[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
FORECLOSURE, PREDATORY MORTGAGE AND PAYDAY LENDING IN AMERICA'S CITIES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON DOMESTIC POLICY
of the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
MARCH 21, 2007
__________
Serial No. 110-22
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.oversight.house.gov
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37-416 PDF WASHINGTON DC: 2007
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COMMITTEE ON OVERSISGHT AND GOVERNMENT REFORM
HENRY A. WAXMAN, California, Chairman
TOM LANTOS, California TOM DAVIS, Virginia
EDOLPHUS TOWNS, New York DAN BURTON, Indiana
PAUL E. KANJORSKI, Pennsylvania CHRISTOPHER SHAYS, Connecticut
CAROLYN B. MALONEY, New York JOHN M. McHUGH, New York
ELIJAH E. CUMMINGS, Maryland JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio MARK E. SOUDER, Indiana
DANNY K. DAVIS, Illinois TODD RUSSELL PLATTS, Pennsylvania
JOHN F. TIERNEY, Massachusetts CHRIS CANNON, Utah
WM. LACY CLAY, Missouri JOHN J. DUNCAN, Jr., Tennessee
DIANE E. WATSON, California MICHAEL R. TURNER, Ohio
STEPHEN F. LYNCH, Massachusetts DARRELL E. ISSA, California
BRIAN HIGGINS, New York KENNY MARCHANT, Texas
JOHN A. YARMUTH, Kentucky LYNN A. WESTMORELAND, Georgia
BRUCE L. BRALEY, Iowa PATRICK T. McHENRY, North Carolina
ELEANOR HOLMES NORTON, District of VIRGINIA FOXX, North Carolina
Columbia BRIAN P. BILBRAY, California
BETTY McCOLLUM, Minnesota BILL SALI, Idaho
JIM COOPER, Tennessee ------ ------
CHRIS VAN HOLLEN, Maryland
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont
Phil Schiliro, Chief of Staff
Phil Barnett, Staff Director
Earley Green, Chief Clerk
David Marin, Minority Staff Director
Subcommittee on Domestic Policy
DENNIS J. KUCINICH, Ohio, Chairman
TOM LANTOS, California DARRELL E. ISSA, California
ELIJAH E. CUMMINGS, Maryland DAN BURTON, Indiana
DIANE E. WATSON, California CHRISTOPHER SHAYS, Connecticut
CHRISTOPHER S. MURPHY, Connecticut JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts CHRIS CANNON, Utah
BRIAN HIGGINS, New York BRIAN P. BILBRAY, California
BRUCE L. BRALEY, Iowa
Jaron R. Bourke, Staff Director
C O N T E N T S
----------
Page
Hearing held on March 21, 2007................................... 1
Statement of:
Bradford, Calvin, National Training and Information Center,
Chicago, IL; and Michael T. Maloney, Department of
Economics, Clemson, South Carolina......................... 263
Bradford, Calvin......................................... 263
Maloney, Michael T....................................... 287
Fitzgibbon, Thomas, Jr., MB Financial Bank, Rosemount, IL.... 210
Fox, Jean Ann, Consumer Federation of America, Washington,
DC; Rita L. Haynes, CEO, Faith Community United Credit
Union, Cleveland, OH; Ed Jacob, Northside Community Federal
Credit Union, Chicago, IL; David Rothstein, Policy Matters
Ohio, Cleveland, OH; Fran Grossman, Shorebank Corp.,
Chicago, IL; Jim McCarthy, president, Miami Fair Housing,
Dayton, OH................................................. 155
Fox, Jean Ann............................................ 0155
Grossman, Fran........................................... 245
Haynes, Rita L........................................... 200
Jacob, Ed................................................ 204
McCarthy, Jim............................................ 177
Rothstein, David......................................... 216
Rokakis, James, Cuyahoga County treasurer, Cleveland, OH;
Inez Killingsworth, president, East Side Organizing
Project, Cleveland, OH; Bill Rinehart, vice president and
chief risk officer, Ocwen Financial Corp., West Palm Beach,
FL; Josh Nassar, vice president, Center for Responsible
Lending, Washington, DC; Dan Immergluck, Georgia Institute
of Technology, Atlanta, GA; and Harry Dinham, president,
National Association of Mortgage Brokers, McLean, VA....... 14
Dinham, Harry............................................ 85
Immergluck, Dan.......................................... 67
Killingsworth, Inez...................................... 22
Nassar, Josh............................................. 40
Rinehart, Bill........................................... 32
Rokakis, James........................................... 14
Letters, statements, etc., submitted for the record by:
Bradford, Calvin, National Training and Information Center,
Chicago, IL, prepared statement of......................... 266
Braley, Hon. Bruce L., a Representative in Congress from the
State of Iowa, prepared statement of....................... 313
Cummings, Hon. Elijah E., a Representative in Congress from
the State of Maryland, prepared statement of............... 9
Dinham, Harry, president, National Association of Mortgage
Brokers, McLean, VA, prepared statement of................. 87
Fitzgibbon, Thomas, Jr., MB Financial Bank, Rosemount, IL,
prepared statement of...................................... 211
Fox, Jean Ann, Consumer Federation of America, Washington,
DC, prepared statement of.................................. 158
Grossman, Fran, Shorebank Corp., Chicago, IL, prepared
statement of............................................... 250
Haynes, Rita L., CEO, Faith Community United Credit Union,
Cleveland, OH, prepared statement of....................... 202
Immergluck, Dan, Georgia Institute of Technology, Atlanta,
GA, prepared statement of.................................. 69
Jacob, Ed, Northside Community Federal Credit Union, Chicago,
IL, prepared statement of.................................. 206
Killingsworth, Inez, president, East Side Organizing Project,
Cleveland, OH, prepared statement of....................... 24
Kucinich, Hon. Dennis J., a Representative in Congress from
the State of Ohio:
Information cocerning Policy Matters Ohio................ 131
Urban Revitalization Agreement........................... 309
Maloney, Michael T., Department of Economics, Clemson, South
Carolina, prepared statement of............................ 289
McCarthy, Jim, president, Miami Fair Housing, Dayton, OH,
prepared statement of...................................... 180
Nassar, Josh, vice president, Center for Responsible Lending,
Washington, DC, prepared statement of...................... 42
Rinehart, Bill, vice president and chief risk officer, Ocwen
Financial Corp., West Palm Beach, FL, prepared statement of 34
Rokakis, James, Cuyahoga County treasurer, Cleveland, OH,
prepared statement of...................................... 17
Rothstein, David, Policy Matters Ohio, Cleveland, OH,
prepared statement of...................................... 219
FORECLOSURE, PREDATORY MORTGAGE AND PAYDAY LENDING IN AMERICA'S CITIES
----------
WEDNESDAY, MARCH 21, 2007
House of Representatives,
Subcommittee on Domestic Policy,
Committee on Oversight and Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 3 p.m. in room
2154, Rayburn House Office Building, Hon. Dennis J. Kucinich
(chairman of the subcommittee) presiding.
Present: Representatives Kucinich, Cummings, Watson, Davis
of Illinois, Tierney, and Issa.
Also present: Representative Turner.
Staff present: Jaron Bourke, staff director; Jean Gosa,
clerk; Nidia Salazar, staff assistant; Natalie Laber, press
secretary, Office of Congressman Dennis J. Kucinich; Alissa
Bonner, professional staff member, Information Policy
Subcommittee; Leneal Scott, information systems manager; Erin
Holloway, Office of Congressman Dennis J. Kucinich; Cate Veith,
Office of Congressman Dennis J. Kucinich; Jay O'Callaghan and
Kristina Husar, minority professional staff members; John
Cuaderes, minority senior investigator and policy advisor; and
Benjamin Chance, minority clerk.
Mr. Kucinich. The Subcommittee on Domestic Policy of the
Committee on Oversight and Government Reform will now come to
order.
I first want to begin by thanking all of you for being here
and to let you know that we have spent the last hour in a
series of votes, and when there is action and votes on the
floor that is our first responsibility. So I am sorry that we
are starting an hour late, but I am very grateful for the
presence of each and every one of the witnesses here.
Today's hearing will examine the subprime mortgage industry
and the problem of foreclosure, payday lending industry, and
the enforcement of the Community Reinvestment Act. The hearing
will also examine alternatives to foreclosure and to payday
lending.
Now, without objection the Chair and the ranking minority
member will have 5 minutes to make opening statements, followed
by opening statements not to exceed 3 minutes by any other
Member who seeks recognition.
Without objection, the Members and witnesses may have 5
legislative days to submit a written statement or extraneous
materials for the record.
Without objection, the subcommittee is going to recognize
and welcome Mr. Turner, who is a member of the full committee,
to sit for the purposes of hearing and questioning witnesses'
testimony during the subcommittee's series of hearings on the
state of urban America.
Again, I bid you good afternoon and welcome. This
Subcommittee on Domestic Policy of the Committee on Oversight
and Government Reform will come to order for its first meeting.
This is the first hearing of the subcommittee, and it is also
the first hearing in a series of hearings on the state of urban
America. This series intends to take a closer look at American
cities, their progress, their problems, and their future. This
series is important, not only for the problems it seeks to
rectify, but also because I think the last time the U.S.
Government took a comprehensive look at American cities was
nearly 40 years ago when the Kerner Commission concluded ``Our
Nation is moving toward two societies, one black, one white,
separate and unequal.'' Today's hearing will examine the
subprime mortgage industry and the problem of foreclosure, the
payday lending industry, and the enforcement of the Community
Reinvestment Act. The hearing will also examine alternatives to
foreclosure and to payday lending.
Next Thursday, March 29th, we will look at urban economic
development strategies, and particularly whether taxpayer-
financed stadiums and large convention centers fulfill the
economic promises made about them. In the coming weeks we will
also take a look at the retail and grocery store industries, as
well as access to health care in the heart of urban America.
Today we are examining the impact of foreclosures,
predatory mortgage, and payday lending in America's cities
against the backdrop of a series plunge in the stock market
last week. On March 13th the Dow Jones Industrials dropped more
than 240 points, its second biggest drop in nearly 4 years,
primarily due to the subprime mortgage industry. All three
major stock indexes dropped by about 2 percent. The stock
market erased $406 billion in wealth. By the end of the week
nervous creditors forced New Century Financial Corp., the
Nation's second-largest subprime mortgage lender, to stop
making new loans.
As the stock market recovers from a bruising week and the
anxiety about what is to come, major American cities are
bracing themselves. The Center for Responsible Lending projects
that one out of five subprime mortgages originated during the
past 2 years will end in foreclosure. These foreclosures will
cost homeowners as much as $164 billion. The exact cost it will
have on urban America is unknown.
I wonder if any of us in Government has a proper
understanding of the dimensions of the forthcoming foreclosure
crisis and the impact it will have on American cities. It will
be severe, it will be prolonged, and it will be very serious.
Today's hearing is meant to examine what has brought us
here. What are the motivations and practices of the lending
industry that brought them to the verge of a financial crisis
and brought American cities to the edge of downfall?
For the record, I have invited leading trade associations
for mortgage brokers, payday lenders, and the American Bankers
Association to help us answer this question. We thought they
were all going to be with us here. I am disappointed to learn
that two out of three associations invited reconsidered their
participation in the hearing. Now, Cleveland, my home town, is
at the epicenter of this national problem.
I want to point to some maps here with the help of staff.
If you look at this map you see the sideways line V highlighted
in light green. Let me tell you what that geographical area
represents. It is the area in the city where depository banks
made very few prime loans.
Now this map highlighted in red and orange, look at the
same V and the same place. This geographical area represents
where the highest number of subprime mortgage loans were made
during the same year.
Now, this next map, again, the same V in the same place.
Here, the red dots indicate the number of foreclosures.
These maps tell you there is a clear and self-reinforcing
correlation between the low number of prime loans, the high
number of subprime loans, and the high number of foreclosures.
Finally, the final map, again, the familiar sideways lying
``V'' shape, but here the foreclosures indicated by blue dots
are superimposed on the neighborhoods. Red indicates
predominately African American neighborhoods. Again, they
match.
Lack of access to prime loans, a high frequency of subprime
loans, and a high rate of foreclosures are by no means specific
to any racial group, but this pattern certainly carries a whiff
of America's dark past.
I started my political career as a representative on the
Cleveland City Council. Later I was clerk of courts, and then
mayor of the city of Cleveland. During my tenure as mayor,
Cleveland became the first city to sign a Community
Reinvestment Act agreement pursuant to the then newly enacted
Community Reinvestment Act of 1977. But what has happened to my
city in the past decade is a story that is reflected
nationwide.
Consider a recently published report on seven of the
Nation's largest financial institutions, entitled, Paying More
for the American Dream. The report found that CitiGroup,
Countrywide, GMAC, HSBC, J.P. Morgan, Washington Mutual, and
Wells Fargo all originated a substantial volume of both higher-
cost subprime and lower-cost prime loans.
The report also found the following: for these seven
lenders, the percentage of total home purchase loans to African
Americans that were higher cost was six times greater than the
percentage of higher-cost home purchase loans to whites. Let me
go over that one more time. These seven lenders, the percentage
of total home purchase loans to African Americans that were
higher cost was six times greater than the percentage of
higher-cost home purchase loans to whites. Those percentages
were actually 41.1 percent to 6.9 percent.
Next point, the percentage of total home purchase loans to
Latinos that were higher-cost loans was 4.8 times greater than
the percentage of higher-cost home purchase loans to white,
32.8 percent to 6.9 percent.
In each of the cities examined, the seven lenders combined
showed larger African American/white and Latino/white
disparities than those exhibited in the overall lending market.
Foreclosure and discrimination in lending practices, these
are serious problems for America's cities, but in almost every
major city there are significant numbers of hard-working
Americans who are working to reverse these problems. Among our
distinguished witnesses today are some of those Americans.
These are individuals and organizations who have created viable
alternatives to payday lenders and the foreclosure and subprime
mortgages. These alternatives are the link between where we are
now, at the brink of a massive wave of foreclosures, to where
we want to be, on the road to the Nation's recovery where
American families can live in: security physically,
emotionally, and financially.
But even with these alternatives, even if these hard-
working Americans worked every second of the day, the tide will
not be turned, because the magnitude of the problem outstrips
even the best of their abilities and efforts. To turn the tide
of foreclosures in America's cities, leadership at the Federal
Government level is necessary.
Today we will have the opportunity to examine what the
problem is and the steps that can be taken before it becomes
bigger and beyond our capacity to resolve.
With that, I would like to recognize the distinguished
ranking member of the committee, my friend from California, Mr.
Issa, for his presentation.
Mr. Issa. Thank you, Mr. Chairman. I couldn't help, when
you were speaking about being from Cleveland, to want to reach
over and remind you that you not only represent most of my
family in Cleveland, but I was born and raised there, so it was
very insightful to look at the map of Cuyahoga County as we
went through this. I appreciate the fact that today we have a
number of experts from our hometown--not the town I represent,
but our hometown.
Mr. Chairman, I want to thank you again not just for
holding this hearing but for allowing Congressman Michael
Turner to sit in and participate. For those who don't know, I
am sandwiched between two large city mayors from Ohio, and
particularly Congressman Turner, who is recently a two-term
mayor of Dayton before coming here and who has, since he
arrived, concentrated on areas of urban America.
Today's hearing is twofold, though. Today's hearing not
only deals with the crisis, if we will, of subprime loans, but
it is also dealing with something that affects my Congressional
District, payday lending. Payday lending is a major and
constant problem for the U.S. military. With over 44,000
Marines and Navy corpsmen who operate from Camp Pendleton
within my District, we are constantly dealing with bailouts
coming through the USA, the Naval Relief, and so on to try to
deal with Marines and Sailors who get behind by utilizing
payday programs. These programs have an incredibly high rate,
and if not for congressional action would have been completely
unchecked. But we may need to do more.
Today I look forward to hearing on both of these subjects,
one which is in the news every day and one which is on Camp
Pendleton and around military bases every day, including in my
District.
I will put the rest in for the record and yield back.
Mr. Kucinich. I thank Mr. Issa for his participation and
also note that we both share a strong interest in each other's
communities. I am always grateful for the knowledge that you
have about our hometown, so thank you.
Mr. Issa. My brother is always calling to tell me, too,
he's your constituent.
Mr. Kucinich. Well, thank you very much.
I would now like to yield to the gentleman from Chicago,
Congressman Davis, for a statement.
Mr. Davis of Illinois. Thank you very much, Mr. Chairman.
First of all I want to thank you and the ranking member for
holding this hearing. I am so pleased and delighted that it is
taking place today because it was 30 years ago that the
Community Reinvestment Act was born in my District, pushed by
an organization called the Organization for a Better Austin, of
which a woman named Gail Sincata was the leader, and I was,
indeed, a member of that organization. I am very pleased to
associate myself with Gail's name and with the tremendous work
that she did.
Chicago helped to lead the effort that heightened the
obligation of the financial industry to reinvest in their
communities. I am, indeed, disappointed that decades worth of
efforts are threatened now by the suspect practices of various
institutions. This hearing offers a wonderful opportunity to
shine light on the problem and discuss specific potential
solutions to support our citizens.
The issue of predatory lending is a serious problem
throughout the country and, indeed, in Chicago. In 2003-2004
the number of foreclosures in Chicago failed, for the first
time in over a decade, particularly on high-cost loans that had
been regulated by the city and State after, I might add, a
tremendous amount of community pressure.
Many of the communities in my District are communities
where, if economically other neighborhoods sneeze, they get
pneumonia. Unfortunately, due to the predatory lending
practices of various institutions, the rate of foreclosure on
subprime loans is 19.2 percent. This is up 37 percent from
approximately 5 years ago. In the North Londale community,
foreclosures are up 247 percent since 1993, in West Garfield
Park they are up 256 percent, and in the Near West Side they
have gone up 440 percent--all of which are in the Congressional
District which I represent.
These foreclosures have dramatic effects on the surrounding
communities. Foreclosures are associated with increases in
abandoned properties and decreased property values. Indeed, for
every one abandoned home, I understand that the property value
of a surrounding home is devalued by $30,000. These effects are
particularly harmful to those with the fewest assets. They see
the equity that they have worked so hard to put into their
homes shrivel up, and they often lack the resources to offset
this negative spiral.
Although the number of foreclosures in Chicago increased in
both white and non-white neighborhoods, the vast majority of
foreclosures on non-Federal Housing Administration loans were
in neighborhoods in which 80 percent or more of the citizens
were minority. In fact, data from the NCRC shows that African
American borrowers in the Chicago area were 2.5 times more
likely than whites to receive a subprime loan in 2005, with
Latino borrowers being 1.82 times more likely to receive a
subprime loan.
These practices have made some obviously wealthy and others
obviously poor. Obviously, today provides an opportunity--and I
want to add my thanks to all of those who have come to witness,
not only for your presence but also for your patience.
Mr. Chairman, I would ask permission to submit for the
record documents from the National Community Reinvestment
Coalition and the National Training and Information Center that
describe some of the problems with banking services and
foreclosures in the Chicago area.
Mr. Kucinich. Without objection, so ordered.
I thank the gentleman from Chicago, and now would like to
recognize for the purpose of his statement our colleague from
the full committee, Congressman Turner, who is a former mayor
of the city of Dayton, OH. Congressman, thank you very much.
Mr. Turner. Mr. Chairman, I want to thank you for holding
this important hearing. Your background as both a mayor and a
leading advocate for individuals is very important for this
process. You are taking up issues of urban and economic
development but also issues that are important to families and
individuals, and in that you can make a difference, so thank
you very much for that.
I also would like to thank you and Ranking Member Issa for
including me in this hearing. I appreciate being included. As
you know, I served as the chairman of the Federalism and Census
Subcommittee in the last Congress, and we had taken up urban
issues that included CDBG, the public housing issues, historic
preservation, and brownfields. I am very appreciative of the
fact that the chairman and I are working together on the issue
of brownfields. It helps to be able to make a difference to
neighborhoods that are plagued by abandoned factory sites and
environmental conditions.
Today we have before us the incredibly important issue of
home foreclosures, predatory lending, payday lending practices.
The latest figures from the Mortgage Bankers Association show
that home foreclosures are a record high. You can certainly see
that both, Mr. Chairman, in what you are experiencing in
Cleveland, Cuyahoga County, and what we are experiencing in
Montgomery County and in Dayton. These record foreclosures are
linked to the mortgage lending practices in the subprime
market.
Rising interest rates and weak home prices have made it
increasingly difficult for borrowers, especially those that
took out subprime loans to meet their obligations. Owning and
maintaining a home is a challenge, even under the best of
financial circumstances. Owning a home when money is tight or
non-existent is virtually impossible. I believe that home
ownership is a privilege that everyone should enjoy, but we
must not allow for the dream of home ownership to be shattered
because of questionable and less than honest mortgage practices
that can steal individuals' futures.
Mr. Chairman, I would like to recognize one of our
witnesses, Mr. Jim McCarthy, who is the president of the Miami
Valley Fair Housing Center of Dayton, OH.
Thank you, Jim.
Jim is going to tell us about how his organization works to
combat predatory lending, and I urge the members of this
subcommittee to listen closely to his testimony, especially as
it relates to how we might be able to address predatory lending
at the local level. His organization has taken an effort to
educate homeowners and to also assist those who have gotten
into trouble.
Mr. Chairman, one other thing I would like to add is that,
as I served as mayor and as we were facing the issue of
predatory lending and we would see the individual crises and
the price that this would have for homeowners, my community
continued to wonder how the financial markets could sustain
these types of losses that would be inevitable, because even
though individual's lives were being impacted, actual capital
was being lost in the market that cumulative one would expect
would have an impact. Today we are now seeing the results of
that as the headlines are beginning to show concerns in the
financial markets over these practices having happened that
have impacted industry lives.
So, Mr. Chairman, I thank you for holding this hearing.
Mr. Kucinich. I thank the gentleman from Ohio.
Mr. Cummings from Maryland will speak next. Thank you, Mr.
Cummings.
Mr. Cummings. Thank you very much, Mr. Chairman. I cannot
even begin to thank you enough for holding this hearing today.
Mr. Chairman, as I go into my statement, I hope that these
hearings will yield some results. I think that so often we hold
hearings--and I have said this on other committees that I sit
on--but when it comes to results sometimes something happens
and we don't get there. I have looked at some of the testimony
here today and I know that a lot of the people here will talk
about things that they are trying to do to prevent foreclosures
and things that stem from predatory lending and trying to
address to whole payday loan situation. We in Baltimore have
done quite a bit in those areas, too.
So I appreciate your efforts to examine the challenges
facing America's cities, and I think the timely issue of
predatory lending is an excellent place to start.
News reports surrounding the recent subprime mortgage
industry's crisis have shone a national spotlight on a problem
that was already known to those of us familiar with our cities.
Low and moderate-income communities are being targeted by
lenders whose singular concern is making money at the expense
of others. For example, subprime loans trapped individuals with
poor credit by offering a low introductory interest rate that
is followed by dramatic rate increase. This year, mortgage
payments on 41 percent of all subprime loans will increase.
Additionally, these loans frequently have an interest-only, no
principal balloon structure and prepayment penalties. These
practices discourage borrowers from paying down their debt and
create a series of scenarios that could easily spiral out of
control.
To be sure, roughly one in five subprime loans go into
foreclosure at least once. This is bad news for individual
borrowers, and it is bad news for entire communities, as well.
Foreclosures have a domino effect in the community. They
depress nearby property values, leading to additional
foreclosures. This cycle has devastated far too many low and
moderate-income communities in America's cities.
I am disappointed that the problem had to affect the stock
market before it really garnered the national attention that it
deserved, but I appreciate the opportunity to investigate the
larger issue of predatory lending with this one high-profile
example as a backdrop.
Today we will also look into the practice of payday
lending, which targets low and moderate-income individuals who
are strapped for cash. Payday loans offer short-term loans
payable in full after 30 days or less with interest and a fee.
The typical payday loan borrower is not as financially unstable
as you might expect. He or she is likely to have steady
employment, a relationship with a bank, and the ability to
transfer funds electronically.
As I close, unfortunately the same circumstances that
caused the borrower to seek a payday loan in the first place
are likely to prevent him or her from paying it off within the
allotted time. For this reason, borrowers become trapped in a
long-term debt making high interest-only payments. Payday loans
can include interest rates higher than 300 percent.
I am seriously concerned that companies are profiting by
trapping vulnerable low and moderate-income individuals in
cycles of debt.
In 1997 Congress passed the Community Reinvestment Act to
prevent this injustice. I am interested to learn what we can do
to better protect our low and moderate-income communities, and
I appreciate the chairman's attention to this critical issue.
As I close again, Mr. Chairman, there is one interest
thing. I don't know whether it happens in Cleveland, but in my
community--I live in the inner city of Baltimore--you can go
miles and not find a bank in the African American community and
poor communities. So I am hoping that we will look into these
matters and go beyond the hearing, Mr. Chairman, and try to
come up with some results.
[The prepared statement of Hon. Elijah E. Cummings
follows:]
[GRAPHIC] [TIFF OMITTED] 37416.004
[GRAPHIC] [TIFF OMITTED] 37416.005
[GRAPHIC] [TIFF OMITTED] 37416.006
Mr. Kucinich. I thank the gentleman from Maryland.
The gentleman from Massachusetts, Mr. Tierney.
Mr. Tierney. Thank you, Mr. Chairman. I add my comments to
the others in thanking you for having this important hearing,
and thank all of the witnesses for their testimony, both the
written testimony, as well as what you will give verbally here
today. This is proposed to be a long hearing, and I know some
of us have to apologize in advance for being in and out of the
room for other commitments, but it doesn't mean that we haven't
had an opportunity to read thoroughly what has been provided by
this panel, as well as the next panels, and appreciate it.
In my District, in Essex County I note on the chart here
from 1998 to 2001, that period up to 2006 has seen an increase
in foreclosures of 289.1 percent. It is a huge issue in my
community, as well as others on the panel that have spoken
here. I look forward to your proposed solutions, because I
think we have identified the problem pretty well. I am looking
forward to hearing your comments on how we might be of
assistance to people to stop this from snowballing out of
control worse than it has now.
Again, thank you, Mr. Chairman, for attending to this
matter.
Mr. Kucinich. I thank the gentleman from Massachusetts.
If there are no other additional statements, this
subcommittee will now receive testimony from the witnesses
before us today.
I would like to begin by introducing our first panel.
From my left, Mr. Jim Rokakis. Jim Rokakis took office as
Cuyahoga County treasurer--that is in Cleveland, OH--in March
1997, after serving for over 19 years on the Cleveland City
Council. Mr. Rokakis has brought sweeping reform to the
treasurer's office. He overhauled the Cuyahoga County's
property tax collection system and significantly improved
Cuyahoga County's investment function. Mr. Rokakis
revolutionized the way Ohio counties collect delinquent
property taxes by working successful to pass Ohio House Bill
371 that allows county treasurers in Ohio's largest counties to
sell their property tax liens to private entities. Mr. Rokakis
spearheaded House Bill 294, which streamlines the foreclosure
process for abandoned properties, and was instrumental in
creating Cuyahoga County's don't borrow trouble foreclosure
prevention program. Mr. Rokakis developed nationally recognized
link deposit loan programs that have helped revitalize the
county's housing stock and reduced urban sprawl. Additionally,
he worked to pass Ohio House Bill 293 that allows senior
citizens to defer property tax payments. Our new Governor and
former colleague Ted Strickland has appointed Mr. Rokakis to
Ohio's recently formed Task Force on Foreclosures in Ohio.
The next witness will be Ms. Inez Killingsworth, who is the
president of the East Side Organizing project, as well as co-
chairperson of the National People's Action, which is a
coalition of hundreds of grassroots organizations. She is a
national leader in the fight for reform of the Federal Housing
Administration, predatory lending, and advocating neighborhood
safety. The East Side Organizing Project was founded in 1993 to
create organized leadership around issues that impact
neighborhood life in Cleveland. ESOP works with community
residents, schools, businesses, churches, and other
neighborhood institutions to identify issues and take actions
that create safe, economically strong, and stable communities
for our residents. Decisions about strategy and organizational
direction are made by ESOP members. Since 1998, much of ESOP's
work has focused on predatory lending, divestment of capital,
and quality loan services for low income and minority
communities, and the foreclosure explosion in Cuyahoga County
and the city of Cleveland. ESOP's aggressive approach toward
predatory lending has been nationally recognized for its
effectiveness in fighting loan industry abuses and setting up
better loan services in low income communities.
We will hear from Mr. William Rinehart, who has served as
vice president and chief risk officer of Ocwen since April
1999, where he is responsible for internal audit, information
security, quality assurance, Sarbanes-Oxley compliance, credit
policy and administration, community relations, regulatory
compliance, and Six Sigma. He joined Ocwen in 1998 as director
of Credit Policy. Ocwen Financial Corp. formed in 1988 as a
public company--it is on the New York Stock Exchange--
headquartered in West Palm Beach. Ocwen derives the majority of
its revenues from the servicing of residential mortgage loans
for third party institutional investors. Ocwen currently
services approximately 480,000 mortgage loans with unpaid
principal totaling $55 billion.
The next witness will be Mr. Josh Nassar, vice president of
Federal affairs for the Center for Responsible Lending [CRL].
CRL is a nonprofit, nonpartisan research and policy
organization that promotes responsible lending practices and
access to fair terms of credit for low wealth families. CRL is
dedicated to protecting home ownership and family wealth by
working to eliminate abusive financial practices. CRL has
conducted or commissioned landmark studies on predatory lending
practices and impact of State laws that protect borrowers. CRL
has also supported State efforts to combat predatory lending
and worked for regulatory changes to require responsible
practices among lenders nationwide.
The next witness is Professor Dan Immergluck. Professor
Immergluck teaches courses, including real estate finance,
housing policy, research methods at Georgia Technology. He has
also taught courses in policy analysis, urbanization, and
nonprofits and public policy. He conducts research on real
estate and housing markets, economic development, community
development, community reinvestment, fair housing, and urban
and regional planning and policy. Professor Immergluck
previously taught at Grand Valley State University in Grand
Rapids, MI, and was for almost a decade a senior researcher
with the Woodstock Institute in Chicago, which is a nonprofit
research organization focused on community and economic
development. At the institute he served as the primary deputy
to the president, authored dozens of reports, advised Federal,
State, and local government, as well as nonprofit agencies. The
professor has also worked as an economic development planner
for an industrial development organization in Cleveland and for
the State of Ohio. His most recent book, Credit to the
Community, examines the history of lending discrimination and
red-lining, fair lending policy, and the Community Reinvestment
Act.
Finally, Mr. Harry Dinham, president of the National
Association of Mortgage Brokers, has served in leadership roles
for both the Texas Association of Mortgage Brokers and the
National Association of Mortgage Brokers. Established in 1973,
the National NAMB is the only national trade organization
representing the mortgage broker industry. Fifty State
affiliates, more than 27,000 members, the NAMB promotes the
industry through programs and services such as education,
professional certification, and government affairs
representation.
I want to thank each and every one of the witnesses for
appearing before the subcommittee today.
It is the policy of the Committee on Oversight and
Government Reform to swear in all witnesses before they
testify.
[Witnesses sworn.]
Mr. Kucinich. The record will reflect that the witnesses
answered in the affirmative.
I will ask that each of the witnesses, beginning with Mr.
Rokakis, now give a brief summary of their testimony, and to
keep this summary within 5 minutes duration. I want you to bear
in mind that the complete written statement that you present
will be included in the hearing record.
Mr. Rokakis, you are our first witness. I welcome you as
not simply as the distinguished treasurer of Cuyahoga County,
but as someone who I have served with in public life for
decades. You have been an exemplary public servant and you
honor us with your work and your presence. Thank you very much
for being here. Please proceed.
STATEMENTS OF JAMES ROKAKIS, CUYAHOGA COUNTY TREASURER,
CLEVELAND, OH; INEZ KILLINGSWORTH, PRESIDENT, EAST SIDE
ORGANIZING PROJECT, CLEVELAND, OH; BILL RINEHART, VICE
PRESIDENT AND CHIEF RISK OFFICER, OCWEN FINANCIAL CORP., WEST
PALM BEACH, FL; JOSH NASSAR, VICE PRESIDENT, CENTER FOR
RESPONSIBLE LENDING, WASHINGTON, DC; DAN IMMERGLUCK, GEORGIA
INSTITUTE OF TECHNOLOGY, ATLANTA, GA; AND HARRY DINHAM,
PRESIDENT, NATIONAL ASSOCIATION OF MORTGAGE BROKERS, MCLEAN, VA
STATEMENT OF JAMES ROKAKIS
Mr. Rokakis. Thank you, Mr. Chairman. Thank you, Chairman
Kucinich and Ranking Member Issa, for allowing me to speak
today on the topic of subprime lending and the harm that it has
caused to so many communities all over America, particularly
communities in Ohio. The damage to the Buckeye State has been
enormous, but, sadly, the news of the past few months convinces
me that the worst is yet to come.
My name is Jim Rokakis. I am the county treasurer for
Cuyahoga County, OH, a county of over 1.3 million people that
includes Cleveland and 59 suburban communities.
For at least the past 7 years, urban leaders in cities like
Cleveland, Dayton, Toledo, and other older, more mature cities
throughout America have been decrying the explosion in
foreclosure filings in their communities. They have complained
of abandonment, of property flipping, and of a lending industry
that we thought was behaving so irresponsibly we were convinced
that some day a segment of that industry, the subprime sector,
would implode.
We complained of no document loans and of adjustable rate
mortgages that would reset at a rate higher, that would be well
beyond the means of the borrower. We complained of borrowers
known as NINJAS, no income no jobs no assets, who were often
buying multiple properties, very often with no down payments.
We complained of fraud on an unprecedented scale that involved
buyers, sellers, brokers, bankers, and appraisers.
Mr. Chairman and members of the committee, these tactics
have devastated Cleveland and its neighborhoods. The most
obvious example, Chairman Kucinich, is a neighborhood in
Cleveland that you once represented, known as Slavic Village,
where 900 homes have been abandoned in just the past several
years.
We pleaded for help at the State level, but we were no
match for the lobbying team assembled by the mortgage brokers,
the bankers, and financial services industries that have come
to view securitization and the use of collateralized debt
obligations as a foolproof way to finance mortgages in this
country, not just for people with good credit but for people
with bad credit or no credit at all.
You have heard this before, but it bears worth repeating.
The American dream of home ownership has become, for the
hundreds of thousands of Americans who have been foreclosed or
who are being foreclosed or who will be foreclosed this year,
for those Americans it has become a nightmare. For older,
struggling American cities like Cleveland this promise of the
American dream has become a nightmare, burdening these
communities with vacant properties and maintenance costs these
cities cannot afford.
For the millions of Americans who live next to one of these
properties or on a street with a vacant home or many vacant
homes, who have witnessed a precipitous decline in the value of
the most valuable asset, their home, this foreclosure disaster
has become a nightmare for them, too.
Last March we began a foreclosure prevention program in our
county that asked our residents who were facing foreclosure to
call 211-hotline where operators referred them to foreclosure
counseling specialists. The director of that program, Mark
Wiseman, is seated behind me. I am proud to say we saved
approximately 600 homeowners from foreclosure during that
period, but I am sobered by the fact that for every mortgage we
saved, 20 more foreclosures are filed with our clerk of courts.
We have gone from 3,500 private mortgage foreclosures in 1995
to 7,500 private mortgage foreclosures in 2000, to over 13,000
in 2006, with no end in sight. These increases coincide
perfectly with the growth of the subprime lending industry.
What are we asking for this Congress to do? Don't fall for
the argument that some on Wall Street are starting to voice,
that this is a market problem that the market will correct,
that the market is already doing so by tightening credit
standards. Mr. Chairman, we have already talked about it, but I
have read various reports that estimate anywhere from 1.4 to
2.4 million mortgages will go into default. The losses suffered
as a result of these defaults will run into the hundreds of
billions of dollars. On a daily basis we read reports of
mortgage banks that are filing bankruptcy or are facing
bankruptcy. Does anybody really believe this is all caused by a
little hiccough in the market, one that we should trust the
market to correct?
There are two areas where this Congress can be of great
help. Certain loan products must be abolished and loan officers
must be held to fiduciary duty. No document loans have no place
in the home mortgage industry. These loans, which are
unapologetically referred to as liar's loans among brokers, are
an invitation to fraud and should be outlawed. If your borrower
can't prove beyond doubt what their income is, why are you
lending them money in the first place?
As far as loan officers are concerned, Mr. Chairman, the
loan officer knows with a considerable degree of certainty
whether the borrower he is working with will be able to repay
that loan, yet they reject the notion that they should be
required to have that borrower's best financial interest at
heart when driving the decisionmaking. This is the most
important financial decision these borrowers will ever make,
and it is critical that these mortgage brokers be held to the
highest fiduciary standards.
There has been talk in this Congress of a suitability
standard. Does the borrower have the income to make a monthly
loan payment, not only next month's payment but the payment
when the loan rate resets? Selling somebody a loan they don't
need or can't afford should cost that mortgage broker his or
her license.
When the industry testifies before this panel, please ask
yourself one question: why are we here to address what has
become a national crisis? They will blame the foreclosure
disasters on a slow economy and rising unemployment, on rogue
brokers and bankers who have misbehaved.
I am going to tell you we have enough laws and regulations.
We just need to do a better job of enforcing the ones we have.
Ask them if lax or non-existent underwriting standards haven't
played a role in this disaster, or if high fees and bonuses
totaling billions of dollars to brokers who are ordered to
write mortgages with higher interest rates and excessive fees
haven't contributed to this foreclosure tsunami.
Mr. Chairman, you will never be able to put a dollar amount
on the heartbreak, the pain, and the distress caused to these
families. Never. Please reject the argument that if Congress
reigns in the abuses of the subprime industry, that it will dry
up credit for the millions of Americans with less than perfect
credit.
There is unquestionably a place for subprime lending in
this country. Subprime loans can provide opportunity for people
to own a home who might not otherwise have that chance. But,
Mr. Chairman and members of the committee, to say that you must
accept these abusive practices as part of the solution, well,
that is just plain wrong.
Thank you for this opportunity.
[The prepared statement of Mr. Rokakis follows:]
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Mr. Kucinich. Thank you very much, Mr. Rokakis.
Now the Chair will recognize Inez Killingsworth, the
president of East Side Organizing Project. Thank you very much,
Ms. Killingsworth. You may proceed.
STATEMENT OF INEZ KILLINGSWORTH
Ms. Killingsworth. Thank you, Mr. Chairman, and to the
subcommittee. I am especially honored today to tell you that I
was beside Gail Sincata, known as the mother of CRA, during the
fight over a decade ago on CRA, that law that allowed banks and
confined banks that they must be accountable to all people.
When Gail passed, I kind of stepped up to the plate, not to
fill Gail's shoes, but to challenge people to get the crooks. I
am national co-chairperson of the National People's Action.
Again, I would like to thank you for convening this meeting and
allowing ESOP to be a part of this.
What I like to call is the Perfect Storm of how it
happened. I live in a community that has been destroyed by all
levels of government, with the exception of our county
treasurer, who you just heard from today. Without question,
cities in Cleveland were ripe for the picking. The steel
industry was leaving. The secondary industries went belly up.
And we continue to have what I call a brain drain. Indeed, the
banking industry would like you to believe that they pulled out
of Cleveland because of the economy. Well, I would like to say
that is not true. They pulled out because they could get more
money in the subprime with their subprime affiliates than they
could with their regular loans. They did not pull out. That was
no mistake. They did not do what they were supposed to do in
terms of the CRA.
Consider National City Bank, whose headquarters is in
Cleveland. Until very recently, National City owned First
Federal Finance. I encourage you to read the Plain Dealer
article of March 15, 2007 where National City Bank has put $50
million in reserve because it foolishly invested in First
Franklin Financial, but now has to foot the bill for that
company's abusive practices as they are stuck with all of those
loans.
National City is not alone. Consider Key Bank, who also
learned the parting of their ways when they decided to sell
their subprime affiliate, Champion Mortgage, late last year.
Had National City Bank, Key Bank, and other banks not chosen to
cut their lending practices in the low and moderate-income
communities over the last 10 years, we would not be here today.
We would have better service in our community. Of course, had
the banking regulators did their job, also, we would not be
here.
I live in the Union Miles community. I have lived in there
for more than 30 years. I remember when we had banks in our
neighborhood, but one by one they all disappeared. The subprime
industry will tell you that they acted based on the economics
of supply and demand. That is probably one of the things that I
kind of agree with them on, but the fact is, as the banks
abandoned low and moderate-income neighborhoods, the subprime
industry moved in, and moved in fast.
For example, in 2002 Argent Mortgage Co., the wholesale
lending arm of ACC Holding, which also owns Ameriquest
Mortgage, had no presence in the city of Cleveland, but since
2003, however, despite only offering a subprime loan product,
they have been the largest lender in the Cleveland area. I
guess you can figure out why.
I would suggest to you that Argent's surge in Cleveland is
the result of years of local banks turning their banks on low
and moderate income.
I would like to spend a minute and give you some sense of
how devastating this has been in Cleveland. Ohio foreclosure
rate is three times the national average, and the highest in
all of the States. This data says that 12 out of 13 largest
Ohio counties indicate that 2003 foreclosure filings increased
by an estimate of 25 percent over 2005 in the year of 2005.
Despite representing less than 5 outstanding mortgages,
subprime loans account for 70 percent of all the foreclosures.
In the Cleveland community where I live, I remember going
past houses that were very vital, having barbecue meals in the
back yard. This one particular lady, Mrs. McCoy--I bring her
name up because she was very dear to me, and she was always
talking about the subprime lender and how they were taking
advantage of our neighborhood. Well, today Mrs. McCoy is no
longer with us, but before she passed on she lost her home.
ESOP has a model that we work with in terms of our hot spot
cards and how we approach that in terms of trying to help
people to save their home and not be homeless. We worked along
with National People's Action NTIC a few years ago, to get an
agreement with CitiFinancial. CitiFinancial, as you know, is a
part of the CitiGroup, the largest bank in the world.
CitiFinancial acquired the associates a few years ago, and we
were going after them because in our community we were hearing
complaints of people about their loans.
We finally got an agreement with CitiFinancial after years
of wrangling over what it was. We developed out of that
agreement what we call our hot spot card. Our hot spot card
allows us to gather information that we may be able to use to
help people to refinance or get a forbearance or even a
resolution to that loan. That is one of the things that has
gone national with ESOP is our hot spot cards, and we work very
closely with the county.
We also have an agreement with Select Portfolio, better
known as Fairbanks. We also have an agreement with Ocwen. Mr.
Rinehart is to my left here today to talk about how we work
together to save people's homes in Cleveland.
I could go on and on and on, but I see my time is up. I
thank you very much.
[The prepared statement of Ms. Killingsworth follows:]
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Mr. Kucinich. I want to note that all witnesses' testimony
will be included in the record. If you would like to confine
your remarks to 5 minutes I can assure you that the record of
the committee will reflect your full remarks, but I can
understand, in reading the full text of all of your
presentations, and notably Ms. Killingsworth and Mr. Rokakis
who have just testified, you know, it is good for us to hear
this, and I am so grateful that you are here to make the
presentation.
I want to note that we have been joined by Mr. Murphy of
Connecticut and Ms. Watson of California. Thank you for being
here.
The next witness, Mr. Rinehart. Mr. Rinehart is vice
president and chief risk officer of the Ocwen Financial Corp.
Thank you for being here. Please proceed.
STATEMENT OF WILLIAM RINEHART
Mr. Rinehart. Thank you, Mr. Kucinich, Ranking Member Issa,
and members of the committee, for giving me and Ocwen Financial
Corp. the opportunity to share our thoughts with you today.
We--and I mean that in the broadest sense to include the
mortgage industry, Congress, regulators, consumer advocates,
and State officials--have two issues to address. The first is
what changes are needed to ensure that all participants in the
origination of subprime mortgages act responsibly. The second,
what do we do to assist borrowers who are already facing
difficulty.
Insofar as Ocwen is a loan servicer and not an originator
or broker, my remarks today will focus primarily on the second
point; that is, what Ocwen is doing to help our servicing
customers who are currently having trouble repaying their loans
to stay in their homes.
As I indicated in my written statement provided to you,
foreclosure is a lose/lose/lose proposition for the homeowner,
for Ocwen as servicer, and for the investor who owns the loan.
Foreclosure should be pursued only when all other options have
failed.
Regardless of the type of loan the borrower has or how it
was underwritten, subprime borrowers often have little
financial cushion to withstand any financial shocks. Any change
in their income level through job loss, reduction in hours,
death or disability of a wage earner, or unexpected expenses. A
leaky roof, broken hot water heater or furnace, new
transmission for their car, or medical expenses can cause an
immediate crisis for these homeowners.
Borrowers already facing difficulty in repaying their
mortgage who are then impacted by an interest rate increase
because they have an adjustable rate mortgage have a high
likelihood of experiencing financial default. Because
foreclosure is a bad economic proposition for all parties,
Ocwen has worked hard to develop processes to help defaulting
customers find alternatives to foreclosure. Ocwen is proud of
our industry-leading loss mitigation programs that avoid
foreclosure for more than 80 percent of our customers who
become 90 days or more past due. In the small percentage of
cases that do go to foreclosure, the primary root cause is our
inability to open a line of communication with our customer.
Despite our repeated attempts to reach out to our customers
through telephone calls and letters, some customers, due to
shame, fear, and a lack of knowledge, tune us out. We also make
available to borrowers an instructional DVD that explains the
various solutions available to them. If the committee would
like a copy, I would be happy to provide one.
Mr. Kucinich. We would.
Mr. Rinehart. OK.
Mr. Kucinich. Thank you.
Mr. Rinehart. But, again, if the customer won't talk to us,
we can't help them.
To close the communication gap, Ocwen has partnered with
nonprofit housing advocacy groups, including the National
Training and Information Center in Chicago and their affiliate,
the East Side Organizing Project in Cleveland, to reach out to
Ocwen customers to try to find alternatives to foreclosure. We
provide lists of our customers who we have been unable to
contact to these housing advocacy groups. Receiving contact
from a local trusted community group such as ESOP may spur the
Ocwen customer to make a call and take that critical first step
to avoiding foreclosure.
Through these partnerships, we have helped many Ocwen
customers stay in their homes. Substantial changes in how
subprime mortgages are granted have already occurred, and more
are likely to occur. These changes have resulted from market
factors--that is, investors and investment banks are requiring
product and underwriting changes--and from recent regulatory
guidance. These changes will reduce the number of new borrowers
finding themselves in trouble only months after receiving their
loan. These changes, however, will make it more difficult for
borrowers already in a loan to fix their current problems.
Ocwen and other servicers, groups like NTIC and ESOP,
investors, and investment banks must work together to help
these homeowners already facing difficulties.
Thank you.
[The prepared statement Mr. Rinehart follows:]
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Mr. Kucinich. I thank the gentleman.
We will next hear from Josh Nassar, who is with the Center
for Responsible Lending.
Please proceed.
STATEMENT OF JOSH NASSAR
Mr. Nassar. Thank you, Chairman Kucinich, Ranking Member
Issa, and members of the committee for having this important
hearing today, and thank you for inviting me to testify on this
important topic.
As has been mentioned, we estimate that, of the subprime
mortgages made in the past 2 years, 20 percent will fail, not
just enter foreclosure, but the person will actually lose their
home. The impact on urban communities is absolutely profound.
Keep in mind that over half of African American homeowners have
subprime mortgages and 40 percent of Latino homeowners.
When looking at the practices in the subprime industry, it
really should come as no surprise that we are seeing such high
rates of foreclosures. The dominant loan product in the
subprime market that most homeowners in subprime market have is
called a 2/28 or a 3/27 hybrid ARM. That simply means that for
the first 2 or 3 years the person has a fixed-rate loan. Then
it enters an adjustable period.
But here's the problem: these loans have a built-in payment
shock of at least 30 percent, meaning that if you have a $2,000
monthly payment, it is going to jump to $2,600, at least.
Generally these loans are only underwritten. The lender is only
providing a loan based on the person's ability to afford the
loan for the fixed rate period, not for the adjustment period,
so it really shouldn't come as a surprise that we are seeing
these problems.
The other thing is that many times, as has been mentioned,
people are receiving no-doc and low doc note loans, which make
it extremely difficult for someone to actually afford the cost
of the loan and generally costs more money.
Lenders also frequently do not escrow for taxes and
insurance, meaning that a person has a major bill due in
addition to the payment shock. And most subprime homeowners
have a prepayment penalty. Over 70 percent of subprime
homeowners have prepayment penalties on their loans. Less than
5 percent of prime borrowers have prepayment penalties. This
means that most homeowners have a terrible choice. They get hit
with the prepayment penalty, or they have to pay the adjusted
rate. It is a lose/lose situation. They are between a rock and
a hard place.
Another thing that should be taken into account is that
many people in the subprime market actually qualify for prime
loans. It has been estimated by Freddie Mac that at least 20
percent of people in the subprime market who receive subprime
loans could qualify for a prime loan, and the reason why is
because there is massive steering going on in the subprime
industry.
We have shown in our research, which I attached to the
testimony, that African American and Latino homeowners are 30
percent more likely to have a subprime loan, even when they
have the same credit score as their white counterparts. So it
is not just about credit risk. There is a lot more going on
here.
So what should be done? That is the natural question. Well,
first of all Congress should pass a comprehensive anti-
predatory lending law that not only holds lenders and brokers
accountable but also allows States and localities to add
additional protections down the road.
We should also have a return to sound underwriting where a
person is qualified for a loan not just for the initial period
but also when the loan adjusts upward. Without that, it is
going to be ineffective.
In addition, brokers really need to have more duties, a
fiduciary duty to homeowners. Over 70 percent of subprime loans
are made by mortgage brokers, and so if we are going to attack
this problem we have to deal with the role of mortgage brokers
who have a financial incentive to put people in a higher rate
loan than what they qualify for through the payment of yield
spread premiums.
In addition, the Federal regulators, bank regulators, have
proposed new guidance which calls on institutions to underwrite
loans to the adjusted rate. We hope that those regulations are,
in fact, finalized, and then the Federal reserve makes sure
that it is applied to the entire market, not just to national
banks and to federally regulated banking institutions.
And we encourage lenders and servicers to reach out to
homeowners now to try to avoid what we will perceive is a much
bigger problem as far as people entering foreclosures.
Finally, we call on the GSEs to play an increased role.
Recently Freddie Mac announced that they were going to require
from the loans they buy that lenders are actually going to
underwrite to the adjusted rate, to after the teaser rate.
Fannie Mae, unfortunately, has not followed their lead and has
not taken the same action. We would hope that Fannie Mae would
take the same action.
The impact of these issues on communities and wealth, it is
difficult to overstate. I would just say to keep in mind that
African American and Latino households have only 17 percent of
the wealth of white households, so the impact and abuses in
subprime industry are just absolutely devastating.
Thank you. I would be happy to answer your questions.
[The prepared statement of Mr. Nassar follows:]
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Mr. Kucinich. I thank the gentleman.
Next we will hear from Dan Immergluck, Ph.D, associate
professor, City and Regional Planning Program, Georgia Tech.
Thank you.
STATEMENT OF DAN IMMERGLUCK
Mr. Immergluck. Good afternoon and thank you, Chairman
Kucinich, and members of the subcommittee.
It is clear to me that the subprime mortgage market and
some parts of the prime market are in many respects
fundamentally dysfunctional. We have had a flood of poorly
structured mortgage credit, much of it which works to the
detriment of the borrower and to the benefit of brokers,
lenders, and some investors. The phenomenon is distorting
housing markets and harming neighborhoods and communities.
One major problem which is being amplified nationally now
as housing appreciation stalls in many more places is that
subprime foreclosure rates are routinely running at more than
10 to 15 times those of prime mortgages. In some localities
this is more than 30 times difference. The greatest increases
in foreclosures in the late 1990's were generally confined to
central city neighborhoods with high proportions of lower
income and minority residents. These areas continue to be hit
very hard, but now, as the subprime industry has grown so much
in recent years, its appetite for pushing product to a wider
and increasingly suburban market has swelled and foreclosures
are now following.
In the five-county Atlanta market, for example, really a
region that hasn't suffered from weak economy of any kind,
foreclosures increased over 180 percent from 2000 to 2006, and
the county with the highest rate of increase was Gwinnett
County, a predominantly middle-income suburban county.
Overly aggressive lending, especially in the subprime
market, hurts housings by encouraging speculation, driving up
property values to unsustainable levels, and creating
essentially bubble neighborhoods. Faculty at the Wharton
Business School recently found that aggressive adjustable rate
lending pushes up neighborhood housing values at first and then
pushes them down much farther when the inevitable market
decline occurs.
Property appreciation that is built upon financing gimmicks
and short-term teaser rates is not real, sustainable
appreciation, and in the long run discourages the smooth
functioning of housing markets and neighborhood economies. Many
neighborhoods subject to high levels of aggressive lending end
up suffering from high foreclosure rates, which my own research
has shown depressed values of surrounding properties.
So the true complete cost of foreclosures are borne more by
the borrowers and the communities in which they live than by
the lenders and investors supplying the credit. Cities,
counties, and school districts lose tax revenue and have to
control the abandoned properties that fall out.
Therefore, irresponsible, overly aggressive lending hurts
neighborhoods and neighbors who had no role in the credit
decision. Even if one does not believe it is the Government's
role to protect vulnerable homeowners--and I should add that I
do believe that it is--it is hard to argue there is no role for
Government in regulating practices and products that harm
entire communities. Given that some cities have not
experienced, at least until recently, the high levels of
foreclosures that cities like Cleveland, Detroit, Baltimore,
and Atlanta have, and the fact that many of these markets are
now cooling, we can be very sure that the foreclosure problems
will be getting far worse at a national level before they get
better.
Some have portrayed the increases in subprime and exotic
mortgages as merely responding to demand as housing prices have
risen in some markets. However, when such products allow buyers
to stretch much farther, farther than they should, they can
become as much a cause as an effect of higher home prices.
I would like to mention just a few quick policy
recommendations.
First, regulators and Congress should issue regulations
that return the mortgage market to a predominant reliance on an
ability to pay rationale in all underwriting. Congress, the
Federal Reserve, and other regulators should do whatever is
necessary to extend such regulations to State-regulated
mortgage lenders and not just depository institutions.
Second, there is an urgent need for making all actors in
the mortgage supply chain accountable for their role in the
mortgage process. Liability for reckless lending needs to
follow from the broker to the lender to the investor. Nothing
will create more accurate information and reduced fraud better
than exposing investors to the downside risk of providing
capital to irresponsible lenders.
Third, Federal preemption of stronger State laws is not an
appropriate quid pro quo for better Federal regulation. The
research shows that mortgage markets are not significantly
impeded by different State regulatory regimes. We have had
different regimes in foreclosure for many years, and I haven't
seen a significant problem. Federal law should be strengthened
to provide a structurally sound floor of basic mortgage
regulation, not one based solely on a confusing battle of
dozens of disclosure documents.
Thank you.
[The prepared statement of Mr. Immergluck follows:]
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Mr. Kucinich. Thank you very much.
We will now hear from Harry Dinham, who is the NAMB
president, National Association of Mortgage Brokers.
Thank you, sir. Welcome. Please proceed.
STATEMENT OF HARRY DINHAM
Mr. Dinham. Good afternoon, Chairman Kucinich and members
of the subcommittee. I am Harry Dinham, president of the
National Association of Mortgage Brokers. NAMB is committed to
preserving the vitality of our cities and the dream of
homeownership. We commend this committee for holding this
hearing.
NAMB is the only trade association devoted to representing
the mortgage broker industry. We speak on behalf of more than
25,000 members in all 50 States and the District of Columbia.
Mortgage brokers must comply with a number of State and Federal
laws and regulations. We are subject to the oversight of not
only State agencies, but also HUD, the FTC, and, to a certain
extent, the Federal Reserve Board.
First let me say that it is a tragedy for any family to
lose their home. No one disputes this. Foreclosure hurts not
only the family but the neighborhood and surrounding
communities. As small business brokers, we live, eat, shop, and
raise our families in these communities. When consumers'
property values decline, our property values decline. When
consumers' neighborhoods become unstable and prone to violence,
our neighborhoods become unstable and prone to violence. More
than any other channel, brokers live by the motto: once a
customer, a customer for life.
What happens in our neighborhoods and in our communities
hurts all of us. Mortgage brokers do care. We believe that
everyone from Wall Street to mortgage originators has a role to
play when a consumer is in trouble and facing foreclosure.
At the same time, we must remember that today America
enjoys an all-time record rate of homeownership, almost 70
percent. The challenge we face now is how do we help people
avoid foreclosure while at the same time ensure they have
continued access to credit.
We realize that a number of recent reports have focused on
the rise in home foreclosures. The truth is we can only
speculate on the causes responsible for any rise in home
foreclosures. There are a number of possible factors:
bankruptcy reform, minimum wage gains, credit card debt,
decreased savings rate, decreasing home values, second homes,
fraud, illness, and other life events, to name just a few. Do
not rush to judgment before we have all the facts.
We understand that Congress is calling for a GAO study on
the causes of foreclosure. We expect the study to take into
account a number of possible economic and non-economic factors
such as product pricing, seasonal and market changes. We should
examine the conclusions before implementing any policy
decisions that could unfairly curtail access to credit.
In 2002, our President challenged the industry to increase
minority homeownership by 5.5 million families by 2010.
Mortgage originators, realtors, lenders, underwriters, and the
mortgage securitizers and investors on Wall Street responded
and helped families in urban America own homes. With this said,
all of us--industry, government, and consumers--have a role in
helping these families stay in their homes.
Let me close with a brief summary of what NAMB is doing to
help families achieve and maintain responsible homeownership.
We continue to advocate for affordable housing, including
FHA reform, and have pushed for increased mortgage
participation in the program. We must make FHA a real choice
for nonprime customers. We support authorizing VA to provide
reverse mortgages and expand access to credit, especially for
elderly veterans.
Since 2002, NAMB is the only trade association that has
advocated for education, criminal background checks, and
increased professional standards for all mortgage originators,
not just mortgage brokers.
We have prepared and submitted a revised HUD statement,
good faith estimate, to help provide comparison shopping.
Our Code of Ethics and best business practices prohibit
placing pressure on or being pressured by other professionals,
and we propose the development of a loan specific payment
disclosure to be given to consumers at the shopping stage and
again at funding. This will help consumers avoid payment shock.
Thank you for the opportunity to appear before you today. I
am happy to answer any questions.
[The prepared statement of Mr. Dinham follows:]
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Mr. Kucinich. Thank you very much, Mr. Dinham.
We are now going to go to questions for the witnesses. The
round of questions will be proceeding under the 5-minute rule,
and I will ask the first set of questions and then recognize
the Members after I complete my questioning.
To Mr. Rokakis, one of the things that you made clear in
your testimony and what was made clear in testimony of a number
of individuals here is that foreclosure is, in and of itself, a
significant contributor to stress on a city. Do you feel that
you and all the forces you can marshall are keeping up with the
demand for foreclosure prevention services?
Mr. Rokakis. Mr. Chairman, Congressman Kucinich, members of
the committee, no, we are not. I don't like to admit this. We
really are losing. As I said, for every mortgage we are able to
save, 20 more are filed. There is an effort underway at the
State level, but we really need help at this level. We can
respond quickly at a local level, but the reality is our
resources are limited. We have tried to partner with local
banks, local financial institutions. Some joined in our
efforts, some did not.
So we are doing the best we can, but this really is a
problem that goes far beyond the power of the Cuyahoga County
government. Really, we needed help at the State level. We have
not really gotten it. You know, there has been a raging battle
in State government over some legislation that was passed and
then repealed. Ultimately, I think the best help can come from
the Federal level and it can come from this Congress.
Mr. Kucinich. So you have done so much work on mortgage
foreclosure prevention. What do you think the consequence will
be for Cleveland, for example, and Ohio and the Nation if the
supply of foreclosure prevention help does not keep up with the
demand?
Mr. Rokakis. Well, we already know that it has been
devastating to neighborhoods. As we said, some entire
neighborhoods have emptied out. Cuyahoga County has lost 50,000
people in the past 5 years. I think that a significant
percentage of that loss is attributable to these practices and
these houses going vacant.
I think that beyond that we really need other tools. I know
the industry would bristle at this, but whether you want to
call it a moratorium or a forbearance period, we know that many
of these ARM resets--which, by the way, are known by some in
the industry as explosive ARMs--we know that many of these ARM
resets are going to push people over the edge, and the industry
needs to really consider whether they want these resets to go
forward, given the fact that so many of these people will go
into foreclosure, or, if they are not better, entering into a
cooling off period or a forbearance period. I know they don't
like the word moratorium.
They are better off having somebody in that home making a
payment that individual can afford than watching one additional
property enter the foreclosure and sheriff's list.
Mr. Kucinich. Thank you, Mr. Rokakis.
Ms. Killingsworth, I noted your statement and I heard the
comments of my colleague, Mr. Cummings, how he said that you
can go for miles and not see a bank. What are your opinions
about why this absence of banks, particularly in inner cities,
has occurred? Why do you think that has happened?
Ms. Killingsworth. Mr. Chairman, I think, and in fact I
believe that the reason my community is like I like to say
debanked, because the banks wanted to find a way around CRA and
they found it, as I like to call it, back door redlining by
having financial institutions that they could use to avoid
doing a prime loan to the individual and go to the subprime
factor. They found it profitable there. That is why I believe
that they left.
Mr. Kucinich. And this debanking, as you call it, what are
the practical implications for people in the neighborhoods when
they don't have a bank to go to?
Ms. Killingsworth. When people don't have a bank to go to--
and in my community banks are not known to be very friendly, so
they turn to the payday lenders that you heard about today, and
the payday lenders are going up all over the city. They are
almost on every corner. I just recently heard that you can
count more payday lending institutions in our community than
you can count McDonald's, Wendy's, or Burger Kings put
together. So the lack of banks causes people to look for other
alternatives to cash their checks or to pay their utilities, so
they go to the payday lender to get that exotic loan.
Mr. Kucinich. Just one last question. It is my
understanding the last time the Federal Reserve Bank of
Cleveland held a public hearing to consider a proposed bank
merger affecting Cleveland was 30 years ago. In your
experience, what does that say about the robustness, if you can
call it that, of Federal regulation, and what would you say
about how regulators are doing their job, seeing the conditions
that are existing right now in your neighborhood?
Ms. Killingsworth. I think the regulators need to do a
better job of monitoring what banks do. They don't do that,
because if they were doing that I believe that we would not see
as many payday loans. We wouldn't see all these financial
institutions that are up there. The regulators are allowing the
banks to use something other than what they should be using as
a measuring stick for how they perform in the community. They
go around that by developing community development banks, and
they invest their resources in those development banks, thereby
allowing them to get credit for CRA.
Mr. Kucinich. I thank the gentlelady.
Now let's go to Mr. Turner. Do you want to participate?
Mr. Turner. Sure.
Mr. Kucinich. Thank you, Mr. Turner.
Mr. Turner. Thank you, Mr. Chairman. I apologize that I am
popping in and out. Luckily, in the room we have your continued
testimony, so I am able to hear the comments. I greatly
appreciate both the dedication that each of you have to this
issue, but also your ability to communicate how this relates to
the average American, how it relates to their neighborhood, how
this relates to what we look at even as the most basic issue of
fairness.
As I have heard your discussions of neighborhoods and the
impacts on individuals--Ms. Killingsworth, you were talking
about a home that you had been at that ultimately had been lost
to predatory lending--one of the things that I do think that
gets lost is it is not just the individuals that in predatory
lending have their homes at risk, but it really is the whole
neighborhood. When you live next to a house that becomes
abandoned, it takes down the neighborhood, it takes down your
housing value, it is a blighting influence, it attracts crime
and other impacts. As you have a whole neighborhood where this
happens, you have then the repetition of this occurring as
housing values begin to drop because of the incidence of
blighting, of abandoned houses. Their resale goes down,
resulting in even more capital being lost for those individuals
that are in a foreclosure situation.
Then the resulting abandonment of these properties
represents a title block on future redevelopment. Once a house
becomes abandoned, has been through sheriff's sale, if no one
has purchased it, the number of liens that are there, the tax
liens that are there, the community, the city, the
neighborhood, even those interested to bring the capital in to
reinvest in that abandoned property have difficulty in doing
the transaction because it is not readily available on the
market. There are so many impediments that are in the way to
clean it up. It has, in fact, left behind not only just a
broken family and a broken, abandoned house; it has left behind
a title problem so that future investors cannot resurrect this
building and it begins to decay further.
I was wondering if each of you might speak of, in that
context, those that aren't even subject to predatory lending
but are the neighbors. Even those that are not subject to
predatory lenders, let's say I live next to a house and I have
not been a victim of predatory lending but my neighbor has,
what is the impact on me?
Mr. Rokakis. Mr. Chairman and Congressman Turner, in my
role as county treasurer I serve on something called Board of
Revision. It is a three-member board comprised of an auditor, a
member of the County Commission, and my office. I chair the
committee. I have been asking my board members, this is a year,
because of reappraisals, that tens of thousands of filings are
occurring where people are arguing or contesting the value of
their property. At least at this point one of three people who
are applying for property tax appeals in Cuyahoga County are
citing the fact they live next to or on a street with abandoned
properties. I can tell you, knowing what I know and knowing of
the work of Professor Immergluck and others, knowing what I
know I would be hard pressed to not consider that request for
reduced property value because both what I have read and both
what I see, talking to realtors, I know the property is
worthless because it is next to.
Can you imagine, Congressman, if you are on a street state
7, 8, 9, 10 of these homes, as we have in some communities in
Cleveland?
Mr. Turner. It would translate, also, that the impact of
that, I mean, the reason why they are going to you to ask for
lowered values is so that they can pay lower taxes.
Mr. Rokakis. Absolutely.
Mr. Turner. And what that does to the community then of the
lower revenues.
Mr. Rokakis. Well, it obviously lowers the revenue base,
and because of the way something called 920 works, which you
know in Ohio, it increases property values within that
category--I am talking about residential--so when people vote
for higher taxes, they would like to see those taxes eventually
come down over time, but it doesn't work. In fact, in cases
where property values decrease on a really substantial basis,
there can be an increase in property taxes for those people who
are left. It is kind of an arcane, complex topic, but it is
significant and it is devastating, especially to schools that
rely upon this funding.
Mr. Turner. Others who want to comment on that topic?
Mr. Immergluck. I think the literature is pretty clear that
there is a big impact. Congressman Davis talked about the
$30,000. There are also effects on crime that have been
associated, as you suggested. That is not just kind of
anecdotal; that has been shown in the literature that vacant
houses to increase neighborhood crime levels. Foreclosures
related to vacant houses increase neighborhood crime levels. It
is also true that in lower-income neighborhoods the effect on
property values is actually greater for a foreclosure than in a
middle-or upper-income neighborhood.
Mr. Turner. Mr. Chairman, I just want to say that,
throughout the country, as people are faced with this, not only
those who have been victims but those we were just talking
about that live next to houses that have been impacted, they
want to know whether or not anybody cares with what they are
living with and what they are facing. I appreciate, Mr.
Chairman, you being one of those individuals that cares enough
to have this hearing to bring to light the challenge.
Mr. Kucinich. Thank you, Mr. Turner. I think that is a very
important point that you just made, because, indeed, the entire
community is affected.
Thank you, again. Mr. Davis of Chicago, you may proceed
with your questioning.
Mr. Davis of Illinois. Thank you very much, Mr. Chairman.
Ms. Killingsworth, you mentioned the failure of different
levels of government to do something about the problem and the
issues. Could you think of something that, say, a local
government or a State government or perhaps the Federal
Government, where would you put the pressure point as being in
terms of ability to impact the situation?
Ms. Killingsworth. Congressman Davis, I would put the
impact on the State level, because that is what we try to do.
We try to work on the State level with our Governor. Their
response to us was we need to study it. We were saying to them,
while you are studying we are dying. Our neighborhood is
becoming a ghost town. One of the things that you said, maybe,
well, why don't you get out. You can't get out because you
can't sell the property because the devalue. The property keeps
decreasing.
So I think from a State level, the States should to more to
regulate the subprime lenders, and in particular the brokers.
In Cleveland that I didn't get to in my written statement,
Argent, part of Ameriquest, didn't have a presence in the city
of Cleveland in 2002, but in 2003 they had 1,600 loans. Of
those 1,600 loans, in 2004 half of them were on default, in
foreclosure. So if the State of Ohio was regulating those
brokers in a proper manner, I think that is one of the things
that could happen.
As I mentioned, the only relief that we had was through our
county treasurer and the efforts that he put.
Mr. Davis of Illinois. Thank you very much. Mr. Nassar, I
was going to ask you if you felt that there was a great deal of
potential for the industry, for example, to regulate itself and
incorporate some best practices without the intervention of
government.
Mr. Nassar. Well, unfortunately, I think the track record
shows the best practices have had really minimal effect in the
fact that the dominant subprime loans have these enormous
payment shocks. This has been known for some time.
To the question of who has responded and done a good job, I
would say that States have led the way, including North
Carolina, in combatting predatory lending, but when Congress
passed HOPE in the mid 1990's it gave the Federal Reserve the
authority to regulate the entire mortgage industry when it
comes to abusive practices for all lenders. They have never
used that authority. They have never used that authority. So
there is no question that the Federal Reserve could do a lot
more.
Mr. Davis of Illinois. Professor Immergluck, I have been so
accustomed to calling you Dan, because we have interacted so
much when you were at the Woodstock Institute and we pestered
you all the time, and this is perhaps a great opportunity for
me to just express some serious appreciation for all of the
help that you have given to me personally over the years as we
have called you for information for studies, for direction, and
approaches, and you escaped us and went to Georgia.
What do you see the role of the Federal Government trying
to seriously impact now the situations that we have described?
Mr. Immergluck. It is a big question. I definitely would
agree with Mr. Nassar that the Federal Reserve can do a lot
more. They made a few moves in 2001, only on refinanced loans
and only on kind of high-cost refinanced loans, and that takes
up such a small part of the market it has had very minimal
effect, although it did have some effect, so it proves that the
Federal Government can do something.
The action on refinances I think actually shifted a lot of
subprime activity into the home purchase market, because they
were totally unregulated there.
I think the Federal Reserve can do a lot more by using that
other authority to work on home purchase and all types of
refinance loans and home equity loans.
I also think that, although some States have done a good
job, the Federal Government at least has to get out of the way
and quit preempting States when they do take action. To me that
has been just a travesty of Federal policy for Federal
regulators to allow banks to export regulations from easy
States into States that want to do something to protect their
consumers.
Finally, I think, yes, Congress can do something to bring
back the discipline in the industry. I think securitization has
just really taken the industry out of regulatory control.
One other thing. We have a dual regulatory market. Most
subprime lenders are not essentially regulated by the Federal
Government and we don't have the capacity at the State level to
regulate them.
Mr. Davis of Illinois. Thank you also very much. And thank
you, Mr. Chairman.
Mr. Kucinich. You know, Mr. Davis, what is interesting,
from what Professor Immergluck said, is the lack of regulation
of subprimes. When we see that hedge funds are included as one
of the principal capital formations now and we know that they
are not regulated, so this is an area that we are starting to
move into that raises questions about the Government's
responsibility for the regulation of capital and for massive
movement of that. So I appreciate Professor bringing that up,
and thank you, Mr. Davis.
We will ask Congresswoman Watson to participate. Thank you
very much for being here. You may proceed with your round of
questioning.
Ms. Watson. I appreciate that. Almost a decade ago the
subprime market lending business exploded in America,
increasing the availability of credit to portions of the
population that do not qualify for loans based on their credit
and income and saving profiles. I look at a chart that was
compiled by the Center for Responsible Lending and it appears
that my District in Los Angeles--and I guess it covers Long
Beach and Glendale in California--Riverside, San Bernadino
County, has the highest rate of foreclosures. Now, that is very
disturbing. These areas that I just pointed out, certain areas
in my District, the 33rd District, certain areas of Long Beach,
certain areas of Riverside and San Bernadino County, are now
minority neighborhoods. Most of the minorities in those
neighborhoods are African Americans.
I am very disturbed that the unfair practices, these
detrimental practices, kind of center in on neighborhoods that
are poor and minority with aging homes. They lend this money at
high rates knowing the credit backgrounds of these people.
This goes to Mr. Nassar. Can you explain what you found
when you put this chart together? Can you give us some idea of
why they locate and target these communities? What did you
find?
Mr. Nassar. Sure. Yes, well, a few things. One is that we
used economic forecasting from Moody's and others to talk about
assumptions about what has already been going on as far as
foreclosures and the mortgage market but what will happen. What
we have seen is that really the explosion of these
unsustainable loans with huge built-in payment shocks, which
become the dominant loan in the subprime market, have had a
devastating impact. It doesn't need to be that way. Subprime
homeowners make great homeowners, and there is no need for
loans to be made in this way.
The other thing I would just like to point out is that,
when looking for solutions here, disclosures will not solve
this problem. Anyone who has been through closing knows about
the kind of paperwork you have to go through, and the thought
and the suggestion that one little line about what could happen
to your mortgage will actually stop these abusive practices is
not credible. Disclosures will not work here.
The other thing is that we do know something about the type
of loan and whether someone is likely to enter foreclosure.
Based on loans made in 2000 and based on our research, if
someone has a prepayment penalty, which most subprime
homeowners have, they are 52 percent more likely to enter
foreclosure. If someone is an ARM, they are 72 percent more
likely to enter foreclosure. That is keeping other factors
constant.
So the quality and the type of loan does, in fact, have a
huge impact here, and the impact on family wealth is just
difficult to overstate.
Ms. Watson. Our committee, Mr. Chairman, if I may, is
focusing on domestic policy. I think this is one of our first
hearings, because this is a scourge in my District but it is
only in certain parts of my District. If you know the Los
Angeles area, I have Hollywood and I have places where the land
value is at the top of the chart, but when you go south in my
District it is just the reverse, so I am quite concerned about
this.
I was very impressed with Mr. Rokakis' testimony and Ms.
Killingsworth's testimony, because we are facing that problem,
too.
Let me ask Mr. Immergluck what would you suggest that we do
at the Federal level that might assist these neighborhoods that
are collapsing, being abandoned, and really producing very
little to the economy because there are very few people that
stay behind once they lose their homes. What would you suggest
that we can do here at the Federal level?
Mr. Immergluck. The first thing I would suggest, which is
to be, I understand, the subject of a later panel, is tell
regulators to enforce the Community Reinvestment Act again. I
think since the late 1990's but especially in the last----
Ms. Watson. Let me just interrupt you.
Mr. Immergluck. Sure.
Ms. Watson. Are you saying it is an enforcement issue?
Mr. Immergluck. I am not saying it is only enforcement
issue. I am saying the first thing that could be done that I
think was done in the late 1980's and early 1990's is enforce
the Community Reinvestment Act and the fair lending laws under
the Fair Housing Act.
We saw a large increase in financing for minority
homeownership and small business lending and lots of other good
things from about 1989 to 1996, 1997, because of a couple of
things. One, the savings and loan bailout, which improved CRA
and HMDA, made CRA regulations public, made HMDA--Home Mortgage
Disclosure Act--include race and gender, and made CRA
evaluations public. That really boosted the impact of CRA. CRA
has not been effectively enforced since the late 1990's.
Ms. Watson. That is very good to know. I think we can use
that information, Mr. Chairman, to maybe fashion some language
that would enforce what we already have on the books.
Mr. Kucinich. If the gentlelady would yield?
Ms. Watson. Yes.
Mr. Kucinich. I would respond that this committee, the
Subcommittee on Domestic Policy, is going to be the vehicle to
not only gather information about what is happening with the
economy of cities, but to propose specific legislative remedies
to respond. That response to what Mr. Cummings raised at the
onset of the hearing, response to what Mr. Davis has commented
on based on his long history of involvement on these issues at
a community level, going back to Gail Sincata, who I also had
the chance to work with many years ago, and response to your
concern that, you know, it is one thing to get this
information. You know, it is another thing to recommend a path
of action to do something about it.
Mr. Rokakis and Ms. Killingsworth, who are really on the
front lines of dealing with this on a regular, daily basis,
your coming here matters greatly, and all the others who have
dedicated their careers to this. Your coming here matters
greatly, because we are going to take this information and put
it together with some solid legislative recommendations and
present it to the Congress, so thank you.
Mr. Cummings, did you have any additional questions?
Mr. Cummings. Yes, I do.
Mr. Kucinich. Wait. Excuse me, I moved too quickly here.
Did you have any final questions, Ms. Watson?
Ms. Watson. I yield back the balance of my time, Mr.
Chairman.
Mr. Kucinich. I want to thank the gentlelady from
California for bringing up that central issue of what do we do.
Mr. Cummings.
Mr. Cummings. Yes, Mr. Chairman, I just have one or two
questions.
I can't remember who said it, but somebody talked about how
these loans are given, and they qualify them for the first few
years and then it balloons, and then they are not qualified
actually for the balloon. To me there is something awfully
wrong about that, because it seems like a setup for failure. It
is blatant. Then I hear my good friend, Mr. Dinham. I listened
to what you said, but it seems as if one of the things that is
so hard, Mr. Chairman, to deal with is when you have things
that are controlled by money and money is the incentive for
doing them, it is hard to get a hold of your hands around it
and try to stop it.
In my former life as a practicing lawyer, and I saw what my
clients went through to qualify for loans, then I hear stuff
like this, how do you get to that? I know the opposite, then
you hear on the other hand the mortgage industry saying people
are not going to be able to get loans, but yet still I think it
was you who said that it becomes a nightmare. I guess in the
end what happens is the person would have been far better off
if they had never even gotten the house.
As I have said many times, we have one life to live. This
is no dress rehearsal. This is the life. Well, we just
destroyed just about somebody's life for maybe 20 years if they
ever get back to a point where they can even buy a house.
The reason why I say it is hard to get your hands around
something when it is motivated by money is because I think
coming up with the strategies to deal with it are going to be
hard because you are going to have so much opposition going in
another direction.
One of you also said something that I found very
interesting. You said that it is beginning to spread to
neighborhoods. There was a time when these issues were just in
the African American community where, you know, no big deal.
Now it is spreading beyond those communities, and, sadly, it is
sad, but in a way it may allow folks to have more umph when
more communities begin to join in, and then these other
communities that you all talked about, the ones where they are
the adjacent communities who are finding that their property
values are being affected, and maybe, just maybe, we will have
enough power with all of this going forward to do something
about it.
But what I fear is that I don't want to be sitting here
saying these same things 5, 10 years from now, because you know
what that means? That means that a whole lot of people have
lost their houses. And we don't think about the children in
these situations. The children have seen their mothers and
fathers excited about a dream, walk in the house, excited, and
the next thing you know they see that dream plummet. I don't
know what effect. I know it has a detrimental effect on them in
the moment, but it also has an effect of it puts a damper on
any dreaming that they might do. I don't even know how you put
a value on that.
So I just think that is why I was so glad, Mr. Chairman,
that you did this. I am just amazed at how this thing has a
rippling effect. We see in Baltimore where, when we have the
foreclosures, you know, folks come in like vultures, so the
next thing you know neighborhoods are changing, and a lot of
the very people who gave their blood, their sweat, their tears
for 30 years or so, stayed in the city when they didn't have
to, and now they find they have nowhere to go.
Anybody want to comment? I still have a minute or two on my
time?
Mr. Rokakis. Mr. Chairman, as you know, I came to city
government back in the late 1970's, and we dealt with redlining
issues. I will tell you this has a far more negative impact on
urban neighborhoods than redlining. I never thought I would say
I miss the days of redlining. Too much credit is far worse, and
it has emptied these neighborhoods out far faster. In a very
strange way, redlining locked people into place. This has
opened the doors and basically emptied entire neighborhoods out
past the point--and I have said it before--there is a tipping
point. There is a point at which urban communities like
Cleveland and Baltimore and Dayton can no longer afford the
cost associated with trying to bring a neighborhood back. You
hate to tell the person living in that community it is beyond
our means, but it is happening, and the tipping point has been
reached in neighborhoods all over this country. This process,
as I have said, has helped to accelerate it in a way that I
never thought I would see possible.
Mr. Cummings. What is the easiest thing you all think we
can do? I know you all mentioned recommendations, but what is
the easiest thing? We need to start with those things first.
This place is a hard place to get stuff done.
Mr. Nassar. I don't know about easy as far as the political
reality, but as far as talking about what is just sound
practice, that is bring back decent underwriting, where
basically a person is qualified to afford the payment increase,
where they don't have to refinance, at best, or foreclose once
the adjustment hits. That is just straightforward.
But it is also important to point out that steering has a
huge role here. You have a situation where so many people who
receive subprime loans should be getting prime loans, and most
of the subprime market is still a refinance market, and so that
should be kept in mind. A lot of people already have equity,
then they are losing that equity. That is just another point I
want to raise.
Mr. Cummings. Who does all the steering? The broker? I
mean, is it several people down the line and all of them get a
little piece of the change?
Mr. Nassar. Yes. I mean, the broker has a financial
incentive to put someone in a higher-priced loan than what they
qualify for. It is just plain and simple, and they get paid at
closing. Those are just the facts. I am not smirching
particular brokers.
Mr. Cummings. I understand.
Mr. Nassar. But those are the financial incentives.
Mr. Cummings. I see the chairman looking at me. I have a
yellow light, so I will stop.
Mr. Kucinich. That is fine. You may proceed. We will give
you a few extra minutes.
Mr. Cummings. No.
Mr. Kucinich. Short clock.
Mr. Cummings. No, I am fine. But I want to thank you all
very much. We are going to do everything that we can, and we do
appreciate you for being here.
Thank you, Mr. Chairman.
Mr. Kucinich. Actually, when we started these hearings and
came up with the idea for this hearing, Mr. Cummings and Mr.
Davis and other members of the committee thought that this was
so critical to proceed, based on their own experience. This is
what we are talking about. So I thank Mr. Cummings for his
participation.
What I would like to do is followup on a question that you
asked. We are calling votes, but we are going to get in a few
more questions. We are going to proceed until the end of this
panel, or 10 minutes.
I am going to ask a question, and I am going to go down the
line, starting with Mr. Rokakis. This picks up on a question
that Mr. Cummings raised. To what do you attribute the
explosion of predatory mortgage loans, just in a very short
answer. If you can say it in two words, that would be great.
Mr. Rokakis. How about unbridled greed.
Mr. Kucinich. That is two words. OK.
Ms. Killingsworth. He stole my comment. Greed.
Mr. Kucinich. Mr. Rinehart.
Mr. Rinehart. I have to agree.
Mr. Kucinich. Mr. Nassar.
Mr. Nassar. Lenders and brokers have managed ways to avoid
the repercussions and risks for bad loans and they have placed
it all on the homeowners, and there is a real breakdown in the
market.
Mr. Kucinich. All right. Mr. Immergluck.
Mr. Immergluck. Yes. De-localization of risk, the spreading
of risk to too many parties on the mortgage supply side.
Mr. Kucinich. And Mr. Dinham?
Mr. Dinham. I guess my opinion is a little different. I
think it is because of the effort to try to bring homeownership
to more people at this point is the reason you have seen the
subprime industry become so large at this point, because there
is only so many people that you can deal with.
I think, to answer your question, if we were to go back to
the days of the 1970's and 1980's where we only had fixed-rate
loans, you would understand the fact that every time you raise
the interest rate by a quarter percent you take a certain part
of the market out who cannot qualify for those loans after that
point. This has been an effort overall to bring homeownership
or give people the chance to do that. That is where we are on
this issue.
Mr. Kucinich. It is important that we hear your
perspective.
Mr. Dinham. Yes, sir.
Mr. Kucinich. One of the things that I am interested in,
and maybe you could give your perspective on this, in Cuyahoga
County, OH, foreclosures topped 1,000 a month in 2006, and they
are on a pace to top 1,200 a month in 2007. What would you say
are the major causes of this epidemic?
Mr. Dinham. That is the reason we asked for an independent
Government study. We don't know the causes at this point, but I
can tell you the traditional causes of foreclosure have always
been job loss, economy, and health and divorce is No. 3.
Mr. Kucinich. Let me ask you this.
Mr. Dinham. Yes, sir.
Mr. Kucinich. Would you agree for the committee that some
of the foreclosure epidemic is the result of borrowers being
allowed into loans that they cannot afford?
Mr. Dinham. Well, at this point, without some kind of
definition or some kind of evidence to that fact, it is hard
for me to make that claim. I mean, I cannot make that claim
that is part of the problem. That is the claim of a lot of
people on this panel, but I don't know that for sure.
Mr. Kucinich. But we are seeing a rising level of defaults,
rising level of foreclosures.
Mr. Dinham. Yes, sir, but we don't----
Mr. Kucinich. Does that tell you anything?
Mr. Dinham. That tells me that there is a problem out
there, but it doesn't tell me what the problem is.
Mr. Kucinich. But you are saying that you really can't say
that this is the result of borrowers being allowed in loans
they can't afford?
Mr. Dinham. What I can say is that there are some borrowers
that may have a problem because of that, but I can't say the
majority of your problem is caused by bad products.
Mr. Kucinich. Again, I need your perspective. Let's take
Argent, for example.
Mr. Dinham. OK.
Mr. Kucinich. They are the top lender in Cleveland for the
last 3 years. Every single loan underwritten by Argent is
originated by an independent mortgage broker. Now, this is
strictly broker-run business.
Mr. Dinham. Right.
Mr. Kucinich. Now, would you agree that Argent's
independent mortgage brokers are the only people from the
lender's side of the table that actually meet the borrower?
Mr. Dinham. Yes, sir.
Mr. Kucinich. Are the parties most likely to know if the
borrower can afford the loan?
Mr. Dinham. No, sir. I would say that Argent is the person
that is most likely to know, because they do all the
underwriting. The mortgage broker gets them into the house,
gets them into their shop and processes the paper and sends it
to Argent to be underwritten. Argent would be the one making
the final decision.
Mr. Kucinich. Well, isn't the independent mortgage broker
the one who sells the loan?
Mr. Dinham. The independent mortgage broker does get them
in there and gives them options, gives them options on what
they want at that point, and then the customer, the consumer
makes the choice of which loan product they want to go with.
Mr. Kucinich. What I would like to do is we now have a
requirement for a recess. If the panel would be so kind as to
wait for a third round of questioning, myself and other members
are certainly going to return, and I would ask if we could pick
up at this point because, again, I want to tell you that we are
grateful for the presence of everyone here, and, Mr. Dinham,
you are giving us a chance for a perspective that we often do
not hear.
Mr. Dinham. OK.
Mr. Kucinich. So we are going to recess until 5:30, and we
will come back at 5:30 with the question. I want to thank you.
We will see you at 5:30.
[Recess.]
Mr. Kucinich. The hearing will come to order.
When we recessed we were talking to Mr. Dinham, and I would
like to continue.
Mr. Dinham, you said that you don't know why so many of the
loans originated by independent mortgage brokers go to
foreclosure. Now, does anybody on the panel know? Mr. Rokakis,
do you know?
Mr. Rokakis. Mr. Chairman, there was a study done by a
group called Policy Matters Ohio on foreclosures. They have
actually done a few of them. They have been tracking
foreclosures in Ohio. They went out and surveyed all 88 county
sheriffs in the State of Ohio. Especially in smaller counties,
nobody knows better the cause of a foreclosure than the county
sheriff. Now, it may not be an issue in Montgomery, where
sheriffs are far removed from the process. They have bailiffs
and other people implementing the foreclosure, the eviction
actions. But of the sheriffs they interviewed in Ohio, the
overwhelming majority of sheriffs said that they thought the
cause, or they observed that the cause of the foreclosures in
the counties in Ohio were predatory loans. It was not illness,
it was not job loss, it was not divorce, it was subprime and
predatory lending, and it is in the Policy Matters Ohio study,
which we will make available to the committee.
Mr. Kucinich. Without objection, I would like staff to
contact Mr. Rokakis' office and get the Policy Matters study
and have it included in the record of this hearing, without
objection.
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Mr. Kucinich. Well, Mr. Dinham, let's go back to the
question just before the recess. Would you agree that Argent's
independent mortgage brokers, who are the only people from the
lender's side of the table to actually meet the borrower, the
parties most likely to know if the borrower can afford the
loan, the independent mortgage brokers, do they know if the
borrower can or can't afford the loan?
Mr. Dinham. Would I agree to that? The only thing I am
going to agree to on that is they do not make the ultimate
decision on whether the loan is approved or not.
Mr. Kucinich. Do you know anything about that process, how
it is approved?
Mr. Dinham. I know exactly how the process works. The
customer comes in, you take an application from the customer,
you get all the information and documentation you have to do,
and then you submit that information to the lender for
approval, underwriting approval, and then they send it back
normally with some additional conditions or they can't make a
decision right off the bat, and then you send those additional
conditions in and they give you what I always call a firm
commitment that says they are willing to make that loan.
Mr. Kucinich. So you are saying the independent mortgage
brokers don't make a decision?
Mr. Dinham. I am saying they do not make the decision on
whether the loan is approved.
Mr. Kucinich. So they are like salesmen?
Mr. Dinham. But it goes deeper than that.
Mr. Kucinich. Yes.
Mr. Dinham. The people that have put these products out are
the people on Wall Street. Wall Street is the one that has
these products out here. Argent really is passing these
products along to Wall Street, and the people at Wall Street
are the people making the rules on what the rules are to get
that loan approved.
Mr. Kucinich. So these subprime loans which are very risky
for those that are engaging in them, you are saying that you
have to follow the system----
Mr. Dinham. Yes.
Mr. Kucinich [continuing]. From the borrower to the agent,
independent broker----
Mr. Dinham. Right.
Mr. Kucinich [continuing]. To the company?
Mr. Dinham. Right.
Mr. Kucinich. And then you have to go back to Wall Street?
Mr. Dinham. Yes, because Wall Street is where it all
starts, and we all know that Wall Street is not used to losing
money on things, so they are making money on what is going on
at this point, and they still are. So even while the consumer
is suffering maybe because of some of these foreclosures they
are doing on this, they are still not losing their money at
that point, and that is part of the reason that you are seeing
these lenders, mortgage bankers, whatever you want to call
them, closing their doors today, is because Wall Street is
coming back to them telling them they need to repurchase these
loans.
But the mortgage broker is not out there----
Mr. Kucinich. At a higher rate of interest?
Mr. Dinham. At a higher interest rate?
Mr. Kucinich. They need to repurchase the loans?
Mr. Dinham. No, they just buy them back. In other words,
what happens is they put them in a pool, they go up there, and
they are part of a million dollar pool.
Mr. Kucinich. Would you say there is any fraud that is
involved here in origination so you have so many bad loans? Is
there incompetence or something else? What do you think it is?
Mr. Dinham. Well, I think I have testified that I don't
know what it is at this point that is causing the problems in
Cuyahoga County. I don't know.
Mr. Kucinich. In 2005 the No. 1 lender of foreclosed
properties up for sheriff's auction in Cleveland was Argent. I
am talking about Argent because I know what is happening in
Cleveland. So in Ohio it takes about 18 months to 2 years for a
foreclosure to go to sheriff's sale. Argent only entered the
market in 2003. This means that a lot of Argent's loans
immediately went to foreclosure. They were bad loans the day
they were written, and independent mortgage brokers wrote every
one of them. So how could you explain that?
Mr. Dinham. I can't explain that particular question, but I
will tell you, if you are having loans that are defaulting in
the first month, 90 days, or 6 months, there is fraud involved
in the deal or poor underwriting. That is the only reason.
I don't disagree with what you are saying. I cannot tell
you what the exact reason is it is going on and how----
Mr. Kucinich. Is there a permanent record of the identity
of independent mortgage brokers on each loan that he or she
originates?
Mr. Dinham. Not in Texas. No, sir, I don't believe. I don't
know what the rules are in Ohio.
Mr. Kucinich. Do these independent mortgage brokers' name
or address even appear on the loan?
Mr. Dinham. Yes, sir.
Mr. Kucinich. Now, how can a borrower and a lender or the
investor, if a loan has been pulled, with thousands of other
mortgages securitized and held by a large investor, how can
they know whose bad judgment resulted in a bad loan?
Mr. Dinham. That is a very hard question to answer, because
the person that made the rules were the people on Wall Street,
which were given to the people that purchased it from the
broker. That was Argent in this case you are talking about. So
Argent is the one that made the decision to make that loan.
Mr. Kucinich. You know, staff just pointed out something
that I think is worth mentioning, and that is that stock
brokers, for example, have a fiduciary responsibility.
Mr. Dinham. Yes.
Mr. Kucinich. Trustees for estates have a fiduciary
responsibility. Professional financial advisors have a
fiduciary responsibility. Guardians have a fiduciary
responsibility. Do you think if independent mortgage brokers
had some kind of a fiduciary responsibility here this could
tighten this up a little bit?
Mr. Dinham. No, sir.
Mr. Kucinich. Why not?
Mr. Dinham. Because I think it is awfully hard for a
mortgage broker, as an independent contractor dealing with
several lenders, to have a fiduciary responsibility or a
responsibility because they are under contract with lenders
also at this point, so it is hard to serve two masters. In
other words, in Texas we are required to tell the borrower at
the time of application what our relationship is going to be to
the borrower. They are told at the very beginning that we are
not agents of the borrower at this point. I don't think that is
going to solve your problem by making everybody a fiduciary.
And if you do that, then you need to add everybody, all
mortgage originators, not just brokers. You add the whole group
in there.
Mr. Kucinich. I mean, that seems like a good
recommendation.
Mr. Dinham. Because we are for all mortgage originators
being licensed. We are for all of them having background
checks. We are for all of them having education, continuing
education, including the banks at this point. so we would
really like to see that.
Mr. Kucinich. Given that, as you put it, that borrowers or
that brokers do not have a fiduciary responsibility at this
point, do you think that borrowers should be able to trust
brokers to bring them the best loan?
Mr. Dinham. Well, the facts speak for themselves. Depending
on who you talk to, they say that we do over 50 percent of the
business on a regular basis. Do you think that the consumers
would continue to come back to us if--in other words, we have
to live on referrals. In other words, you don't go out and
solicit new business every time, so you are living on referrals
at this point. I really think that without those we wouldn't be
doing as much business as we are. So the consumer believes that
we are giving him a good deal.
Mr. Kucinich. But do they have a choice, though? Do these
consumers have a choice?
Mr. Dinham. Sure they have a choice. That is one of the
things we really like to see them do is to shop. That is one of
the problems. They mentioned steering on here before.
Mr. Kucinich. Yes.
Mr. Dinham. Steering people into a particular loan? The
fact of that is if they had gone out and shopped at two or
three different places, they couldn't have been steered into
anything.
Mr. Kucinich. OK, but let me ask you this: do consumers
have a choice, let's say, that vary in price, or does the
broker present the consumer with one loan which the broker
tells the consumer is the best for him? How does the broker----
Mr. Dinham. I can't speak for every broker. I can tell you
what I do. I normally give them three choices of what they
would like to do. What normally will happen is you will have
somebody call you up on the phone and say would you send me a
good faith estimate with your cost on a particular loan
product.
Mr. Kucinich. Is a fee a percentage of a loan?
Mr. Dinham. Sir?
Mr. Kucinich. Is the fee----
Mr. Dinham. Yes, sir.
Mr. Kucinich [continuing]. Based on a percentage of the
value of the loan?
Mr. Dinham. Right. Yes, sir.
Mr. Kucinich. So if the value of the loan is a function of
appraised property, what efforts do independent brokers make to
make sure that an appraiser has made a correct appraisal,
rather than an inflated price to justify a loan?
Mr. Dinham. That is another function of underwriting.
Underwriters make the determination based on the comparables
and the information provided on the appraisal whether the
appraisal is accurate. If they don't like it, they also have
the option to go out and get an independent application at that
time. So the underwriter is the actual person that makes those
decisions.
Mr. Kucinich. Have you ever heard of any brokers who would
choose appraisers who would inflate house values?
Mr. Dinham. Only if they wanted to commit fraud.
Mr. Kucinich. Does it happen?
Mr. Dinham. Yes, it does. I am sure it does, because there
have been court cases where it has happened. But I will say
this, too, that any industry has some bad actors in it, and at
least these are being caught. In fact, in Texas we are working
on a fraud bill which will go a little further to stop these
things.
Mr. Kucinich. How long have you been doing this?
Mr. Dinham. Since 1967.
Mr. Kucinich. Let me ask you something. I imagine after a
while you know the business so well that you can go and you can
be talking to someone and kind of guess if they are going to be
able to make this financial deal happen. Have you ever had a
case where you told someone I can't do this, I can't loan you
the money?
Mr. Dinham. Yes, I have.
Mr. Kucinich. What are the circumstances under which that
happens?
Mr. Dinham. Well, they don't qualify for the loan. They
don't meet the guidelines at that point. In other words, you
turn them down if they don't qualify.
Mr. Kucinich. How do you suppose, then, if that is the
way----
Mr. Dinham. It is a lot easier today than it used to be.
There was a time before the invention of the automated
underwriting system where I could just take an application and
tell you whether somebody would be approved or not at that
point.
Mr. Kucinich. Right.
Mr. Dinham. Today, with automated underwriting, you don't
dare do that because we have computers out there that are
making some of the decisions, and after those decisions are
made you have to get the requirements along with that and send
them to the investor for the final approval.
Mr. Kucinich. Do mortgage brokers write no-doc loans?
Mr. Dinham. I am sure they do. Yes, sir.
Mr. Kucinich. OK. Again, you are very helpful in describing
how it works, and I think that as we work to develop some
alternatives and some legislative remedies, I think it will be
very important to hear from the mortgage brokers to make sure
that, as you put it, everyone ought to be covered.
Mr. Dinham. That is correct.
Mr. Kucinich. If someone is going to try to put some
guidelines into law, then it ought to be expanded so that you
are not the only one that is covered.
Mr. Dinham. That is correct.
Mr. Kucinich. Because, as you pointed out, this goes all
the way to Wall Street.
Mr. Dinham. Yes it does.
Mr. Kucinich. It is very important for you to be here to
say that.
Mr. Turner, do you have any questions you want to ask?
Mr. Turner. Not at this time.
Mr. Kucinich. We are going to go to that second panel
momentarily.
Mr. Davis, do you have any questions you want to ask?
Mr. Davis of Illinois. Mr. Chairman, I have no further
questions.
Mr. Kucinich. I want to thank all of you for participating
in what has been one of the most comprehensive discussions we
have had on this subject of foreclosures, subprime loans, the
industry, how this all fits together. Each one of you has made
a contribution to this discussion, and your very presence here
and your testimony will enable this committee to make
recommendations to the Congress about the direction that we can
take to remedy some of the abuses that are present. I want to
thank each of you for your participation.
The first panel has now been completed, and we will ask the
second panel to prepare to testify.
Thank you.
At the request of Congressman Turner, we have added Mr.
McCarthy to the panel. Welcome.
I would like to thank all of the members of the second
panel for coming forward. This next panel concerns payday
lending and alternatives to payday loans.
Before we begin, I would like to ask that we watch a video,
a short video, about one woman's experience with payday lenders
and how she broke the cycle with the help of an alternative
created by one of our witnesses.
[Videotape presentation.]
Mr. Kucinich. Thank you very much.
I would like to take the liberty of further introducing a
member of the panel who was part of this solution, and that was
Mr. Ed Jacob, who is the manager of the Northside Community
Federal Credit Union, a 33-year-old community development
credit union with assets of $8 million. The credit union is a
certified CDFI. It has a low income service designation from
the National Credit Union Administration.
Northside offers checking and savings accounts, ATM cards,
small consumer loans, Visa credit cards, new and used auto
loans, as well as home equity and home mortgage loans. It
provides an alternative to the payday and predatory lenders who
take advantage of low income people to its 4,000 members. Prior
to leading the credit union, Mr. Jacob was a vice president of
the Community Reinvestment Department for Bank One Corp. and
its predecessor banks, First Chicago and First Chicago NBD,
where he was responsible for Illinois programs.
Rita Haynes is joining us. Rita Haynes is the CEO of the
Faith Community United Credit Union in Cleveland, OH, and
chairwoman of the Board of National Federation of Community
Development Credit Unions. Faith is a community development
credit union established in 1952. Ms. Haynes also served as the
chairwoman of the National Federation of Credit Unions. Faith
is based on the faith and vision of the members of the Mt.
Sinai Baptist Church. Ms. Haynes is a recipient of the Peak
Career Lifetime Achievement Award of the African American
Credit Union Coalition. Welcome.
David Rothstein is a researcher at Policy Matters Ohio. Mr.
Rothstein researches tax, wage, and consumer policy, including
the earned income tax credit, the living wage, and predatory
lending. Policy Matters Ohio is a nonprofit policy research
organization founded in January 2000, to broaden the debate
about economic policy in Ohio. Policy Matters Ohio provides
analyses focused on issues pertaining to low and middle-income
workers in Ohio. It makes its findings accessible to the
public, the media, and to policymakers.
Ms. Fran Grossman is the executive vice president of
ShoreBank Corp. ShoreBank is a community development and
environmental bank serving Chicago, Cleveland, and Detroit.
Established in 1973, ShoreBank has been a pioneer of economic
equity. ShoreBank was created to demonstrate that a regulated
bank could be instrumental in revitalizing the communities
being avoided by other financial institutions based on racial
and economic discrimination. In 2000, ShoreBank expanded its
focus to include environmental issues, believing that
communities cannot achieve true prosperity without also
attaining environmental well-being.
Jean Ann Fox serves as a director of consumer protection
for the Consumer Federation of America and leads the
organization's efforts to assure that the privacy rights of
American consumers are protected, whether it is in the
traditional or the electronic marketplace. She has extensive
experience in representing consumer interests in privacy-
related policy issues.
The Consumer Federation of America [CFA], is an advocacy,
research, education, and service organization. As a matter of
fact, I believe my good friend, Senator Metzenbaum, has had a
long association with the Consumer Federation of America. The
CFA has provided consumers a voice in decisions that affect
their lives. The CFA's professional staff gathers facts,
analyzes issues, and disseminates information to the public,
policymakers, and the rest of the consumer movement.
I want to thank all of you for being here. Also, I am going
to introduce Mr. McCarthy, who is part of this panel.
Mr. Jim McCarthy is the president and CEO of the Miami
Valley Fair Housing Project, which seeks to eliminate housing
discrimination. In furthering this goal, the Miami Valley Fair
Housing Project engages in activities designed to encourage
fair housing practices through educational efforts, assists
persons who believe they may have been victims of housing
discrimination, identifies barriers to fair housing in order to
help counteract and eliminate discriminatory housing practices,
works with elected and governmental officials to protect and
improve fair housing laws, and takes all appropriate actions
necessary to ensure that fair housing laws are properly and
fairly enforced through the Miami Valley. Mr. McCarthy is one
of the architects of the Predatory Lending Solutions Project, a
project that addresses the epidemic problem of predatory
mortgage lending in Montgomery County, OH.
Thank you to all members of the panel.
Mr. Turner. Mr. Chairman, if I might, I just want to thank
you. As you know, Mr. McCarthy was on your third panel, and I
appreciate you putting him on the second. His topic is not
payday lending, but is predatory lending. They are an
organization that has been instrumental in trying to address
both education on predatory lending and assist those who have
been victims, so thank you for including him.
Mr. Kucinich. And also, in deference to Mr. Turner, Mr.
Turner wants very much to be here while the gentleman who he
has worked with testifies, so in deference to my colleague what
I am going to do is just announce the order of speakers. All of
this will go into the record. I just want to facilitate Mr.
Turner's schedule here. Jean Ann Fox will go first, then Mr.
McCarthy, Ms. Haynes, Mr. Jacob, Mr. Rothstein, and Ms.
Grossman. That will be the order.
Mr. Turner. Thank you.
Mr. Kucinich. OK. Thank you.
As with panel one, I am going to ask that all the witnesses
rise and raise your right hands.
[Witnesses sworn.]
Mr. Kucinich. Thank you. Let the record reflect that all of
the witnesses answered in the affirmative.
As with panel one, I am going to ask that each witness give
an oral summary of his or her testimony and to try to keep the
summary within our 5-minute time period. I want you to bear in
mind that your complete written statement will be included in
the hearing record.
Let's start with Jean Ann Fox. Again, thank you. Please
proceed.
STATEMENTS OF JEAN ANN FOX, CONSUMER FEDERATION OF AMERICA,
WASHINGTON, DC; RITA L. HAYNES, CEO, FAITH COMMUNITY UNITED
CREDIT UNION, CLEVELAND, OH; ED JACOB, NORTHSIDE COMMUNITY
FEDERAL CREDIT UNION, CHICAGO, IL; DAVID ROTHSTEIN, POLICY
MATTERS OHIO, CLEVELAND, OH; FRAN GROSSMAN, SHOREBANK CORP.,
CHICAGO, IL; JIM MCCARTHY, PRESIDENT, MIAMI FAIR HOUSING,
DAYTON, OH
STATEMENT OF JEAN ANN FOX
Ms. Fox. Thank you, Chairman Kucinich and members of the
committee. I represent Consumer Federation of America, but I am
also testifying today on behalf of Consumers Union, publisher
of Consumer Reports, and the National Consumer Law Centers on
behalf of their low income clients.
I have worked on studying the high cost small loan market
now for my 10-year career at CFA, and we have published
numerous studies and reports about payday lending. I can assure
you that this is a national predatory lending problem for
consumers. Payday lending is legal in 39 of the 50 States, and
it is a $5 billion cost to American consumers for about $28
billion worth of very small loans every year. This is based on
a study done by the Center for Responsible Lending, which sets
a more conservative figure on this industry than industry
investment advisors do.
Academics tell us about 5 percent of the population uses
payday loans which are made through about 25,000 storefront
outlets around the country and are available online, as well.
These are small cash loans that you take out by writing a
personal check on your own bank account or signing over
electronic access to your bank account for the amount you want
to borrow. It tends to be $300, $500, certainly less than
$1,000.
The cost of the loans is expressed by the industry as
dollars per hundred, so they will say they charge $15 per $100
or $20 of $25 or $30. The annual percentage rate for a 2-week
loan runs at 390 percent and up. These are balloon payment
loans. They are due in full on your next payday or the check
that you wrote and left behind with the lender will be
deposited in the bank. It is likely to bounce, because a family
that can't make it to payday without borrowing a few hundred
dollars at 400 percent interest is hard pressed to have enough
money in the bank to cover the check on payday, and then the
payday lender will charge you a bounced check fee, as well as
your bank, each time that transaction is presented.
These loans are made without asking the kinds of questions
that let you determine ability to repay. Just as you heard with
the mortgage issue, payday loans are made without pulling a
credit report, without asking who else you owe or how much you
owe. All you have to have is an open bank account, a source of
income, and a form of ID. Every payday loan is based on a
prospective bad check, so these loans put bank account
ownership at risk. And they function as the modern day
equivalent of wage assignments, and that form of lending was
ruled years ago by the Federal Trade Commission as an unfair
trade practice. Our modern equivalent today is you write a
check on your account that you expect to have covered by the
deposit of your next pay check in order to repay the loan.
We view these loans as predatory. As we have mentioned,
they are made without regard to the leader of pay. They are
exorbitantly expensive. They are too big to be repaid in one
balloon payment. A $500 cap is typical for State payday loan
laws, and the average customer makes about $24,000 a year, so
these are low to moderate-income borrowers.
So if you are borrowing $500 plus the $75 to $150 finance
charge that has to be repaid on your next payday, if you are in
that average income range you are agreeing to pay 75 percent of
your take-home pay to keep that check from bouncing to get that
loan paid. Not very many middle class people pay a lot more
than the minimum payment on their credit card, but we expect
payday loan borrowers to pay it all back on their next payday.
If this is an electronically processed loan, we have heard
testimony that the debt is presented over and over, each time
triggering a bounced check fee. There was testimony before the
Senate Banking Committee last fall of a service member whose
Internet lender bounced electronic payday loan 11 times in 1
day.
Given these loan terms and the lack of underwriting, it is
no surprise that these loans create a debt trap for cash-
strapped families. This data on what is going on in this
industry comes from regulators. The Colorado Attorney General's
office has been collecting data for years from loan
applications. They tell us that 60 percent of the borrowers
come from the lowest three income brackets, that they make
around $25,000 a year. Other States have even lower incomes.
These are minority borrowers, as well.
A North Carolina academic study found that African American
consumers are twice as likely to use them. A study in Texas of
145,000 customers showed that, although African American
consumers make up 11 percent of the adult population in Texas,
33 percent of the payday loan borrowers are African American
consumers. As Representative Issa pointed out, they cluster
around military bases. They also cluster in minority
neighborhoods and low to moderate-income high traffic
commercial areas.
The proof of the debt trap is that the average borrower has
8 to 13 loans per year. These are not one-time emergency loans
when your car breaks down. This is perpetual debt.
We think that Congress needs to step in here, because the
States have failed to protect consumers. We would urge you to
enact legislation to prohibit basing loans on a personal check
written on a federally insured depository account or mandatory
electronic access to the account, and to amend the Electronic
Funds Transfer Act to extend the prohibition against
conditioning credit on electronic payment to the single payment
loan. Lenders can't make you pay it back electronically if it
is a periodic payment loan. We need the same protection for the
single payment loans.
And, of course, we need for you to close once and for all
the rent-a-bank tactic that has been used in the past by
lenders to evade State law by partnering with a bank. It has
been stopped by the bank regulatory agencies for now, but we
need to have that as a matter of law.
I would be glad to answer any questions. Thank you.
[The prepared statement of Ms. Fox follows:]
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Mr. Kucinich. Thank you very much for your testimony.
Mr. McCarthy.
STATEMENT OF JIM MCCARTHY
Mr. McCarthy. Thank you.
Mr. Chairman, Congressman Turner, and members of the
subcommittee, I appreciate this opportunity to discuss the
subprime lending problem as faced by borrowers and ways in
which the cities are affected by the rise in foreclosures.
My name is Jim McCarthy and I am president and CEO of the
Miami Valley Fair Housing Center. I also currently serve as the
Chair of the Board of Directors of the National Fair Housing
Alliance, which is based here in Washington, DC, and is a
consortium of more than 200 private, nonprofit fair housing
organizations, State and local civil rights agencies, and
individuals from throughout the country.
Since 2001, my agency has been implementing the Predatory
Lending Solutions Project in Montgomery County, OH. Through the
PLS Project, we assist residents of Montgomery County by
providing outreach and education on the dangers of predatory
mortgage lending and providing intervention and rescue services
to the victims of predatory mortgage lending.
Fair housing enforcement is the most important fair housing
issue facing our Nation; however, there is no strong commitment
by the Federal Government to enforce the fair housing laws that
we have. Fair lending, which is covered by the Fair Housing
Act, is a key part of ensuring equal housing opportunity in our
communities.
While the subprime lending market offers credit to high-
risk borrowers at higher interest rates and fees, some lenders
have capitalized on this extension of credit by steering
vulnerable individuals, often on the basis of the borrower's
race, ethnicity, age, or gender, to take loans whose terms they
cannot possibly repay, and thus are not suitable to the
borrower.
This practice of predatory lending is a serious fair
housing concern. Our work suggests that homeowners were
targeted by subprime lenders because they had significant
equity in their homes, and their credit needs have been ignored
by depository lending institutions. So the same neighborhoods
that have been subjected to years of homeowner insurance
redlining and mortgage lending redlining have now also been
targeted as vineyards ripe for harvesting of the hard-earned
equity in their homes.
This is having a devastating effect on our cities and our
counties. In the past 6 years, the number of mortgage
foreclosure filings in Montgomery County has more than doubled.
In 2006, we had in excess of 5,075 mortgage foreclosure
filings, which accounted for approximately 50 percent of all of
the civil actions filed in Montgomery County Common Pleas
Court.
Fair housing and consumer advocates have been sounding
warnings regarding Ohio's subprime lending and foreclosure
problems for years. In Ohio, foreclosed-upon homes often sit
vacant for months or years, and once they are abandoned by
their homeowners they become a huge cost to society.
The costs of abandonment are enormous. Even one or two
abandoned properties force neighbors to tolerate eyesores that
attract crime, arson, vermin, and dumping. Derelict buildings
present safety and fire hazards, reduce property values, and
degrade community quality of life. But perhaps most importantly
it erodes the tax base and it inhibits the municipalities from
providing basic services that we all expect, like police, fire,
and schools.
Since the launch of our project, the need for our services
has far exceeded our capacity to provide the services with the
limited resources available. For those clients that we are able
to assist, given our resources, we have been exceedingly
successful in keeping them in their homes and getting them into
appropriate loan products.
I would like to share with you just a few of those real
quickly.
In one case we had a caucasian American married couple with
adult children who were living outside of the home. When they
came to us, their original loan amount was for $144,500. The
value of their home, according to the Montgomery County
auditor, was $97,470. Their interest rate on their original
loan was 10 percent. We negotiated a short payoff to the
offending lender for $89,600 and secured refinancing for the
clients on a loan amount of $92,600 at a 6.375 fixed interest
rate for 30 years. What is important to know is that in order
to accomplish that it took us 113.5 staff hours.
One more example is an African American single female with
three children who we assisted. Her original loan amount was
$80,992.80, with an 11.051 percent interest rate and a monthly
payment of $796.84. Her monthly payment did not include escrow
or taxes and insurance. We negotiated a short payoff with the
offending lender and secured refinancing for the client on a
loan amount of $53,300, which is what the house was valued at,
with a 6.5 percent interest rate fixed for 30 years and a
monthly payment of $336.89, which included an escrow for her
insurance and taxes. The staff time required to resolve this
case was 124.5 hours.
As the work of our project clearly demonstrates, when
consumers have effective advocates who are armed with the
appropriate time and resources, intervention that keeps the
homeowners in their homes and paying their mortgages is
possible. Our clients are not deadbeat mortgage borrowers. They
are hard-working individuals and families who are chasing the
American dream of homeownership as it has been marketed by some
of the largest and most wealthy residential mortgage lenders
and brokers in the United States.
No matter what regulatory or legislative steps are taken to
address the problem of predatory mortgage lending and its
subsequent foreclosures, there absolutely must be resources
designated to provide for legal and advocacy assistance to
those individuals and families who have already fallen victim
to some of the most pernicious practices ever seen in the
residential lending market.
There is one other thing I wanted to say about legal
representation, and that is our legal aid society can't help
these folks. These are not folks who qualify at 100 percent of
poverty, 200 percent of poverty, or 300 percent of poverty.
These are folks who own their home, usually outright, and are
working people who are just trying to improve their standard of
living and make sure they have something to pass on to their
children.
Legal Services Corp. is a great function, but they can't
help these folks because of the constraints on who they are
able to assist.
I would like to end by saying there are a couple of
recommendations that Congress should implement and/or oversee.
Congress should allocate at least $26 million to HUD's fair
housing initiatives program in order to increase the education
and enforcement efforts on the part of local fair housing
organizations. Fair housing organizations, when properly
funded, can serve as the infrastructure through which a lot of
this could be addressed.
Congress should support and pass anti-predatory lending
legislation that contains the following provisions: effective
rights and remedies, prohibitions against steering, a
suitability standard, designating high cost as including all
the loan fees, no Federal preemption, and an advanced
disclosure of all the costs and fees.
Congress needs to create a rescue fund to help people who
have received discriminatory loans, predatory loans, or loans
that were not suitable for their situations to convert those
problematic loans into appropriate loan products.
And Congress should require Federal Government agencies,
including HUD, the Department of Justice, and the Federal Trade
Commission to undertake more aggressive, effective, and
expansive fair lending enforcement activities. These agencies
should consult with experts in fair housing enforcement and the
organizations who provide it so that the Federal examination
and enforcement programs best reflect the practices and state-
of-the-art investigation techniques and litigation strategies
that are being realized in private lawsuits that are being
brought by fair housing agencies.
Thanks again for the opportunity. I am ready for any
questions.
[The prepared statement of Mr. McCarthy follows:]
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Mr. Kucinich. Thank you very much.
Ms. Haynes.
STATEMENT OF RITA HAYNES
Ms. Haynes. Thank you, Mr. Chairman and to the committee.
My name is Rita Haynes, and I am the manager/CEO of Faith
Community United Credit Union in Cleveland, OH, and I am past
chair of the National Federation of Community Development
Credit Unions.
Faith Community Development Credit Union, popularly known
as Faith, is a community development credit union with 6,000
members and approximately $10 million in assets. We are a
certified CDFI, chartered in the State of Ohio to serve anyone
who lives, worships, or works in Cuyahoga County.
In the credit union's 55 years of operation, Faith has been
in the forefront of creating and implementing financial
products and programs that assist lower-income residents in
building wealth. One of our more successful products is the
Faith-developed Grace loan. The Grace loan is an alternative to
the predatory payday loan initiated in 1999 to combat the flow
of our membership to predatory payday lenders who moved into
our area when most banks vacated the inner city.
In our research, we found that our members needed a product
that was fast, simple, and a convenient way to obtain cash when
an emergency arose. We named our product the Grace loan because
it is based on unmerited favor, and therefore no credit report
was required.
The payday lenders require a pay stub and a post-dated
check. We disagree with this. In our financial literacy
training, we have taught against using an instrument that was
basically no good.
Since our electronic records detailed the information that
we received from the member's application, no check is required
for the Grace loan. This shortens the time and simplifies the
process.
The Grace loan requires that a resident have a share
account of at least $50 and an electronic deposit to their
transactions or savings account for 3 months before they can
apply for a Grace loan.
Whereas the payday lenders charge an application fee of
$17.50 to $22 per hundred, we charge a flat $15 application fee
for up to $500, which must be paid in advance. By not financing
the application fee, the member receives the full amount that
they borrowed.
After explaining to them that they are saving $72.50 to
$95.00 in fees, we get their commitment to save at least $10
with the repayment of their loan, that they must leave in a
savings account for at least a year. The Grace loan must be
repaid in full with a 17 percent interest rate, which averages
around $7 for 30 days on a $500 loan. Payments can be paid in
one or four payments within a month, depending on their pay
cycle.
We will allow up to 12 loans a year, but we try to wean
them off of this product by lowering the amount they get
monthly or skipping a month to only use this product when it is
truly an emergency.
After a year of positive history, members can apply for a
regular loan at a lower interest rate or an amazing Grace line
of credit, which requires less paperwork. The member's credit
history is reported to the credit bureau in either case.
In 2006 we made 2,023 Grace loans totaling $697,755, and we
only charged off seven loans totaling $1,922.53.
Here is what some of our members have said about our
program: ``I have saved money without even using checks, and I
have also improved my credit history with Faith.''
``When it came to repairing my car to get to work, I had no
choice but to borrow before payday. I am so glad the Grace loan
was available.''
``It was worth using my Grace line of credit when I ran
short to pay my mortgage on time, avoiding the $55 late charge
and damaging my credit.''
I thank this committee for this opportunity to testify, and
I would be happy to answer any questions that you might have.
[The prepared statement of Ms. Haynes follows:]
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Mr. Kucinich. Thank you very much. I would like to say that
we are in the middle of another vote. We are going to recess
until 7. I would appreciate it if you can remain.
Is there any witness here who has to catch a plane right
now? Sir, what time is your flight?
Mr. Jacob. It is at 7:55.
Mr. Kucinich. I am going to ask Mr. Jacob, why don't you
testify right now? Why don't you testify, and then you can go.
I am going to ask Mr. Jacob if he could testify briefly, and I
am going to invite the gentleman from the other panel to come
forward and we will swear you in. This has been an
extraordinarily long day. Some of you came in around noon. I
don't want you to miss your flight, so let's see if we can all
accommodate each other here, and then I will dash. Congressman
Davis, I will be shortly behind you.
If you could proceed, Mr. Jacob, and if you could keep your
testimony a little bit limited we will get it on the record. We
will put your full statement in.
STATEMENT OF ED JACOB
Mr. Jacob. Thank you, Chairman.
Chairman Kucinich, members of the subcommittee, I
appreciate the opportunity to testify today. You will hear from
others about the payday lending industry. I would like to focus
in on our product, our payday alternative loan [PAL].
We developed this loan in mid-2002, and we did that as a
result of the story that you saw in the video with one of our
members. We received support for this product from the National
Credit Union Administration. They were very supportive, both on
the regulatory and examination side, and also from the CDFI
fund of the U.S. Department of Treasury.
We structured our loan as a $500 loan, 16.5 percent,
payable over 6 months. The reason we structured it as a term
loan is, as Congressman Cummings noted earlier, the payday
lending industry really structures their loan in a way to
encourage rollovers, in a way that is really not able to be
repaid in 2 weeks or in 1 month. The goal is to bring new
members into the credit union.
We have made over 4,200 of these loans over the last few
years, totaling over $2 million. To date we have had to charge
off about $140,000, or about 6 percent of these loans, and our
60-day delinquencies are about 5 percent. While this is higher
than the rest of our portfolio, it is manageable for us and
sustainable in that way.
There are other financial institutions that are offering
alternatives to payday loans, to which I say the more the
merrier. I don't want to corner this market. The more banks,
the more credit unions that are involved in this, certainly the
better, including Southside Community Federal Credit Union in
Congressman Davis' District is offering an alternative product.
We have learned three lessons from our work in this area.
First, in general, the product is not used for one-time
emergencies. You will often hear the stories from the payday
lenders about somebody's car breaking down and they need to fix
their car to get to work. Our experience is that these are
people who are living paycheck-to-paycheck, week-to-week,
really in some cases living a week-before-paycheck-to-week-
before-paycheck. That is why the traditional payday loan is so
destructive. There is no way for them to get out of that cycle
of debt, and so they continue to roll it over.
The second thing that we have learned is an issue of
profitability. We structure this product to be sustainable, not
a profitable product but a sustainable product, and we have
gotten to the case where that is the case for us now. One way
to certainly increase the sustainability is to reduce the
transaction cost, and there are banks that are larger than I am
and credit unions that are larger than I am that can use
technology and other ways to cut the transaction cost.
The second thing is to view profitability on a relationship
basis. The individual who comes in and joins the credit union
to take out a payday alternative loan will later be with us
when they need an auto loan or when they need the mortgage
loan, and we need to view profitability on a longer timeframe
than just that one initial loan.
So far we have made over 150 loans totaling over $600,000
to what we call PAL graduates, people who started out with a
payday alternative loan and graduated to larger loans with us.
I don't want to be the cheapest payday lender. That is not
why I am in business. In some ways the most important
difference between the work we do and Ms. Haynes does and a
payday lender is that we want to move people out of these
products. We don't want them stuck in an endless cycle of debt
with us, and that is the important thing.
You saw the story of the woman who is a member of ours who
paid $3,000 to borrow $3,000. Every dollar that she paid to a
payday lender is a dollar that was drained from our community.
For the 4,200 payday alternative loans we have funded so far,
our members have saved over $3 million compared to traditional
payday loans.
I am a small $8 million credit union sitting on the north
side of the city of Chicago, and I have saved my community $3
million. If I can do that from my 2,500 square foot location on
the north side, think what other larger banks with better
technology, better knowledge, better expertise can do. I
encourage other traditional financial institutions, good
financial institutions to get into this marketplace.
Thank you very much.
[The prepared statement of Mr. Jacob follows:]
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Mr. Kucinich. Thank you very much, Mr. Jacob. Your full
statement will be in the record, as well as a transcript of the
video. We are very grateful. If you wish to leave right now so
you can get your flight, you certainly have permission of the
Chair.
I want to ask Mr. FitzGibbon to come forward.
[Witness sworn.]
Mr. Kucinich. Let the record reflect that the witness
answered in the affirmative. You may proceed.
STATEMENT OF THOMAS FITZGIBBON, JR., MB FINANCIAL BANK,
ROSEMOUNT, IL
Mr. FitzGibbon. Thank you very much.
Just a quick briefing. I am the executive vice president of
a commercial bank that is traded on the NASDAQ Stock Exchange.
We are an $8.3 billion bank. But my love is in community
development. I head up the Community Development Corp. for the
bank and am very active in community development activities,
including being chairman of the NHS of Chicago and several
other nonprofit organizations.
With that as a background, with my testimony in writing in
place here, you asked about and Congressman Davis asked about
resolutions. I think there are some things.
I served for 3 years on the Consumer Advisory Council to
the Board of Governors to the Federal Reserve during the time
up until 2004, when they were exploring ways in which they
could change, amend the rules for CRA. Out of that came a lot
of controversy with the OTS going off on its own to come up
with its own rules, and several other controversial things that
went on for years after that.
The real challenge here is that we have a dual financial
system here. We have financial feed, if you will, in this
country, with the wholesale or limited purposes banks that are
allowed to do certain things that suck deposits out of markets
where those deposits are needed by the regulated depositories
to put into work in our communities. That needs to be changed.
We need to work on that.
That discussion and debate went on for 3 years while I was
there, and no real resolution came out of it. We need to get
back to that CAC and tell them they need to come back with some
more look at that wholesale unlimited purpose charter that is
out there.
I have not seen one single community development investment
or deal that has been done by ING Direct in Chicago while we
hear the sucking sound of deposits going out of that market.
[The prepared statement of Mr. FitzGibbon follows:]
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Mr. Kucinich. What I would like to do is to ask staff if
you would be in touch with the witness so that we can get these
observations, Mr. FitzGibbon, because it is very valuable to
hear that because of the position you are holding in the
industry.
I would like to say this. I must leave immediately to get
to vote.
Mr. FitzGibbon. No problem.
Mr. Kucinich. There are votes on the floor. I am going to
declare the committee in recess until 7:05, at which time we
will continue with the testimony. I am very grateful.
Mr. FitzGibbon. That is OK. Let me ask one more thing. The
Alternative Mortgage Instrument Parity Act, you need to look at
that. That is another instrument and a congressional act that
in the 1970's, which supersedes State law and allowed these
alternative mortgage instruments to be done. That is another
way in which you can deal with it. OK?
Mr. Kucinich. Thank you very much. We are in recess until
about 7:05. Thank you.
[Recess.]
Mr. Kucinich. The committee will resume.
We will pick up with Mr. Rothstein. I want to thank all the
witnesses for their patience in remaining through these series
of votes and say that after this panel and a period of
questioning we will go to the other representatives who are
here. Thank you so much for participating in this discussion
and being willing to wait through this very long day here.
Mr. Rothstein, please proceed.
STATEMENT OF DAVID ROTHSTEIN
Mr. Rothstein. Thank you.
Chairman Kucinich, distinguished members of the
subcommittee, thank you very much for the opportunity to appear
before you today. I am David Rothstein, a researcher with
Policy Matters Ohio. We are a nonprofit, nonpartisan
organization that provides research on economic issues that
matter to low and moderate income working families in Ohio.
We appreciate your invitation today to discuss our recent
research on payday lending in Ohio. The economic situation for
many of Ohio's workers is very difficult. Policy Matters
research has shown that Ohio wages have been stagnant,
employment has not recovered from the last recession, and those
who do work are often without health care or retirement
benefits.
This troubling economic climate is worsened by predatory
lending from companies who sell loans to working families at
egregious rates, often 391 percent for a 2-week payday loan.
In a recent report, Policy Matters found that payday
lending locations in Ohio had increased dramatically from 107
in 1996 to 1,562 in 2006. For those 11 years, there was a 1,400
percent increase in lending locations across Ohio. What's more,
our analysis found that, while payday lenders were concentrated
in mostly urban areas in 1996 in the early part of our study,
by 2006 they were in urban, suburban, and rural neighborhoods,
alike.
Mr. Kucinich. If I could interrupt your testimony just for
a minute, you know, one of the things that you have in your
prepared executive summary, which I think is worth everyone in
this room hearing, is that Ohio has more payday lending
locations than McDonald's, Burger King, and Wendy's restaurants
combined.
Mr. Rothstein. That is correct, sir.
Mr. Kucinich. That is an image worth recalling. Please
continue.
Mr. Rothstein. Sure. I suppose I can take that sentence out
of my testimony then.
Mr. Kucinich. Actually, it bears repeating. Go ahead.
Mr. Rothstein. The report, Trapped in Debt, maps the growth
of lending locations from a small number of scattered locations
in 1996 to 86 of Ohio's 88 counties in 2006. That means that
there were only two counties in Ohio without payday lenders.
Large urban counties had the most payday lenders in
absolute terms, but less-populated counties had a greater
number of lenders per capita.
Our report found that, as Chairman Kucinich stated, they
are so common throughout Ohio that by 2006 there were more
payday lending locations than McDonald's, Burger King, and
Wendy's restaurants combined.
The sheer volume of payday lenders in Ohio is problematic
because of the weak regulation of the industry. Ohio has a
maximum limit of $800 per loan, with a maximum allotted charge
of $15 for every $100 borrowed. As the Center for Responsible
Lending estimates, most borrowers are repeat borrowers, taking
out loans between 7 and 14 times per year.
In Ohio, borrowers cannot roll over their loans but can do
back-to-back transactions, where after a 24-hour cooling off
period they can take out a loan to repay the previous loan.
Payday lending affects various demographic groups. Our
analysis, surprisingly, found little relationship between
lending locations and areas of low and moderate-income housing
where African American census tracks.
A recent study found that lenders who cultivate more repeat
business from existing customers will fare better financially
than those who do not. I am going to repeat that. A recent
study found that lenders who cultivate more repeat business
from existing customers will fare better financially than those
who do not, so they have an incentive to get repeat borrowers.
In the business of payday lending, all workers in Ohio and
other States are potential clients, regardless of race, income,
or living area.
Lenders in Ohio are mostly chains or franchises. The two
most common locations are Advance America and Cashland
Financial Services, with more than 100 locations each. In fact,
the top 10 lending companies in Ohio account for more than 55
percent of all payday lenders in Ohio. One lender in Ohio,
Buckeye Check Cashing, receives substantial financing in grants
and loans from the State of Ohio to expand operations in Ohio.
The lending industry in Ohio is extremely volatile, as
well, with lending locations opening and closing frequently
within a given year. For instance, in 2005 a total of 113
payday lending locations closed, but 357 new locations opened.
That same year, 12 locations opened and then subsequently
closed in that year.
A $500 loan in Ohio can carry an origination fee of $50 and
interest charges of $25, for an effective APR of, again, 391
percent for the 2-week loan.
Borrowers face an even more difficult situation when the
loan comes due because their economic situation is often the
same or worse than before, meaning they either need another
loan to repay the first loan or they default on the post-dated
check. Thus, the cycle of borrowing keeps borrowers trapped in
a constant state of debt.
In our report we recommend the protections extended to
service members and veterans in the Talent-Nelson Amendment be
extended to all working families. Capping lending rates at 36
percent, while still a high effective APR compared to other
loans and forms of borrowing, is a vast improvement over loans
made in the 300 percent range.
Additionally, credit unions and banks should be offering
competitive, fair, and responsible loan products to working
families in their communities. We have heard testimony from
people at this table who are doing just that.
Fair and responsible lending is an economic and social
benefit to the entire community. Members of Congress can play a
pivotal role in implementing these policy recommendations,
which again benefit the entire community.
Mr. Chairman, distinguished members of the subcommittee, we
thank you again for the opportunity to present our findings on
the dangerous expansion of payday lending in Ohio. We strongly
believe these policy recommendations will lead to a better
economic situation for everyone involved. We look forward to
working with the subcommittee and to Members of Congress on
issues of payday lending and other economic issues.
I look forward to any questions you may have. Thank you.
[The prepared statement of Mr. Rothstein follows:]
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Mr. Kucinich. And thank you, Mr. Rothstein. I appreciate
the exceptional and thorough report which Policy Matters has
submitted to this committee.
Now we will hear from Ms. Grossman. Thank you very much for
being here.
STATEMENT OF FRAN GROSSMAN
Mr. Grossman. Thank you. I am Fran Grossman. I am an
executive vice president at ShoreBank. I am a grandmother, and
actually I did miss my flight, so my grandchildren----
Mr. Kucinich. Did you say something about it?
Mr. Grossman. I missed my flight.
Mr. Kucinich. But when I asked does anyone here have a
flight----
Mr. Grossman. No, no. There was no way I was going to make
it.
Mr. Kucinich. I just wanted to make sure I didn't----
Mr. Grossman. When I was going like this, that is what I
was doing.
Mr. Kucinich. I am sensitive to people missing flights, so
when I asked witnesses to raise their hand----
Mr. Grossman. You were wonderful. I just wanted credit for
staying.
Mr. Kucinich. Well, thank you.
Mr. Grossman. I wasn't subtle enough.
Mr. Kucinich. The Chair will duly credit the gentlelady
from ShoreBank here. Thank you for being here.
Mr. Grossman. I started out as I taught school as a
librarian, as a social worker. I worked at Continental Bank and
Bank of America running small business real estate lending,
starting the CDC, raising capital for ShoreBank. I wound up at
ShoreBank. I also got my start with Gail Sincata. I care a lot
about the subject.
I would like to use, though, my 5 minutes to give you a
glimpse of the payday lending industry from our vantage in
Chicago. I am sorry that Congressman Davis is not here, but I
will send it to him, and we speak, anyway.
What I am going to posit is a way that community
development banks like ShoreBank can help meet the complicated
needs of our customers and members of our neighborhoods who use
payday loans.
As I said on the phone when we talked about this with your
terrific staff person, there are no easy answers. There are no
silver bullets. I think I am not going to go into the horrors
of payday lending. I think you have heard enough from others.
What has happened in Illinois--and Ms. Fox has this in her
prepared testimony--is we have developed regulations that have
changed but not eliminated payday lending. These guys are
smart, and every time you make a new rule they are going to
figure it out, because there is a lot of money involved. As we
always say, nature abhors a vacuum, and they do find the
loopholes.
A number of things have taken place in Illinois, including
an industry-wide cap limiting payday loan principal to 25
percent of somebody's income, only 345 days of continual
indebtedness before a mandatory debt recovery period, special
protection which I think we are all interested in for military
personnel, including a limit on wage garnishments. And we do
have a Statewide reporting system and we do have fines. It is
not perfect, but it is a start and it is an acknowledgement.
But it is also important to remember that payday lending
fits into a broader set of businesses that provide alternative
financial services, and usually they all charge high rates for
basic services such as check cashing, bill paying, and the
like.
ShoreBank is a $2 billion mainstream financial institution
that is also a community development bank. We have 39,000
checking accounts. Our largest service area is the Chicago
area. We also have branches in Cleveland. We did $7 million in
single family mortgages in Cleveland last year. We have lost
market share because we have a fixed rate product, which means
that none of the fancy stuff. We underwrite them ourselves.
What you see is what you get.
But the consumer is bombarded with probably over 300 types
of mortgage products today. When you were mayor of Cleveland,
everyone you knew got a mortgage at a bank. Now everyone you
know doesn't get a mortgage at a bank.
I think what Tommy FitzGibbon was talking about was very
interesting. We also have a 600,000 deposit from the Cuyahoga
County Link Deposit Program, and we are going to talk about
doing more business, but that is not in my speech.
Our communities have a median income of just over $30,000.
We offer a wide range of products, from loans to rehab mortgage
loans for walk-up rental apartment buildings. These are
affordable rental apartment buildings and they are not
subsidized. This is not FHA. This is not section 8. Well, it
could be. It is not section 8 project based. It is not low
income housing tax credits. These are Ma and Pa developers who
buy a building. We help them get a rehab mortgage, and they
charge micro-market rents.
We make loans to small businesses. We do a lot of lending
to churches and nonprofits, as well as we do many kinds of
accounts for individual customers.
We are a community development bank and we meet the strict
criteria as a community development bank, which means that we
have to make 60 percent of our loans in low and moderate-income
communities. But, interestingly enough, there are only 52
community development banks nationwide. Some of you may know
that the community development financial institution is a part
of Treasury, and it certifies banks, credit unions, venture
funds, and nonprofit loan funds. They do the 60 percent.
Our banks are located in many of the same areas where
payday lenders, check cashers, money transmission shops, and
those are the remittance shops, and pawn shops--don't forget
about pawn shops. There is a whole array of people out there
who are in what we would call the quick cash business.
Payday loan customers care about their customers and they
are often customers of our banks and banks like ours. They care
because they are a constant source of income.
We provide many services that these same customers want,
and remember that people who use paydays have to have a
checking account, so we do share many of our customers, but we
cannot, though we know, we cannot provide for these small,
unsecured credit, these loans of $500 to $1,000 with no credit,
no unsecured. We cannot make them at this point. We don't have
the ability.
There are some programs, and the reasons are some have to
do with issues of pricing and prudent risk management. Others
have to do with the banking culture and regulatory system. And
still others with all of our full understanding of how to
effectively and responsibly meet the needs of many community
residents.
The consultants who work with retail banks tell us that, in
order for a checking account to be profitable--and that means
that it would earn $136 a year for the bank--it has to have
approximately $2,000 in it and only one NSF. Now, you can make
a lot of money off of NSF, but that is an equally ugly way to
make a living, so that is why I use that number.
I think community bankers and community development bankers
can help. We are intensely local and truly relationship
focused. We are small organizations with limited resources, as
well as limited resources for error. We are regulated.
Some CDFI banks have been able to engage in some
alternative developments to payday loans; however, we have not
as a group or individually cracked the code that enables us to
not only do more, but ideally to move residents of our
communities and all of our customers away from paydays into
savings accounts and things that really are building assets.
And we have certainly not figured out how to do it profitably.
What I also want to make sure, that we don't wind up having
programs that are not sustainable over the long haul, are
simply a reaction to political and public pressure, and/or are
charitable act, because those are not going to be sustainable.
Community development banks could be well positioned to
meet the particular needs of these customers. Not only are we
relationship driven, we are embedded in the community. We know
our Congresspeople. We know our church leaders. they know us.
This is our turf and our neighborhoods. Decisions are made
locally. You have access to the highest people in the
institutions. You call up and you want the president or the
chairman of the board and you get him because he is there, or
her. You want to know where a credit decision is being made? It
is being made there. It is not being made in a far-away State.
It is not only formatted lending.
But there are things that we would need as community
development banks to do more.
Actually, before that let me give you two examples of what
the Central Bank of Kansas does, which is not really an
antidote to payday lending but is an attempt to try and get
customers of theirs into what they would call savings and we
would call savings. They offer a certificate of deposit loan
that they feel competes with payday lending products. The
customer takes out a loan and immediately receives a
certificate of deposit which serves as collateral for the loan,
and when the borrower pays the loan back they have established
credit and now are bankable.
There is a wonderful bank in Milwaukee, Legacy Bank--
actually, it was started by women--and they connect checking
account customers with bad credit to financial management
classes, and they are able to borrow an emergency loan from the
organization that sets it and the bank gets paid back. Legacy's
whole focus is on making low income customers good, solid,
profitable customers.
One of the problems with the CDFI banks is that the CDFI
banks have to declare, in order to be certified by the
Treasury, that you are mission oriented, which means that most
community bankers who really do all this are not going to say
that. They see themselves as bankers and profit people. The
fact that 60 percent of their loans and everything they
actually do fits into what we would call a CDFI doesn't matter.
One of the reasons then we have over 7,000 community banks
nationwide, and it is interesting to note that only 8 percent
of those certified are banks, 67 percent are nonprofit loan
funds, 19 percent are credit unions, 3 percent are venture loan
funds, and another 3 percent are depository holding companies.
The CDFI fund has been helpful with the grant programs to
banks, as well as helping many banks get established in areas
that would not otherwise be banks. ShoreBank had a community
development bank in Cleveland which is now a branch of our
bank.
But other things that would be helpful are CDFI banks
should receive favorable consideration for receiving Government
deposits and loan participations. This came out quite clearly
when we talked to people in the Katrina area. What they really
needed was not deposits but they needed loans. They had a lot
of money, but there was no way to help those banks in an
organized fashion, whereas you could have identified them as
CDFI banks, certified them, and taken a class of those who
passed the 60 percent test.
We need to deal with loan loss reserves if we are going to
expect and task community development financial institutes,
banks, to support these specialized lending programs.
We need encouragement from bank regulators, the others as
well as the FDIC, in the form of examiners who understand and
support banks' roles in providing alternatives to payday loans.
The easy money is for financial education. I guess I pray
that we don't wind up recommending financial education. Of
course it is needed, but everybody would like to send you to a
class instead of really doing the hard thing.
Regulating away payday lending will not eliminate the
unique financial needs of individuals with low assets and poor
credit, needs that high-interest, short-term check cashers
offer easily, and it is at a cost, and people do know that.
They just can't deal with it because they need the money or we
do live in a society of wants. Wherever you go, if you can't
afford the plasma TV I will help you get one. If you can't
afford the house, I will help you get one. If you want a new
fur coat, I will help you get one. Whatever it is, we live in
that kind of world and we have to acknowledge that.
What must be part of a regulatory package to limit payday
lending are incentives to help mainstream financial
institutions and credit unions. Community development banks are
mainstream, and they do offer products to these customers and
they need to be tasked to offer more.
Bottom line: it is not easy. There are no simple answers.
It will take the will of Government to encourage, incentivize,
because money does talk. If these banks are able to achieve
profitability through loans, deposits, and other ways that the
government helps, through the regulators, everyone has to be
involved. We do not want to look back a few years from now and
see another mess like we now have with some of the subprime
lenders and the institutions that funded them.
A way was figured out because we all promoted
homeownership. Homeownership was going to be the answer to
everything. We wanted minorities to own homes. We wanted poor
people to have homes. Whether it was the Democrats, the
Republicans, the Governors, the States, we all believed in
homeownership. Now we have a pretty mess and a lot of people
who thought that they were getting the American dream and now
realize that it was a sham. We can't do that on quick loans. We
have to figure out how to look at the source. We understand the
problem.
[The prepared statement of Ms. Grossman follows:]
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Mr. Kucinich. Thank you very much for your testimony, Ms.
Grossman.
I am going to now go into the questions for the second
panel. I would like to ask Mr. Davis if he would like to start,
or if you want me to start.
Mr. Davis of Illinois. You can go ahead.
Mr. Kucinich. OK. To Ms. Haynes, thank you again for being
here and thank you for the work that Faith Community United
Credit Union does for people.
Ms. Haynes. Thank you, Mr. Chairman.
Mr. Kucinich. One of the things that is important to
realize, I think, about the payday lending industry is that
payday loans are made only to people who, one, are employed
and, two, have checking accounts. Customers are working people,
have a relationship with the bank.
Ms. Haynes. Right.
Mr. Kucinich. Nonetheless, they go to payday lenders and
not to their banks. Why do you think that is? Why don't they go
to the bank?
Ms. Haynes. The payday lenders make them feel wanted, which
banks don't. They are quick. At times when they get off work,
they are open and available. They are even open on Sundays.
They are on every corner. That is why people go to them rather
than to a bank, and sometimes to a credit union that has hours
that don't always apply to what they need.
Mr. Kucinich. Since you offer a competing product to payday
lenders, what is most important to the borrower? Is it the cost
of the loan, the speed with which they get the loan, the
location, accessibility? What do you feel are the factors?
Ms. Haynes. I think the simplicity to make it quick and
easy and convenient for them. And the cost is not the primary
thing that they are looking at. They need the money. They need
it then, and they want the solution to this problem right then.
Mr. Kucinich. I am sure you have given this some thought in
terms of loans. In your opinion, the payday lenders, they are
charging these high fees and these big interest rates. Do you
think that is necessary for them to do that, to charge such
high interest rates and big fees to make these kind of loans?
Ms. Haynes. No, I definitely do not. I think that those
rates are unnecessary for them to charge; however, they are
taking a niche that banks and credit unions should be filling,
and they are simply over-charging people for the service that
they are giving them. But the people in a depressed market need
the funds so bad that they will pay whatever, and then they get
trapped into that. And it is very difficult for a credit union
like us to get them out of that habit of getting the money
immediately and using those post-dated checks.
Mr. Kucinich. Right. What, if anything, about the Federal
or State governments do you think that could be done to change
the laws to protect people you describe as being trapped?
Ms. Haynes. Well, I think laws should be made to regulate
them just as credit unions are regulated. We are regulated as
to how much interest we can charge and all of that. I think
there should be regulation to regulate those payday outfits, as
I call them.
Mr. Kucinich. And the people who use the payday outfits,
you talk about being trapped. What do you think is the biggest
trap they get into, just in your experience with people who use
that model? What is the trap? What is going on in their minds
when they are using it?
Ms. Haynes. The only thing going on in their minds is they
need the money, they need it right then, and they are not
looking down the road to having credit. They don't ask them
things that we would ask in a credit union about building
credit, saving for the future, those kinds of things. They see
them as being friendly because they don't ask the most meager
questions about what are you doing, how are you going to send
your children off to college if you don't have a good credit
rating or savings account. So in the credit unions we try to
build that into pulling them or weaning them, as we call it,
from the payday lenders.
Mr. Kucinich. You know, it would be interesting to do some
historical research, because I remember in growing up in the
inner city that there were always people out there on the
corner you could borrow money from.
Ms. Haynes. Right.
Mr. Kucinich. But they would charge you a lot of money to
loan you money.
Ms. Haynes. Yes.
Mr. Kucinich. And these people were sometimes called loan
sharks.
Ms. Haynes. Yes.
Mr. Kucinich. And there was a point at which if you charged
a certain percentage it was made illegal.
Ms. Haynes. Yes, that is true.
Mr. Kucinich. And we are in a situation today where there
is a lack of regulation here. You know, when you look at
annualized percentage rates, it would be interesting to see if
that in any way falls into the same kind of category, because
these percentage rates are so high that it does raise questions
about matters of fairness and simple justice.
Thank you very much.
Ms. Haynes. Thank you.
Mr. Kucinich. I have a minute left just to ask a question
of Mr. Rothstein, and then I will come back to you.
You noted in your testimony that one payday lender, Buckeye
Check Cashing, receiving taxpayer financed grants and loans
from the State of Ohio to finance their operation. As a matter
of fact, I made a note on the chart there. Can you tell us more
about this? How did that happen?
Mr. Rothstein. Sure. Thank you for the question, Chairman
Kucinich. What happened is they received several loans and
grants. The first is they received $100,000 business
development grant through the Ohio Department of Development
which was approved by the Ohio Controlling Board.
Mr. Kucinich. What was the interest rate?
Mr. Rothstein. I don't actually know that offhand.
Mr. Kucinich. It would be good to find that out, wouldn't
it?
Mr. Rothstein. That is a good question. I don't know it
offhand, though.
Mr. Kucinich. I am sure it wasn't 391 percent.
Mr. Rothstein. The vote from the Controlling Board was six
to one, with only one member dissenting saying that he doesn't
think that public dollars should go to financing this type of
business.
They also received a 60 percent, 9-year job creation tax
credit in 2004 from paying the corporate franchise tax in Ohio.
The city of Dublin, which, for those of you who aren't
familiar with Ohio, is a very wealthy, affluent suburb located
right near Columbus, offered them a 25 percent, 5-year payroll
performance incentive and a $150,000 relocation grant.
I should note that they declined a $7 million Ohio
enterprise bond fund loan as specifically citing Federal tax
reasons.
Those are list of credits that I have noted for them.
Mr. Kucinich. OK. I would like to come back to you, but at
this point I would like to yield time to my friend and
colleague, Mr. Davis.
Mr. Davis of Illinois. Thank you very much, Mr. Chairman.
First of all let me again thank you for the patience and
the fact that you are still here. I mean, that is an indication
to me that we are what we call in the community real troopers,
you know, that you are actually people who care a great deal
about what you are doing, what we are talking about, and
seriously seeking solutions or direction or something that is
going to help alleviate the problem.
But, Ms. Grossman, you indicated that people are really
looking for money. I mean, they are not looking for financial
education, and yet, as I listen to the discussion, it appears
to me that a great deal of what they actually need is
education.
Mr. Grossman. Maybe I wasn't clear. It is not that people
do not need financial education and that financial literacy is
important, but it becomes like homeownership. It becomes the
large banks, the large institutions, the large insurance
companies. It is an easy fix. Of course, it is a part of it,
but if we stop at financial literacy and we put it in the high
schools and we put it in after school and we put it here and we
don't do anything else, we will not have solved anywhere near.
One of the issues I guess I am looking for is trying to
figure out. We know there is a terrible problem. We might be
able, through regulatory issues and legislation, to begin to
control the rate, but the problem will still exist, and that is
why I began to talk about the CDFIs and community development
banks. We have to begin to think about ways to acknowledge the
need, provide education, but also help people so that they can
go and borrow money, that they can develop credit, because if
we stop this we will go back to loan sharks, we will go back to
contract buyers. I mean, you and I remember the contract buyers
leagues. I mean, these people are always going to be with us.
Mr. Davis of Illinois. It is kind of like my father would
say: pray for a good harvest, but keep on hoeing. I mean, that
is, provide alternatives at the moment, while at the same time
try and wean people away.
Mr. Grossman. Yes.
Mr. Davis of Illinois. I mean, I was thinking of I used to
work in health care, and how we would see a brand new health
center down the street, and there were more people going to the
Medicaid mill up on the corner. When we would ask them why,
they would come back and say they really know what we want, and
they give us the pills that we like or they give us the pills
that we ask for. So it seems like a combination of both things.
Let me ask, we talk about usury. We talk about the high
fees. Would we be treading on sacred ground if we were to
regulate those entities and say you can only charge 10 percent?
Mr. Grossman. That is what leaders are for.
Mr. Davis of Illinois. Or 12 percent.
Mr. Grossman. That is what leaders are for. Of course it is
sacred ground to somebody, but that is what leadership is
about. That is why some of us, including you, are still here,
because it is wrong and we know it is wrong and we have to not
only stop it but we have to move on and think of other ways.
Ms. Fox. There are 11 States that still have their usury
and small loan laws that apply to small loan companies. You
would violate criminal law in New Jersey if you charge more
than 30 percent APR, and 25 percent in New York. In Georgia it
is a RICO violation to do payday lending at over 60 percent
APR. North Carolina tried it and found it was such a debt trap
that they reimposed their 36 percent small loan rate cap if
payday lenders want to get a regular small loan license.
Congress said the way to protect military borrowers was to
cap interest rates at 36 percent, including all of the extra
fees, and to prohibit check holding and electronic access to
the bank account.
We are starting to move back to thinking about how to
protect borrowers in this market, and there are States that
still do it through rate caps.
On your question about loan sharks, a paper in Salt Lake
City did a big story that talked about payday lenders and title
lenders, rate lenders, and what we call loan sharks today were
charging. That was less.
Mr. Davis of Illinois. Finally, is there anything that
would, from a market vantage point--for example, if we were to
talk about a national cap, are there things that are taking
place in one market that would suggest that there is something
or some reason why the rate couldn't be the same in New York as
it is in Illinois as it is in Indiana as it is in Texas as it
is in Missouri?
Ms. Fox. Traditionally, the small loan industry has been
regulated at the State level, and interest rate caps have been
a function of State law. The Federal Government does cap credit
unions at 18 percent APR for federally chartered credit unions.
Mr. Davis of Illinois. So it would just be new territory.
Ms. Fox. It would.
Mr. Davis of Illinois. Or new ground that was being looked
at.
Ms. Fox. For civilian. Congress last year enacted a
national rate cap for loans to the military at 36 percent APR.
A lot of folks said wow, that is really high, and we said well,
it is a lot less than 390 percent for a payday loan or 300
percent for a car title loan or, you know, a couple hundred
percent for refund anticipation loan, or other forms of high-
cost credit.
But the other thing we really need you to do besides
looking at the cost is to take the features of payday loans off
the table that trap people in repeat borrowing, and that is
their ability to get you to write them a check when they know
you do not have money in the bank, and hopes that on your
payday you will. That is an unsafe banking practice, and that
is something that Congress could do.
Mr. Davis of Illinois. Thank you very much. And thank you,
Mr. Chairman.
Mr. Kucinich. Thank you, Mr. Davis.
Mr. Cummings.
Mr. Cummings. Just one question.
Mr. Kucinich. Take your time.
Mr. Cummings. The credit unions have always seemed to
provide services and have been able to target populations that
the bank seems to skip over, and I think the credit unions give
people a sense of ease, as far as getting into them. You know,
you have several people on the job and somebody says, Girl, did
you join a credit union? How did you get your car? You say I
got it through the credit union. So the next thing you know
they feel comfortable.
I am just wondering, I see that some of you are from credit
unions and you may have testified to this, but how can credit
unions help to address these kinds of issues? Is there
something that you all have and are there things that you are
able to do that the banks are not able to do? Do you follow me?
Mr. Grossman. Can I just say I think it is important to
know that you are talking about low income credit unions.
Mr. Cummings. Right.
Mr. Grossman. We are involved on the banking side. You now
have very, very large credit unions who act much more like
large banks, whereas Faith--and I think she can respond much
better--I mean, these are small credit unions, North Side
Credit Union, South Side Credit Union, they are very different
than the Credit Union of New York, which encompasses the whole
State.
I just wanted to make sure that we understood the
difference between those credit unions.
Mr. Cummings. I have you. I still want to know.
Ms. Haynes. Yes, Representative Cummings, one of the
reasons that we can't really compete as a credit union--we are
a low income community development credit union, CDFI--we are
only $10 million in assets. We cannot compete with payday
lenders on every corner----
Mr. Cummings. Right.
Ms. Haynes [continuing]. That are open all day, evenings,
and Sundays.
Mr. Cummings. Right.
Ms. Haynes. So that is why credit unions can't compete as
totally as the payday lenders. And, of course, the transactions
are costly, you know. They are a costly kind of loan to make.
Mr. Cummings. Sure.
Ms. Haynes. So, consequently, we are regulated and our
interest rate is capped, so theirs needs to be capped.
Mr. Cummings. Yes, ma'am.
Ms. Fox. The bank's equivalent of a payday loan is the cash
advance on a credit card or an overdraft line of credit at 18
percent APR. The FDIC has proposed guidelines for banks for
responsible small loan products. We have congratulated the FDIC
for taking the leadership on that. Hopefully those will be
issued and they will be an encouragement to banks to look at
the small loan needs of their own customers in a responsible
way.
Credit unions are also looking at ways that they can make
small loans to their members. I understand that at the recent
CUNA conference that session was standing room only to talk
about how to compete with payday loans for your own members.
So there is work going on in this area, but that fact isn't
reason to not address the consumer protection issues. I agree
we need both effective regulation, small loan market, and good
alternatives for consumers. And the third thing that we really
need is emergency savings accounts for people.
We have done some research. We have looked at research. For
families making $25,000 a year, if they have over $500 in
emergency savings they are much less likely to take out a
payday loan than a consumer making $25,000 with no savings. The
difference is you are eight times as likely to have a payday
loan in your portfolio if you have no emergency savings than
you would be if you have a least $500 in the bank. Savings are
really important.
Mr. Cummings. That is interesting you said that, because
one of the things that I talk about quite a bit in my District
is what I call bridges. So often what happens to people is that
$500 you just talked about, if that bridge, that $500 can
bridge them from one thing to another--now, it is only $500,
but without it they are doomed. I think that is where the
payday loan folk come in. They are looking at it from the
standpoint, the borrower is looking at it from the standpoint.
Let's say, for example, I got all of the money for my
daughter's tuition but I need $500, and so they go to the
payday loan person, get the money knowing that it is going to
cost them a lot, but they look at it from the standpoint that
this is the bridge to get me from one point to the other.
I have heard people talk about this kind of stuff. While
this $500 is only $500, for that situation it is like a million
dollars because they are looking at it that this is what is
going to allow my kid to be able to afford the tuition to go on
to become the doctor, or whatever.
So I think companies do take advantage of that, and I guess
people get hooked on those payday loans, and then it is just
rolling down a hill of ice. So I was just amazed as I listened
to the various testimony that has been presented here, Mr.
Chairman. I look at the neighborhood that I live in. I live in
the inner city of Baltimore. I see people who are paying the
highest prices for everything. They pay the highest prices at
the grocery store, because there are no stores. They do the
payday loan thing. They get cabs because they don't have a car.
I mean, you go on and on. If they have a car, they pay the
highest insurance. It is amazing that people who are poor ever
get out of the hole. And when you go to the grocery store, when
I shop in the grocery store in my neighborhood--and I know Mr.
Chairman is going to have some hearings on grocery stores--I go
to the grocery store in my neighborhood, you know, to buy a can
of shaving cream, there may be a 50 cent difference. In my
neighborhood it may cost me $3. I go to a neighborhood about
may be 5 miles away and it is 50 cents less. They add up and
they add up, so people just go down and down and down.
Then folks say why can't they ever get up and get on their
feet. And even when it comes time to get their taxes, you have
folks saying come to me, I will give you your money right away.
Even then they are finding themselves in difficult
circumstances.
That is why I asked the question about the credit unions,
because I am trying to figure out, you know, this is a multi-
faceted problem that perhaps needs multi-faceted solutions.
I want to thank you all for staying around here. I know we
have another panel. I just wanted to thank you.
Mr. Kucinich. And I want to thank Mr. Cummings and Mr.
Davis for staying with us, because we all represent
constituencies which include solid inner city constituents, and
our experience is that people are always broke, and that if
they don't have a job and they need money they borrow money,
they get into debt. People are maxing out. If they don't have
the kind of traditional paths to credit that some people have,
they get into these traps and it becomes a nightmare. It is
absolutely a nightmare, and people never get out of it. They
never get their head above the water. That is why we are here.
I appreciate Mr. Cummings and Mr. Davis staying with us on
this.
I think that what we will do, there are numerous questions
that we have for the witnesses, and what I would like staff to
do is to followup and submit these questions to the witnesses
so that perhaps in some followup discussion with our committee
you can give us some written responses, because you are such
valuable resources on this important economic issue for people
in the cities.
What I would like to do right now is to thank the second
panel and thank you for the cooperation you have given us and
will continue to give us. Good evening.
We will now call those hearty souls who have been here all
day waiting for a chance to testify to the committee. Please
come forward. Thank you.
We are, indeed, fortunate to have an outstanding group of
witnesses on our third panel. Actually it is a couple at this
point. Mr. FitzGibbon had testified earlier.
I want to welcome Mr. Calvin Bradford. Mr. Bradford is the
president of Calvin Bradford and Associations, a consulting
firm that engages in research, policy evaluation, general
consulting, and expert witness services in the fields of fair
housing and community development. Mr. Bradford is also a board
member of the National Training and Information Center, which
was founded in 1973 as a research and technical support
provider to National People's Action and other community
organizations that first initiated the movement against
redlining and disinvestment.
Through issue-based community organizing, NTIC helped
spearhead the Community Reinvestment Act. Since its passage,
the NTIC's efforts on the Community Reinvestment Act have
resulted in over $1.1 trillion to low and moderate-income
families across the United States. NTIC has been involved in
more CRA agreements than any other organization, which is a
tremendous testimony to your work.
Next we welcome Professor Michael T. Maloney. Professor
Maloney is a professor of economics in the John E. Walker
Department of Economics at Clemson. Mr. Maloney received his
Ph.D in economics from Louisiana State University and started
at Clemson in 1974. He has taught at Emory University, as well.
He was a senior financial economist at the U.S. Securities and
Exchange Commission in 1990. Mr. Maloney is an associate editor
of the Journal of Corporate Finance and is widely published on
a variety of topics, including research and development in the
drug industry, nuclear power and nonproliferation, and the
complexity of financial markets.
Welcome, gentlemen. I would ask you if you would stand.
[Witnesses sworn.]
Mr. Kucinich. The record will show that the witnesses
responded in the affirmative.
Mr. Bradford, you may proceed.
STATEMENTS OF CALVIN BRADFORD, NATIONAL TRAINING AND
INFORMATION CENTER, CHICAGO, IL; AND MICHAEL T. MALONEY,
DEPARTMENT OF ECONOMICS, CLEMSON, SOUTH CAROLINA
STATEMENT OF CALVIN BRADFORD
Mr. Bradford. Thank you, Chairman Kucinich and members of
this committee. My name is Calvin Bradford, and I am a board
member representing the National Training and Information
Center. I want to convey to this committee NTIC's assessment of
CRA enforcement after our 35 years of providing training and
assistance to community-based organizations who are responsible
for both the Home Mortgage Disclosure Act and the Community
Reinvestment Act.
We have not forgotten your role, Mr. Chairman. I have a
copy of your agreement from May 1979. And we also point out
that we know, as Congressman Davis pointed out, the CRA in many
respects started in his neighborhood with Gail Sincata and the
organizing there. In light of your hearings, it is important, I
think, to say that its purpose was to pump prime lending money
back into neighborhoods that at that time in Cleveland and
Baltimore and Chicago and Detroit and other cities were
devastated by the predatory abuses of FHA lending. So in some
ways we are in a similar situation today.
Our overall assessment of the Community Reinvestment Act is
that many of the community groups and some lenders deserve
outstanding ratings, while the Government regulatory agencies
typically deserve substantial noncompliance ratings.
The details of our recommendations are contained in our
written statement. In summary, we find that the CRA needs a
formal written fair lending test with a public disclosure,
which it doesn't have, a requirement that all communities and
all service areas be given a full evaluation. There should be
no CRA-free zones, as the regulators now permit. There should
be a requirement that all the lending affiliates and
subsidiaries of a lender should be included in the lending test
so that lenders can't, as they can today, pick and choose which
affiliates to use and cherry pick their performance. But the
CRA regulations, exam process, and examiner training need to be
revised to eliminate grade inflation and ensure accurate
ratings of real performance.
We also recommend some changes in the Home Mortgage
Disclosure Act and in the release of CRA and HMDA data to make
it more usable by the public.
I would like to summarize just a few examples that are more
fully defined in our written statement. We provided three
examples of cases where the Federal CRA regulators consistently
gave satisfactory and even outstanding ratings to three major
regional lenders and found no violations of the fair lending
laws, while at the same time the U.S. Department of Justice
under this administration filed race discrimination cases
against these very lenders and claimed blatant racial redlining
and violations with the Fair Housing Act, the Equal Credit
Opportunity Act, and the CRA by systematically excluding the
minority neighborhoods in the metropolitan areas that these
lenders served.
Mid-America in Chicago, Old Kent in Detroit, and Centier in
Gary, IN, are all major metropolitan-wide lenders. All define
their metropolitan service areas in ways to exclude the
minority areas, in some cases excluding the entire central
city.
Over many years and several CRA evaluations, the OTS, the
Fed, and the FDIC ignored this blatant form of discrimination
and rewarded these lenders with satisfactory and outstanding
evaluations, allowing them to engage in substantial expansions
into other White neighborhoods by granting additional branches
and expansions and approvals of mergers.
Then consider finally the case of Flagstar Bank. It was
twice found liable for race discrimination in Federal courts,
first in an individual case in Detroit and then in Indianapolis
for a nationwide written policy that set fees explicitly based
on race. This case was so blatant that the court ruled against
Flagstar in summary judgment. Yet, the OTS actually raised its
rating from satisfactory to outstanding after this decision.
Moreover, this written racial pricing policy was developed and
implemented while the OTS was examining Flagstar for
compliance. Flagstar literally violated its way to an
outstanding rating.
The Sunflower Community Organization in Wichita, KS, had a
significant concern about lending practices of a Bank of
America. The Wichita MSA has a large African American
population, and the largest Hispanic, Native American, and
Asian population in the entire State of Kansas, yet the
Comptroller of the Currency did not consider Wichita large
enough for a full CRA evaluation, so its rating of the Bank of
America was based on performance in other communities. It took
years of research and organization and negotiations with the
help of NTIC to get the Comptroller to add a more in-depth
evaluation of this one lender in just this one metropolitan
area.
Finally, the recent actions by Countrywide lending
illustrate our concern that lenders will hide behind the
protection of banking regulators. In the past, Countrywide has
been one of those lenders that has shown huge disparities in
FHA lending that are racially based. We have submitted with our
testimony examples of that for Baltimore, Washington, Chicago,
and Orange County, CA.
Last fall the Attorney General of New York charged
Countrywide with racial bias in subprime lending. When Elliot
Spitzer announced the settlement with Countrywide last
November, he lamented that the Federal regulatory agencies were
protecting depository institutions by refusing to allow State
agencies to investigate them for fair lending violations. At
that time, Countrywide was the Nation's largest independent
lender, not regulated. But just this month on March 12th the
parent company of Countrywide became a savings and loan holding
company and changed its full regulation to the Office of Thrift
Supervision, clearly the regulator with the worst fair lending
record.
These are the kinds of examples we have come against year
after year in the past 28 years of CRA enforcement.
I would be glad to respond to any questions you may have.
[The prepared statement of Mr. Bradford follows:]
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Mr. Kucinich. I thank the gentleman.
Professor Maloney, you may proceed. Thank you.
STATEMENT OF MICHAEL MALONEY
Mr. Maloney. Thank you, Chairman Kucinich, for asking me to
be here today, and honorable members of the committee. It is an
honor to be here. I am going to talk about payday lending, and
I am going to talk about it from a slightly different tack than
the other people on the former panel.
My interest in this topic is 5 or 6 years old and purely
academic. From that perspective, I have done some research that
I will report today.
As you pointed out, I am a professor of economics at
Clemson. I have been on the staff of the Securities and
Exchange Commission. But my main love is teaching, and
especially graduate students.
At Clemson we are interested in the short-term credit
market, and, in particular, whether consumers are better off
having access to such credit. As part of our research, we have
examined payday lending and its impact on consumers, and our
research has found that payday lending has increased access to
short-term credit without harming consumers.
A couple of things that need to be pointed out, I believe,
in the context of the short-term credit industry, the industry,
itself, generates more than $95 billion in fees annually. These
are not interest charges; these are fees.
Some of those fees may shock you. The fees charged for
insufficient funds amount to $30 billion. More than $50 billion
is generated by credit card companies for late fees or over-
the-limit fees. So these are fees that are being charged by
other credit providers. The payday lending industry generates
$6 billion in fees.
I think that credit card thing is the one that is kind of
shocking, because you think about somebody that has a credit
card and they are just paying some fairly high interest rate,
but where they really get ding'ed is where they don't make that
payment or they go over the limit.
One of my graduate students had this exact thing happen to
her. I was just shocked by the number.
Some critics of payday lending have proposed limiting
interest rates or eliminating these loans altogether. In fact,
the interest rate cap of 36 percent will end the industry,
because they can't make any money at 36 percent. They can't
cover their cost. I don't think that is the right tack to take.
All forms of legal credit are vast improvements over loan
sharks and wholly unregulated forms of credit that dominated
the credit market prior to the 20th century, and I think that
we would return to that again if people are denied access to
legal forms of short-term credit.
The access to credit is best conducted in the open and
competitive market. Although likely to be always relatively
high cost, short-term credit has high cost because of its fixed
cost and in the cost of doing business. Its fees are still
competitively determined, and there is a lot of competition in
the industry. Hence, we have to believe that is the cost of
doing business.
Research by Dr. Donald Morgan at the Federal Reserve Bank
of New York has confirmed previously published research that
consumers of payday loans shop for best prices and have
benefited from increased competition.
Another thing to recognize about payday loans is, as Ms.
Grossman pointed out, consumers want these loans and they
recognize the value of the loan because of its ease of access.
They also enjoy its convenience in terms of location and its
privacy.
As I mentioned before, for many it is a choice of taking
out a payday loan or confronting more expensive alternatives. A
2005 study by Professor Tom Lehman confirms that payday loan
fees offer a cost advantage to consumers over non-sufficient
fees at banks, and are understood by consumers to be that.
But what I really want to talk to you about today is the
new research we have done at Clemson.
My position on this payday loan industry has always been
that it could be good or it could be bad. It seemed to me that
the questions that should be answered are whether communities
are worse because of payday loans or better off. Are there more
homeless people because of payday loans, or are there less
homeless people because of payday loans. That is a scientific
question, and a scientific question that I think we have some
answers to, though not complete.
We looked at bankruptcies nationwide, State-by-State. We
compared bankruptcies State-by-State over the years 1990 to
2004 to the number of payday stores in each State over that
period. What we found was that, instead of payday loans causing
bankruptcies, payday loans reduced bankruptcies in a
statistical test of causality. We also found, as you might
expect, bankruptcies caused payday loans. When bankruptcies go
up, payday loan stores go up, responding to the demands for
short-term credit by those consumers.
Now, as I say, a lot more research needs to be done on this
topic. We are pursuing it, and I hope a lot of academics in the
marketplace are pursuing it and the answers will come forth.
I think our results on bankruptcy is especially important
in the light of the other issues that were being considered
today, particularly important in the light of the focus on
mortgages and foreclosures. Having access to emergency cash
that is not tied to a credit rating, home equity, or assets is
particularly important for consumers who are seeking to
maintain their homes.
In conclusion, Mr. Chairman, payday lending is one of many
options available to consumers of short-term credit. it appears
to offer advantages of convenience, privacy, and cost that make
it welfare-enhancing to consumers. No data exists to show that
payday lending is inherently a poor choice for consumers as a
whole, relative to the other options that they have.
Demand for short-term credit will always exist as long as
cash reserves for consumers are less than the emergency cost
they are likely to face, and efforts to constrain the market
forces are more likely to harm rather than benefit consumers
with short-term credit needs.
Thank you.
[The prepared statement of Mr. Maloney follows:]
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Mr. Kucinich. Thank you very much, Professor Maloney.
I would like to just ask you a question about that study
that you talked about that is being done that shows that the
more bankruptcies there are the more payday loans there are.
Mr. Maloney. Yes. If you just kind of think about it in
terms of time, going through time, as bankruptcies go up in,
say, year one, the number of payday stores will increase in
year two.
Mr. Kucinich. Yes.
Mr. Maloney. Now, if the number of payday stores increases
in year two, the number of bankruptcies in year three will go
down. That is the kind of sequencing of causality that we are
finding.
Mr. Kucinich. You are not really trying to establish,
though, that payday loans are the answer to holding the limit
on bankruptcies, are you?
Mr. Maloney. What we are finding is that payday loans
reduce the number of bankruptcies, that the ability--to use Mr.
Cummings' idea, the ability to bridge certain bad events with a
payday loan may make people better off in terms of avoiding
bankruptcy.
Now, the effect is very small. I mean, it is not a huge
thing. You wouldn't expect it to be.
Mr. Kucinich. What you are saying is that some people will
take out a payday loan, and that may help them avoid
bankruptcy, but you are not trying to establish an axiom here?
Mr. Maloney. I don't think that payday loans are going to
stop bankruptcy. No.
Mr. Kucinich. Right. I just wanted to make sure that, you
know, in some cases--Mr. Bradford, would you like to respond to
that?
Mr. Bradford. I guess what I would like to say is if you
look at the population, say, that are affected by payday loans,
which tend to be more rental people, people who haven't had a
lot of established credit, as opposed to the predatory lenders
we talked about who are dealing with people who own homes or
are in a position to own a home or have credit, you are dealing
with different populations.
To some extent the renter population has less incentive to
ever file bankruptcy anyway because they haven't got debts to
protect themselves from, other than maybe the payday loans.
Also, I guess I would just say, since my own Ph.D
dissertation was in statistical analysis, that I think you have
to be careful in making assumptions about aggregate sets of
relationships without actually doing time sequence studies that
track individual people over time to see what the sequence of
their behavior is. We oftentimes get correlations between
events at an aggregate level that don't actually represent the
actual behavior underneath those, so I think you would need
more study.
Mr. Kucinich. In fairness, I think Professor Maloney a
moment ago asserted that, you know, maybe in some cases. He
wasn't trying to establish any real, but your point is well
taken.
Let me ask you a question, Mr. Bradford. Your testimony
discusses the apparent paradox that most banks are passing
their CRA compliance tests while African Americans and Latinos
specifically are receiving higher-priced subprime loans. We
used to call that redlining.
Mr. Bradford. Yes.
Mr. Kucinich. In your opinion, is race still a factor in
banking?
Mr. Bradford. I think it is a serious factor in banking.
Yes. I think you can see it from these examples. What I am more
concerned about is that the existence of race in banking seems
to be something that the Federal regulators just ignore. They
don't take it into account. It used to be an actual factor in a
CRA evaluation that you had to, as a rating factor, explain how
you defined your area and your area couldn't have been defined
by any discriminatory processes. There is still part of that in
the regulation, but there is no assessment factor any more for
that.
Also, for your first part of your question about making
subprime loans, when you look at the way they analyze loans for
CRA, they lump all the loans together. What you really end up
with is a situation where subprime lenders who target minority
neighborhoods are going to get outstanding ratings on the
lending performance because they have lots of loans in those
neighborhoods because the agencies aren't taking account of the
effect of different types of loans or whether various types of
loans are appropriate.
The same thing happened early on with FHA loans, where they
inundated the east side of Cleveland or the west side of
Chicago with FHA loans. Those banks who did those loans would
get very high ratings because they had high penetration in
those markets, without taking into account whether that led to
high foreclosure rates or whether those loans were unsound.
Mr. Kucinich. Well, you make a good point, and that is in a
followup we really do need to take that into account. We need
to take into account, OK, you are giving these loans, but what
is happening, because it could be the height of cynicism for an
institution to say all of a sudden, OK, you want loans, we will
give you loans, but then either the terms are close to usurious
or they know full well that they are going to be putting
somebody in a position where they can't pay it back anyway.
Mr. Bradford. Well, the other thing that they can do under
the present rules is, if you have several loan companies--and
that has become very common with the large banking
institutions--you have several subsidiaries and they specialize
in different types of loans. But it is more likely that the
bank, itself, through direct lending will make CRA loans. So if
you just look at the bank's loans, they will have a fairly good
number of loans in minority and low and moderate-income
neighborhoods. And then if they say they don't want their
subsidiaries counted, then you get this great CRA performance,
where they might have one of the largest subprime lenders as a
subsidiary, and if you counted them the loan pattern would look
quite different.
Mr. Kucinich. I think it would be helpful to do a case-by-
case analysis in selected urban areas to be able to demonstrate
how that actually works.
Mr. Bradford. Yes.
Mr. Kucinich. We will discuss that with staff as a
followup.
I am going to go to my colleague, Mr. Davis, right now for
the next 5 minutes. We will come back to Mr. Bradford in a
second and closing round.
Thank you.
Mr. Davis of Illinois. Thank you very much, Mr. Chairman.
Mr. Maloney, would you suggest that one could view payday
loan establishments the same way that you would view a
convenience store? I am saying that people are simply willing
to pay for the convenience of getting whatever it is that they
are looking for whenever it is that they need it or want it,
and therefore they just simply pay for it?
Mr. Maloney. I definitely think that is the truth. I mean,
I think that all of the studies suggest that the consumers are
really, really interested in that convenience, and, as the lady
with the Faith Credit Union pointed out, I mean, consumers of
payday loans like the smiling faces they get when they walk in
the store. These stores charge a lot of money, but they also
charge a lot of money for milk at the Quick Way relative to the
grocery store, so you are getting a similar phenomenon.
Mr. Davis of Illinois. And so would you be suggesting also
that the market sort of dictates the action?
Mr. Maloney. Yes.
Mr. Davis of Illinois. As well as the behavior of the
institution?
Mr. Maloney. Well, I think I am not exactly sure what you
mean, but----
Mr. Davis of Illinois. Well, what I mean is that whatever
the market will bear, I mean, that is what people charge.
Mr. Maloney. Well, there is a lot of competition in the
industry, and I believe competition lowers prices to the bare
minimum cost, and my reading of the data is that the profit
rates are just not that high in the industry. If you look at
the profit for an average transaction, it is about 2.5 percent.
That is about the same as the grocery store industry. If you
think about an average transaction of, say, $300--I think the
average for Advance America is about $340--you look at that
average, that $340 would be like a basket of groceries. The
vendor is making about $7 on it, so you have 2.5 percent. It is
about the same as a grocery store.
Mr. Davis of Illinois. I would ask either one of you or
both of you and Mr. Bradford, of course, payday loans is a
fairly new phenomenon. I am saying I don't remember any of them
when I was a kid. There may have been some, but I didn't come
in contact with them or I didn't hear about them.
Is there any evidence that the advent of these on the scene
has reduced loan sharking, or have you come into contact with
any evidence that would suggest that there aren't as many loan
sharks around, and part of the result may very well be because
of the payday loans?
Mr. Bradford. I just don't know. Sorry. It seems very
likely, but I don't have any data on that.
Mr. Davis of Illinois. I am trying to firm up in my mind
the moral value of these, as well as the economic utility, and
you indicated that they might go out of business if there was a
cap at a certain level, and I am trying to see whether or not I
think if they went out of business that wouldn't be a good
thing.
Mr. Bradford. Both of us are.
Mr. Davis of Illinois. Yes.
Mr. Bradford. I am very interested in that question.
Mr. Davis of Illinois. Yes.
Mr. Bradford. By the way, I have some vague recollection of
a study about Europe, looking at the difference between England
and France, and it was in reference to loan sharking. The
evidence there, and my recollection is very vague on this, but
my recollection is there was some evidence that loan sharking
went down. Loan sharking was negatively related to payday
lending. I will get you a reference on that if you would like
it.
Mr. Davis of Illinois. Well, thank you both very much. It
has been a very interesting discussion.
Thank you, Mr. Chairman.
Mr. Kucinich. Thank you.
Mr. Cummings.
Mr. Cummings. First of all, thank you both for your
testimony.
Dr. Maloney, I was very intrigued by almost everything you
said. I just wanted to ask you, I was just reading your written
statement, and I guess you read that. Is that what you read
from?
Mr. Maloney. More or less, yes. The first part of my
written statement, yes.
Mr. Cummings. It says ``our research has found that payday
lending has increased access to short-term credit without
harming consumer welfare.'' What does that mean?
Mr. Maloney. Well, that was just a summary statement of
this bankruptcy finding that we have.
Mr. Cummings. Yes.
Mr. Maloney. But, in general, what I think we should be
looking at is consumer welfare measured a whole bunch of
different ways, like crime, domestic abuse, child abuse,
homelessness. But the one thing we have data on right now is
bankruptcy, and so what we have found is that payday lending
does not increase bankruptcy and, in fact, arguably it
decreases it.
Mr. Cummings. I am a lawyer, but I never did any of this
kind of stuff you talked about, you doctors, the kind of
research you do. I am just trying to hook up this causal thing,
because it seems like there is a gap here. On the one hand, I
am just trying to figure out how do you go into an area and
figure that payday loans have reduced bankruptcies? I don't
understand how you do that. How is that done? You just don't
look at the blanket numbers, do you? I mean, it seems like you
have to go a little deeper than that.
Do you follow what I am saying?
Mr. Maloney. I do. I do, very much so. The whole issue of
correlation versus causation is one that plagues all scientific
analyses. But the technique that we used is called the Granger
causality test. It is based on the timing of events. So we look
at States across time and we look at how much did the
bankruptcy rate change between time period one and time period
two.
Better put, more to the point, we look at how the number of
payday stores changed from period one to period two, and then
we look at how the bankruptcies changed from period two to
period three, under the argument that if the payday stores
increased in the prior period, that couldn't be caused by
bankruptcies going up in a later period, and hence the
causation has to run that way.
Mr. Cummings. Professor Bradford said something that I
found very interesting when he talked about so often these
payday loan folks are based in areas that have a large
percentage of renters. Did you factor that into your research?
Mr. Maloney. No.
Mr. Cummings. Because you saw that as irrelevant?
Mr. Maloney. No. I mean, we haven't collected all the data
in the world. What we did have was we had a lot of control
variables for bankruptcy, and in the literature the one that
tends to be the most important is the number of people that
don't have health insurance. You know, when you get sick, if
you don't have health insurance it is going to put a drain on
your financial resources, and that is a big predictor.
Unemployment rate, income, we looked at those kinds of things.
Income would surely pick up rental versus homeownership as a
proxy.
We looked at a lot of that stuff, but, again, this Granger
causality thing really takes account of everything that could
be going on to change payday stores back here is in the past,
and bankruptcies in the future can't be causing the payday
stores in the past.
Mr. Cummings. Hang with me, because I have to get these
questions in and I am running out of time.
Mr. Kucinich. You can have whatever time you need.
Mr. Cummings. Thank you.
I guess what I am trying to get at is we have 44 million
people in America, 40 to 44 million without health insurance,
and a whole lot of them are in my neighborhood.
Mr. Maloney. Yes. Serious concern for you.
Mr. Cummings. That is serious now. You made some statements
here that really do concern me, because I feel like I am
putting together a puzzle and there are some pieces missing.
When was this research done?
Mr. Maloney. It is preliminary. We are still working on it.
Mr. Cummings. So this research isn't complete?
Mr. Maloney. No, no. No. Not even close. We will probably
have a research document, a research paper done, submitted to a
journal by the middle of the summer. It is very preliminary
research.
Mr. Cummings. I see. So really the information that you are
giving us is preliminary. And is it possible or probable that
your findings might change when you come to the end of your
research?
Mr. Maloney. It is entirely possible.
Mr. Cummings. All right.
Mr. Maloney. But I wouldn't come here and tell you stuff
that I didn't think was going to be true in the long run. I
mean, I am just a scientist.
Mr. Cummings. I understand that. I understand. I am just
trying to figure out. I believe in research, so I am just
trying to figure out whether this is rolling research or
whether this is done research or what it is.
Mr. Maloney. Yes.
Mr. Cummings. The thing that I guess I found very
interesting is that you have said that in paragraph four of
your statement, ``nevertheless, the number of payday loan
offices nationwide has increased from approximately--'' and
this is deep--``from approximately 300 in 1992 to more than
20,000 today.'' Is that accurate?
Mr. Maloney. I think so, yes.
Mr. Cummings. What do you mean you think so?
Mr. Maloney. Well, I mean, the numbers are----
Mr. Cummings. Where did you get those numbers from? This is
your statement. I am just reading what you gave us.
Mr. Maloney. I know. I know. It is over 20,000, but the
numbers on that come from various sources. I don't exactly know
what the number is.
Mr. Cummings. Do you know what the sources are they cited
here?
Mr. Maloney. Some of the sources are industry sources. The
trade organization, Community Financial Services Association,
has members that are payday, and they report their members, and
then they estimate how many other stores are not members, and
they probably do Yellow Pages counts, but our research on the
Yellow Pages counts is that they are not always accurate.
Mr. Cummings. I see. What did you get your doctorate in? I
am just curious.
Mr. Maloney. Economics.
Mr. Cummings. Economics. I just have a few more questions.
I am going now to the second page of your statement, and you
said about 10 percent--no, let me go back to something else
that I found very interesting. You said in paragraph three on
the second page, ``Access to credit is best conducted in the
open and competitive marketplace.'' This is what I want to know
about. ``Although likely always to be relatively costly due to
the risk profile of the borrowers it serves and the fixed cost
of delivery and collection, the payday loan industry is
increasingly competitive, and fees and profit margins for
providers of payday loans have been reduced in recent years.''
I want you to just tell me what you mean by the risk of the
borrowers. What does that refer to, and how does that relate to
your research?
Mr. Maloney. Well, the riskiness of the borrowers is that
they obviously are not good credit risks or they would have
access to lower-cost credit alternatives. But the fact of the
matter is they are not all that risky in terms of their
default. They are risky to the lender because the lender does
not have very much recourse. The lender can't do much except
not give them another loan, and so that is really what the
riskiness is.
Mr. Cummings. Is this an assumption on your part, or is
this that they are bad credit risks because they use the payday
loan system? Is that an assumption, or is that based on some
research? Have you looked at any credit ratings on these
people? Because, you know, there are a whole lot of people who
are the working poor, and they work hard. Even you, in your
statement you talk about how 10 percent chose payday loans
because they were located at a convenient place.
A lot of these people have not even had access to banks.
Banks are not in their neighborhoods. A lot of them, maybe
their education, maybe they have limited education and they are
trying to figure out the best way, trying to deal with things
the easiest way. It doesn't mean that they are necessarily a
bad credit risk. As a matter of fact, many of them are probably
paying their rent every week. Did you take any of that into
consideration?
Mr. Maloney. Let me just go back a step and say what is
really the riskiness of the borrower from the lender's
perspective is that the lender does not have much recourse to
collecting the debt. There is no real assets at risk. It is not
like a car title loan where the lender can go repossess the
car. So that is a riskiness to the lender.
Mr. Cummings. OK. Let me just ask you this one last
question, because I want to give the weight of your testimony
the weight that it deserves, and you told me that this is
basically what I would call a rolling piece of research,
document, because you said that it is not complete. Am I right?
Mr. Maloney. You are right.
Mr. Cummings. And I am just wondering, do you do work for
the payday loan people? Do you do any research for them?
Mr. Maloney. This study, the payday loan industry has made
grants to Clemson University to fund graduate student research.
Mr. Cummings. All right. Thank you.
Mr. Kucinich. I thank Mr. Cummings.
I just have a couple of final questions, and I would invite
Mr. Davis and Mr. Cummings, if you can just hang in there for a
few minutes then if you would like to ask any final questions.
I want to go back to Mr. Bradford. Your testimony discusses
the coincidence of a few cases where Federal bank regulators
passed banks for outstanding or satisfactory compliance with
the Federal law preventing redlining and discrimination, while
at the same time the Department of Justice is prosecuting these
same banks for discrimination. How do you explain this
coincidence? How can a bank fulfill the purpose of the CRA, on
the one hand, and at the same time be guilty of discrimination?
Mr. Bradford. Well, Mr. Chairman, that is a question I
would sure like to see the regulators have to come up and
answer some time in specific to these cases.
There is an interesting quirk of language that the OTS and
the FDIC used for these same lenders after they were found to
violate these laws. In the CRA reports they usually say ``we
found no violations of fair lending,'' and now they say ``we
were not able to find no violations of fair lending,'' whatever
that means. I mean, even when someone has been essentially
found liable twice in a Federal court, they can't bring
themselves to say there has been a fair lending violation.
I think that is why we recommend that there has to be a
publicly disclosed fair lending exam as part of this process,
because the law was created to stop discrimination in lending,
and if the regulatory agencies can't find it when the Justice
Department finds it over and over again and private individuals
find it over and over again, then there is no point in issuing
these exams and giving them the right to branch.
Mr. Kucinich. You raise a very interesting point, and that
is that if there has been a finding by the Justice Department,
why wouldn't we amend the law if we need to on CRA to say that
has to be taken into account as to whether or not they are in
compliance? Would that----
Mr. Bradford. Well, I think as a practical matter, the
problem is, you know, that your regulatory agencies in a
certain sense are competing with each other, because
institutions change their charter from one place to another for
particular reasons to protect themselves, and so in a way the
financial regulators have been in the business of protecting
their industry. I think they are also concerned about what
liability it creates if they say that they found a violation of
fair lending, because then they are basically exposing that
lender to lawsuits that other people might file.
I think those are issues that they have to face. After all,
they refer cases to the Justice Department when they think
there are violations, and there is no reason why they can't
produce that in their public reports.
But the examples we gave you couldn't be more blatant. I
mean, you know, Centier eliminated the entire city of Gary, IN.
Old Kent eliminated the entire city of Detroit, which is the
largest African American city in the United States. In the
Chicago market Mid-America eliminated all the Black
neighborhoods. It is the largest African American home buying
market in the United States.
I mean, if you are the largest lender, which they were at 1
year, in the largest African American market, and you eliminate
them, you certainly expect a regulatory agency to figure that
out. I just think they are so fundamentally incapable of doing
exams they have to start again. They have to rewrite their
regulations. They have to start the exam trainer all over
again. They are really going to have to go back to square one,
or all the effort that you and other people put into this right
from the beginning seemed lost.
Mr. Kucinich. Mr. Davis, Mr. Cummings, do you have anything
else?
[No response.]
Mr. Kucinich. I want to say to Mr. Bradford, it was
interesting that you produced that document from May 1979,
because it was an institution on, I believe, Kingsman Avenue,
which is in the African American community in Cleveland----
Mr. Bradford. Right.
Mr. Kucinich [continuing]. Where we were experiencing that
people were not getting the benefits that they were putting
money into the bank, but the bank wasn't loaning money back to
the community in a way that was equitable, and that was what
the CRA was designed to do to begin with, to make sure there is
some relationship between people helping to assure the
financial integrity of an institution, putting their deposits
in, and then when they need help to grow a community, you know,
for their homes or whatever reason, they would be able to have
access. CRA was passed to make that mandatory. That was 1979.
Here we are.
I would be happy, by the way, to make sure that is included
in the record.
[The information referred to follows:]
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Mr. Kucinich. This is the Domestic Policy Subcommittee,
which has held a hearing on foreclosure, predatory mortgage,
and payday lending in America's cities. We have had 15
witnesses today on three panels, and we are pleased to have
with us, after almost 6 hours of work here, Mr. Davis and Mr.
Cummings.
We will continue our inquiry into this economic challenge
that is causing so many people in the inner cities to look for
alternative ways of surviving financially and finding
themselves sometimes in a greater bind than they were before
they started.
This committee will stand adjourned. I thank the witnesses
and everyone for participating and hanging in there with us,
including our staff. Thank you.
[Whereupon, at 8:55 p.m., the subcommittee was adjourned.]
[The prepared statement of Hon. Bruce Braley follows:]
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