The federal banking regulators should set higher standards for banks’ Community Reinvestment Act (CRA) lending performance and give closer scrutiny to a bank’s involvement in predatory lending. Regulators should correct the grade inflation that results in satisfactory, and even outstanding, CRA ratings for institutions with lackluster lending records. They should correct the erosion of standards which has assured that virtually every merger request is granted, even where there are serious problems with the involved lenders community lending performance. The regulators should also consider not just the number of loans the bank originates to low- and moderate-income borrowers, but also the quality of those loans. In addition, banks that purchase high-cost loans with predatory terms should be penalized under CRA for buying those loans, not rewarded.

The Federal Reserve should set a moratorium on bank mergers for all lenders whose lending shows marked patterns of racial disparities. The lending industry has been transformed by a continuing wave of mega-mergers, consolidating capital among a diminishing number of financial institutions and exerting downward pressure on credit availability for minority and low-income borrowers.

Congress should strengthen the Community Reinvestment Act (CRA). In light of continuing, and in some cases worsening, racial disparities in the mortgage industry, Congress should be looking at ways to make CRA more effective and require lenders with discriminatory lending patterns to improve their business practices. Sadly for minorities and all resident of lower-income communities, Congress did just the opposite in 1999, passing “financial modernization” legislation that seriously weakened CRA. Congress should remedy this mistake by acting on HR 865, the Barrett/Gutierrez Community Reinvestment Modernization Act. Among its provisions, the bill would extend CRA coverage to affiliates of banks or thrifts, downgrade CRA ratings for institutions that engage in predatory lending abuses, and require insurance companies to report data on where they make policies available and at what prices.

Congress should increase funding for HUD's Housing Counseling program well beyond the $20 million provided in FY 2002; at least to the $40 million dollar level included in the Senate Appropriations Committee bill this year. To come closer to meeting the demand for such services, the annual funding level should be increased in future years to $100 million. Fannie Mae, Freddie Mac, mortgage lenders, and state and local governments should mandate and expand funding for programs that provide basic information about lending and enable people to protect themselves from predatory practices. The most effective tool for helping minority and lower-income families to become successful homeowners is high-quality loan counseling and homebuyer education by community organizations. The failure by the industry and public agencies to adequately support housing counseling has left lower-income and minority homebuyers vulnerable to all the worst aspects of an already confusing system.

Congress and state legislatures should pass strong anti-predatory lending legislation to protect consumers from abusive practices, which have been especially targeted at lower-income and minority communities. Federal legislation has already been introduced that would strengthen the protections in the Home Ownership Equity Protection Act (HOEPA), extend those protections to more borrowers in high-cost home loans, and establish penalties for violating the law that are more in line with the damage caused to borrowers. A number of state legislatures and state regulators have also taken action to curb predatory lending, and more should follow suit.

Regulators should aggressively study the impact of credit scoring and automated underwriting on racial inequities in the lending market. They should immediately assess the racially disparate impact of these procedures on minority communities. These new tools are widely touted by the industry, but no one has adequately examined how they affect lending patterns to lower income and minority borrowers. After investigation, the regulators should promulgate rules to ensure these practices do not have a negative impact on inner-city areas. Clear problems, such as the fact that having a loan from a subprime lender negatively affects a borrower’s credit score - regardless of their payment record on that loan, and regardless of how good their credit otherwise is - must be corrected.

The federal banking regulators must not worsen the problematic impact of credit scoring by penalizing lenders for making ‘A’ loans to any borrower with a credit score below 660. Unfortunately, the regulators are proposing higher capital requirements for lenders making such loans under a July 12 Federal Register notice regarding data collection on subprime loans made or purchased by banks and thrifts. Such a step could arbitrarily and unfairly exclude millions of consumers from the low rates and fees provided in the prime market, significantly raising the cost of homeownership for those families. In the final rule, the regulators also should follow the industry practice of classifying loans as subprime or not based on the rates and fees, not on the borrower’s characteristics, and make public the data on subprime loan volume engaged in by banks and thrifts.

A matched testing program should be implemented for all lenders to identify banks that screen minority and lower-income borrowers out of their lending business. Such a testing program could determine if banks are steering certain borrowers into more expensive, alternate lending products or even discouraging them from submitting applications. This last item is a concern because lenders are required to report HMDA information on all applicants, but if a bank discourages a person from ever submitting an application, there is no disclosure of any information on the applicant.

Fair lending laws should be strongly enforced and violators punished with civil money penalties and cease and desist orders. The appalling records of lenders over the past three years should be sounding alarms in the halls of the banking regulators. If they are unwilling to enforce the law, the Justice Department and HUD should have a higher profile in investigating mortgage discrimination. In addition, Congress should increase funding for HUD's fair housing programs, rather than providing the level funding of $46 million that was included in the Senate Appropriations Committee-passed version of FY 2003 VA-HUD appropriations legislation. Also, a greater share of this money should go to the Fair Housing Initiatives Program, which provides for independent assessments of lenders’ fair housing performance.

Lenders should be more active in making good loans in minority and low-income communities, and in eradicating any possible discrimination in their lending and outreach practices. Lenders should expand their partnerships with community-based organizations to make home purchase credit available in underserved communities.

Lenders that offer both prime and subprime products must establish uniform pricing and underwriting guidelines for all of their lending subsidiaries, and for all of the communities in which they do business so that consumers in lower-income and minority communities do not receive worse terms simply because of who they are or where they live.

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