Copyright 2002 The Washington Post


The Washington Post
May 1, 2002 Wednesday
Final Edition
SECTION: FINANCIAL; Pg. E02

LENGTH: 978 words

HEADLINE: Sarbanes Reviving Effort to Crack Down on Predatory Lending

BYLINE: Sandra Fleishman, Washington Post Staff Writer

BODY:


Sen. Paul S. Sarbanes (D-Md.), chairman of the Senate Banking Committee, today plans to introduce his latest attempt to curb unscrupulous mortgage lending, backed by consumer and civil rights activists and armed with a new study on racial disparities in lending.

The national study shows that minority borrowers -- no matter their income level -- are more likely than whites to have high-cost "subprime" mortgage loans, which are targeted at people with blemished credit records.

Sarbanes has scheduled a news conference to discuss his proposal to expand the pool of high-cost loans covered by federal consumer protections. The bill, which has 14 Democratic co-sponsors, also will prohibit certain practices in covered loans, such as prepayment penalties, balloon payments and the financing of some fees.

The goal is to rein in predatory lenders who target vulnerable homeowners for loans they can't afford or don't understand.

The bill is similar to one that Sarbanes offered two years ago with Rep. John J. LaFalce (D-N.Y.), ranking minority member of the House Committee on Financial Services. That legislation ran into a wall of Republican and industry opposition.

But Sarbanes today will be buttressed both by new arguments for action and by his increased power as chairman of the banking committee, a position he landed 10 months ago after Democrats took control of the Senate. Sarbanes and LaFalce will be joined at the news conference by representatives of the Leadership Conference on Civil Rights, the National League of Cities and the AARP, all groups that have long campaigned against predatory lending.

Although Hill sources say the legislation has little chance of reaching markup this year, Sarbanes plans to set the stage for action next year. Since becoming chairman, Sarbanes has held three hearings on predatory lending and plans more.

The new study he will release draws the clearest picture yet, according to its authors, that high-cost lending seems to be determined by the race of the borrower rather than by the borrower's income or credit risks.

The "Risk or Race?" study, conducted by the nonprofit Washington-based Center for Community Change with funding from the Ford Foundation and the Atlantic Philanthropies, looked at federal data on subprime refinance lending in all 331 U.S. metropolitan areas.

It concludes that "there are significant racial disparities in subprime lending" in all areas, that "disparities exist in all regions and cities of all sizes," and that "these disparities actually increase as income increases." Numerous government and private reports over the years have also underlined racial disparities in lending, but most have focused on bigger cities.

The center said its report documents that big cities with high concentrations of low-income people aren't the only places with high concentrations of subprime loans among minorities.

It also found that lower-income African Americans, Hispanics and Native Americans are more likely than lower-income whites to get subprime loans, and that the disparity is greater for upper-income minority borrowers when compared with upper-income whites.

"Nobody else has shown that the gap grows as income rises," said Allen J. Fishbein, the center's general counsel and project co-director. Also "disturbing," he said, is that upper-income blacks are 1.29 times as likely to get a high-cost loan as low-income whites.

Fannie Mae and Freddie Mac, the secondary mortgage-market enterprises, have questioned whether bad credit is the sole reason that borrowers end up in the subprime market. Freddie Mac has estimated that 10 to 30 percent of borrowers who obtained subprime mortgages could have qualified for a prime loan.

Lender groups said they have not seen the newest study, but in responding to similar findings have said that the data do not reflect critical information such as borrowers' credit histories or their inclination to shop for lower rates.

"It's a well-known fact that every time . . . data comes out many people can read different things into it," said Robert Davis, managing director of government relations for America's Community Bankers. "I don't know what is in this particular data, but there is no data analysis that shows any pervasive problems."

In the absence of tougher federal laws, about 35 cities and states have passed or are considering their own lending rules.

Although local initiatives have been successfully challenged by the lending industry as a preemption of state law in some places, including Maryland, some cities, such as Cleveland, are defying state bans.

A handful of state legislatures have also passed stringent laws.

Georgia's governor, for instance, recently signed into law a bill that preempts local actions but that raises the bar above what had been considered the nation's toughest regulation, a North Carolina statute adopted three years ago.

The profusion of laws is starting to unnerve some national lenders, who say they have to meet different rules in each jurisdiction.

National lending groups, such as the Mortgage Bankers Association of America, say that consumer education, enforcement of existing laws against fraud and simplifying the mortgage process will help consumers more than new laws that limit loan options.

Steve O'Connor, vice president of government affairs for the mortgage bankers group, said "consensus is growing among MBA members that it would be necessary to have a form of federal preemption in order to support a federal predatory-lending bill."

While the Sarbanes bill does not include preemption language, one industry insider said Sarbanes is "telling lenders that preemption is a possibility but the bar would have to be set very high" in terms of limits on lending practices. "The question for the mortgage industry is how high a bar are they willing to jump over."

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