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NCRC Explores Myths of Subprime
Lending
Recently, segments of the lending industry have sought to
legitimize subprime lending by hiring academics to write papers extolling
the benefits of subprime lending. For example, the American Bankers
Association commissioned a paper by Dr. Robert Litan of the Brookings
Institution. NCRC does not dispute that responsible subprime lending
serves credit needs. It is not, however, a driving force behind the boom
in homeownership for minorities and lower income families as industry
officials assert. Also, NCRC strongly believes that stronger regulation
and legislation is needed to clean up subprime lending and eliminate
predatory lending. Below, please find a NCRC op-ed that appeared in the
American Banker. Beneath the op-ed, please find a link to a NCRC position
paper on subprime lending.
Viewpoint: An Anti-Predator's Reader
Guide to Tall Tales of Subrime Lending
Friday, April 27,
2001
By John Taylor
Academics including Robert Litan of the Brookings
Institution have spread myths recently about the role of subprime lending.
Let's explore some of them.
Myth 1: Subprime lending has been responsible for
record homeownership rates among minorities and lower-income
groups.
An invigorated Community Reinvestment Act and
community-lender partnerships - not the advent of subprime lending - have
spurred banks to make record numbers of home mortgage loans to minorities
and lower-income borrowers. In 1990, low- and moderate-income borrowers
received 18% of home mortgage loans made by lending institutions. That
rose to 26% by 1995 and 30% by 1999.
Notice that the largest
increase - 8 percentage points - occurred from 1990 to 1995, before the
huge spike in subprime lending. When subprime lending took off from 1995
to 1999, the share of mortgage loans received by low- and moderate-income
borrowers climbed only 4 percentage points.
The recent Department
of Treasury study required by the Gramm-Leach-Bliley Act of 1999 found
that banks made more home mortgage loans in geographical areas in which
they made Community Reinvestment Act agreements and established
partnerships with community groups. The study also concluded that
CRA-covered banks had a considerably smaller share of the subprime market
than the prime market.
Myth 2: By and large, subprime lending
is priced efficiently.
A study by the Research Institute
for Housing America, an offshoot of the Mortgage Bankers Association of
America, found that minority borrowers are more apt than whites to receive
subprime loans, even after controlling for credit risk factors. Freddie
Mac estimates that up to 30% of the subprime loans they have purchased
were made to borrowers qualified to receive prime loans. Fannie Mae's CEO
claims that half of subprime borrowers should be receiving lower interest
rates. Accordingly, Fannie Mae's Timely Payment Rewards product offers
subprime borrowers rates that are 2 percentage points lower than
prevailing subprime rates.
The assertions of overall pricing
efficiencies in the subprime market are untested, disingenuous, and
misleading.
Myth 3: Proposed legislation is
counterproductive.
The subprime market is plagued with a
segment of predatory lenders that discriminate on the basis of price and
load-up loans with abusive terms unrelated to compensating for risk. For
example, single-premium credit insurance or the up-front financing of
credit insurance products is much more costly to borrowers than if they
were to purchase life or disability insurance independent of the mortgage
transaction.
Steep prepayment penalties, high balloon payments, and
negative amortization on high-interest-rate loans are also abusive
practices that were not needed for the prime-rate homeownership boom among
lower-income and minority borrowers in the 1990s.
Economists differ
on the extent to which regulation and legislation is needed to eliminate
market imperfections. But when the imperfections such as natural
monopolies appear to be impervious to other approaches, legislation and
regulation are called for.
Our group, the National Community
Reinvestment Coalition, believes that certain lending practices are so
exploitative that they need to be outlawed. Homeownership counseling can
help borrowers shop for better loan rates, but why should we warn
borrowers about single-premium credit insurance when we believe that such
a product is inherently harmful? Why should we counsel borrowers against
high prepayment penalties and balloon payments on high-interest-rate loans
when limiting these features does not choke off good credit, but only
eliminates abusive lending?
It is time for Congress to enact
predatory-lending legislation introduced by Rep. LaFalce and Sen.
Sarbanes. These carefully crafted bills aim to prevent such lending
without blocking underserved populations' access to credit.
Mr.
Taylor is president and chief executive officer of the National Community
Reinvestment Coalition, Washington.
Copyright 1997-2001, American
Banker
Click here to download NCRC's
position paper on Predatory Lending
Last Modified: Tuesday, May 1, 2001
National Community
Reinvestment Coalition Suite 540 733 15th Street, NW Washington,
DC 20005 Phone: (202) 628-8866 Fax: (202) 628-9800 |
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