are rejected by legitimate lenders, simply go
to others who have no knowledge of the loan terms, or reputational or compliance
concerns about funding predatory loans.
Some states like New York are
conducting vigorous exams of their licensed mortgage companies, but
unfortunately many states lack sufficient resources. Some states and
municipalities believe that stricter laws and ordinances will solve the problem
of predatory practices. Many NAAHL members believe that the plethora of local
laws and ordinances may only drive out the responsible lenders who will choose
not to offer what may become "high cost loans" under a crazy quilt of new rate
and fee restrictions.
Third, our symposium also confirmed that subprime
lending is an important source of home finance. For many consumers, subprime
loans may be the only way available to finance the American dream - a home of
their own. And many, many programs exist, in both the private and public
sectors, to help subprime borrowers achieve prime borrower status --- a worthy
financial goal. Cutting off access to credit on appropriate terms would not be
constructive. As OTS Director Ellen Seidman has warned, legislation must be very
clear so as not to chill " the operation of the legitimate subprime market. The
flow of responsibly delivered credit to underserved markets is critical to their
survival and any legislative or enforcement solutions. . .must proceed with this
caution in mind."
Fourth, we also heard that vigorous enforcement, at
all levels of government, works. We heard from people actively involved in
combating
predatory lending at the city and state levels.
Increased government investigations, criminal prosecutions to the fullest extent
of the law, and revocations of mortgage brokers' licenses all help to eradicate
predatory lending. State bank supervisors coordinating across
state lines on a single company and its practices will also accelerate progress.
Fifth, consumer education is key. Our experts recommend that financial
literacy education must begin early, down to and including the high school
level. The NAAHL symposium also confirmed that both the public and private
sectors, on all levels, are undertaking consumer education and outreach
campaigns, to stop
predatory lending before it even happens,
with good results. For example, New York residents can easily use state
government information to shop for competitive mortgage rates. Chicago borrowers
can call 1-866-SAVE HOME to receive counseling and legal assistance, funded by
banks and city government. Lenders across the country fund financial literacy
programs to help borrowers with debt management, the implications of signing
contracts, and tips on how to avoid stalkers who offer financing on predatory
terms.
Increased Federal resources for targeted counseling in
neighborhoods that are vulnerable to predators could greatly extend these
efforts. Education may not solve the entire problem. As Martin Eakes points out,
"the Department of Education says that 24 percent of adult Americans are
illiterate." But counseling can go a long way. As Governor Gramlich proposed,
"the best defense is if people really know what they are doing."
Overall, our symposium confirmed once again that
predatory
lending is a complex issue requiring a multi-faceted solution. It takes
a combination of responses from both the public and private sectors, including a
broader Federal framework establishing a level playing field for legitimate
lenders, more vigorous enforcement of existing laws, and more resources devoted
to consumer education to deal with it.
But, as our closing speaker, the
Honorable Mel Martinez, Secretary of the Department of Housing and Urban
Development put it, "juntos podemos": together we can.
As the President
of an organization whose members have spent years trying to increase the flow of
private capital into underserved communities, I say, "together we must." Equity
stripping, foreclosure triggering loans lead to family tragedies, foreclosures
and destabilized neighborhoods. They must be stopped. We at NAAHL commit to help
you in any way we can.
LOAD-DATE: July 31, 2001