[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
               PROTECTING THE AMERICAN DREAM (PART II): 
         COMBATING PREDATORY LENDING UNDER THE FAIR HOUSING ACT

=======================================================================

                                HEARING

                               BEFORE THE

                   SUBCOMMITTEE ON THE CONSTITUTION, 
                   CIVIL RIGHTS, AND CIVIL LIBERTIES

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 29, 2010

                               __________

                           Serial No. 111-88

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov



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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            DANIEL E. LUNGREN, California
MAXINE WATERS, California            DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts   J. RANDY FORBES, Virginia
STEVE COHEN, Tennessee               STEVE KING, Iowa
HENRY C. ``HANK'' JOHNSON, Jr.,      TRENT FRANKS, Arizona
  Georgia                            LOUIE GOHMERT, Texas
PEDRO PIERLUISI, Puerto Rico         JIM JORDAN, Ohio
MIKE QUIGLEY, Illinois               TED POE, Texas
JUDY CHU, California                 JASON CHAFFETZ, Utah
LUIS V. GUTIERREZ, Illinois          TOM ROONEY, Florida
TAMMY BALDWIN, Wisconsin             GREGG HARPER, Mississippi
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DEBBIE WASSERMAN SCHULTZ, Florida
DANIEL MAFFEI, New York
[Vacant]

       Perry Apelbaum, Majority Staff Director and Chief Counsel
      Sean McLaughlin, Minority Chief of Staff and General Counsel
                                 ------                                

  Subcommittee on the Constitution, Civil Rights, and Civil Liberties

                   JERROLD NADLER, New York, Chairman

MELVIN L. WATT, North Carolina       F. JAMES SENSENBRENNER, Jr., 
ROBERT C. ``BOBBY'' SCOTT, Virginia  Wisconsin
WILLIAM D. DELAHUNT, Massachusetts   TOM ROONEY, Florida
HENRY C. ``HANK'' JOHNSON, Jr.,      STEVE KING, Iowa
  Georgia                            TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin             LOUIE GOHMERT, Texas
JOHN CONYERS, Jr., Michigan          JIM JORDAN, Ohio
STEVE COHEN, Tennessee
SHEILA JACKSON LEE, Texas
JUDY CHU, California

                     David Lachmann, Chief of Staff

                    Paul B. Taylor, Minority Counsel



                            C O N T E N T S

                              ----------                              

                             APRIL 29, 2010

                                                                   Page

                           OPENING STATEMENT

The Honorable Jerrold Nadler, a Representative in Congress from 
  the State of New York, and Chairman, Subcommittee on the 
  Constitution, Civil Rights, and Civil Liberties................     1

                               WITNESSES

The Honorable Thomas E. Perez, Assistant Attorney General, Civil 
  Rights Division, U.S. Department of Justice
  Oral Testimony.................................................     6
  Prepared Statement.............................................     9
The Honorable A C Wharton, Jr., Mayor, Memphis, TN
  Oral Testimony.................................................    25
  Prepared Statement.............................................    27
Mr. Roger Clegg, President and General Counsel, Center for Equal 
  Opportunity
  Oral Testimony.................................................   138
  Prepared Statement.............................................   141
Ms. Gillian N. Miller
  Oral Testimony.................................................   149
  Prepared Statement.............................................   152
Mr. Gary Klein, Roddy, Klein & Ryan
  Oral Testimony.................................................   159
  Prepared Statement.............................................   162

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable F. James Sensenbrenner, Jr., 
  a Representative in Congress from the State of Wisconsin, and 
  Ranking Member, Subcommittee on the Constitution, Civil Rights, 
  and Civil Liberties............................................     2
Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, 
  Chairman, Committee on the Judiciary, and Member, Subcommittee 
  on the Constitution, Civil Rights, and Civil Liberties.........     3
Prepared Statement of the Honorable Henry C. ``Hank'' Johnson, 
  Jr., a Representative in Congress from the State of Georgia, 
  and Member, Subcommittee on the Constitution, Civil Rights, and 
  Civil Liberties................................................     4
Material submitted by the Honorable Robert C. ``Bobby'' Scott, a 
  Representative in Congress from the State of Virginia, and 
  Member, Subcommittee on the Constitution, Civil Rights, and 
  Civil Liberties................................................   194

                                APPENDIX

Material Submitted for the Hearing Record........................   281


                            PROTECTING THE 
                       AMERICAN DREAM (PART II):
                      COMBATING PREDATORY LENDING 
                       UNDER THE FAIR HOUSING ACT

                              ----------                              


                        THURSDAY, APRIL 29, 2010

              House of Representatives,    
              Subcommittee on the Constitution,    
                 Civil Rights, and Civil Liberties,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 1:45 p.m., in 
room 2141, Rayburn House Office Building, the Honorable Jerrold 
Nadler (Chairman of the Subcommittee) presiding.
    Present: Representatives Nadler, Conyers, Scott, Johnson, 
and Chu.
    Staff Present: (Majority) Michelle Millben, Counsel; 
Elliott Mincberg, Counsel; and Paul Taylor, Minority Counsel.
    Mr. Nadler. This hearing of the Subcommittee on the 
Constitution, Civil Rights, and Civil Liberties will come to 
order. I am sorry we were delayed by the votes on the floor.
    The Chair will begin by recognizing myself for an opening 
statement.
    Today's hearing continuing the Subcommittee's review of the 
Fair Housing Act and its enforcement by the Department of 
Justice. In this hearing, we will be looking at predatory 
lending practices that have targeted minority communities and 
borrowers.
    I am pleased that Assistant Attorney General for Civil 
Rights, Tom Perez, has joined us today to discuss the Civil 
Rights Division's enforcement initiatives in this area. It is 
really refreshing to have a seasoned civil rights lawyer who 
believes in the Division's mission at the helm again.
    Years ago, minority communities were denied credit under a 
policy called redlining, in which individuals who lived in 
those communities were denied credit not on the basis of their 
creditworthiness but on the basis of their race. The term came 
from the practice of simply drawing a red line around the 
minority neighborhood and refusing to lend in that area.
    In addition to being unfair to individual borrowers who 
were otherwise qualified for loans on an equal basis as White 
borrowers, redlining destroyed whole communities around the 
country. Fortunately, States and Federal Government enacted 
fair lending laws to outlaw this practice.
    What we witness today, however, is something called reverse 
redlining, a mortgage brokerage or bank's practice of 
systematically singling out minority borrowers in neighborhoods 
for loans with inferior terms such as high up-front fees, high 
interest rates, or lax underwriting practices.
    It seems that everything old is new again. Here we are 
again looking at the impact of discriminatory lending practices 
on families and communities, but what we are now looking at is 
not the refusal to lend in those areas or to those people, it 
is the refusal to give normal loans. It is steering people into 
subprime and more expensive loans with inferior terms in the 
areas in effect or the groups that used to be red lined.
    What is most pernicious about the more recent practice is 
that the banks figured that they can make more money through 
predatory lending than they can by simply refusing to lend 
altogether. The geographic pattern is the same. Whether you 
look at a map of Memphis or Boston or Baltimore or Brooklyn, 
the pattern is disturbing; and anyone who knows his or her city 
knows exactly who is targeted.
    We know the results of the wave of subprime lending: 
foreclosures, destroyed lives, destroyed credit, destroyed 
communities, and a destroyed financial system. These people are 
the human face of the unrestrained subprime lending spree. And 
what is most disgraceful is that it did not have to happen. 
Many people who were sold subprime mortgages could easily have 
qualified for conventional mortgages, but they were not offered 
conventional mortgages or they were steered into subprime 
mortgages because of their race or their location.
    In addition to hearing about the problem and about how the 
courts and the Justice Department are attempting to address the 
harm, I hope to hear from our witnesses today what more we can 
do to provide the tools necessary to prevent this outrage from 
occurring in the future.
    I want to welcome our distinguished panels of witnesses, 
and I look forward to your testimony.
    I yield back the balance of my time.
    In the interest of proceeding to our witnesses and the 
absence of the distinguished Ranking Member, mindful of our 
busy schedules, I ask that other Members submit their 
statements for the record.
    Without objection, all Members will have 5 legislative days 
to submit opening statement for inclusion in the record.
    [The prepared statement of Mr. Sensenbrenner follows:]

  Prepared Statement of the Honorable F. James Sensenbrenner, Jr., a 
  Representative in Congress from the State of Wisconsin, and Ranking 
   Member, Subcommittee on the Constitution, Civil Rights, and Civil 
                               Liberties

    The Obama Justice Department has made it clear it intends to follow 
the Clinton Administration and file more lawsuits under what is called 
the ``disparate impact'' theory. Disparate impact lawsuits challenge 
practices that lead to statistically worse results for a particular 
group relative to other groups without alleging that the practice is 
actually discriminatory in its terms, design, or application. That is, 
disparate impact lawsuits claim there is discrimination when there is 
often no discrimination at all under any reasonable definition of the 
term.
    Disparate impact theories arose out of Title VII of the Civil 
Rights Act of 1964, which was designed to protect individuals from 
intentional discrimination in employment. The Senate floor managers of 
Title VII, Senators Clifford Case and Joseph Clark, made clear that 
Title VII prohibited only intentional discrimination, and that it did 
not require statistical parity in hiring. In their exhaustive 
memorandum distributed prior to Senate debate on the bill, the Senators 
wrote ``There is no requirement in title VII that an employer maintain 
a racial balance in his work force.'' This was reiterated by Senator 
Hubert Humphrey, who said ``If [a] Senator can find in title VII . . . 
any language which provided that an employer will have to hire on the 
basis of percentage or quota related to color, race, religion, or 
national origin, I will start eating the pages one after another, 
because it is not there.''
    But then Alfred Blumrosen, the Equal Employment Opportunity 
Commission's first chief of compliance, admitted in a law review 
article years later that he employed ``[c]reative administration'' to 
draft regulations under Title VII allowing disparate impact claims. He 
admitted that those regulations did not ``flow from any clear 
congressional grant of authority.'' Subsequently, the courts often 
upheld disparate impact claims even without the grant of congressional 
authority, and different Congresses have from time to time codified 
them in one way or another in other contexts that require businesses 
that are not engaging in discriminatory treatment to ensure their 
products are sold in racially proportionate ways.
    The abuse of the disparate impact theory in courts has had real-
world consequences. There were many pressures on mortgage lenders to 
relax the standards under which loans were extended in the 1990's. But 
one factor was the Clinton Administration Justice Department's 
aggressive pursuit of disparate impact claims in which it sought to 
prosecute entities whose mortgage lending policies did not 
intentionally discriminate, but only had a disparate impact on one 
group or another.
    In 1998, for example, Clinton Administration Housing Secretary 
Andrew Cuomo announced the results of a federal lawsuit settlement in 
which a bank was made to extend $2 billion in loans to people who posed 
a greater credit risk. Secretary Cuomo even admitted during a press 
conference televised on C-Span that ``the 2.1 billion, lending that 
amount in mortgages, will be a higher risk and I'm sure there'll be a 
higher default rate on those mortgages than on the rest of the 
portfolio.''
    A leading article published in the Banking Law Journal at the time 
made clear that ``Lenders relying on written standards and criteria in 
making decisions as to whether to grant a residential mortgage loan 
application run the risk of exposure to liability under the civil 
rights law doctrine known as disparate-impact analysis . . . Several 
underwriting guidelines that are fairly common throughout the mortgage 
lending industry are at risk of disparate-impact analysis [including] 
creditworthiness standards.''
    These lawsuits pressured lenders to bend traditional and time-
tested accounting rules and extend more mortgages to many who could not 
afford them. These relaxed lending standards are now widely regarded as 
being a prime cause of the current financial crisis. Even the 
Washington Post editorialized that ``the problem with the U.S. economy 
. . . has been government's failure to control systemic risks that 
government itself helped to create. We are not witnesses a crisis of 
the free market but a crisis of distorted markets . . . [G]overnment 
helped make mortgages a purportedly sure thing in the first place.''
    As one economist wrote recently in the Wall Street Journal:

        . . . [T]he focus on subprime [mortgages] ignores the widely 
        available industry facts (reported by the Mortgage Bankers 
        Association) that 51% of all foreclosed homes had prime loans, 
        not subprime, and that the foreclosure rate for prime loans 
        grew by 488% compared to a growth rate of 200% for subprime 
        foreclosures ... The suggestions being put forward by the 
        administration and most media outlets--more stringent 
        regulation of subprime lenders--would not have prevented the 
        mortgage meltdown regardless of their merit otherwise. Rather, 
        stronger underwriting standards are needed ... But to do so 
        political leaders must face up to the actual causes of the 
        mortgage crisis, not fictitious causes that fit political 
        agendas and election strategies.

    In our efforts to enforce the nation's housing laws, I hope we do 
not repeat past mistakes. I look forward to hearing from all our 
witnesses today.
                               __________

    [The prepared statement of Mr. Conyers follows:]

Prepared Statement of the Honorable John Conyers, Jr., a Representative 
  in Congress from the State of Michigan, Chairman, Committee on the 
Judiciary, and Member, Subcommittee on the Constitution, Civil Rights, 
                          and Civil Liberties

    Compelling evidence demonstrates that banks and mortgage companies 
have committed prohibited practices of predatory lending and reverse 
redlining targeted at minority communities across the country. The very 
same people victimized by redlining--the refusal to provide 
conventional loans in minority neighborhoods--are now victimized by 
reverse redlining--efforts to steer minority residents of those same 
neighborhoods towards high cost subprime or other predatory loans. 
These practices have played a key role in fueling the home foreclosure 
crisis and devastating communities of color across our nation.
    For example, take my home state of Michigan. The NAACP has reported 
that 70.7% of subprime loans in Michigan in 2006 went to African-
Americans.\1\ In 2009 and the first quarter of 2010, Michigan had the 
sixth highest foreclosure rate in the country.\2\ And as a 2009 study 
by the Applied Research Center found, Detroit neighborhoods with ``high 
proportions of people of color have the highest foreclosure rates.'' 
\3\
---------------------------------------------------------------------------
    \1\ NAACP, Discrimination and Mortgage Lending in America (March 
2009) at 5.
    \2\ See ``Foreclosure activity increases 7 percent in first 
quarter,'' Realty Trac (April 15, 2010); ``Michigan foreclosure rate is 
nation's sixth highest,'' Detroit News (April 16, 2009).
    \3\ Applied Research Center, Race and Recession (May, 2009) at 39.
---------------------------------------------------------------------------
    Listen to what a Detroit attorney who has worked on foreclosure and 
predatory lending issues has to say. I would like to place in the 
record, with unanimous consent, the full statement of attorney Vanessa 
G. Fluker. She explains that:
    ``In my practice, which unfortunately now consists almost solely of 
predatory lending and foreclosure matters, the vast majority of my 
clients are the poor, minorities, and senior citizens over the age of 
75 years old, who initially owned their home outright until steered 
into ARMs, despite the fact that they were on a fixed income, and now 
face foreclosure and homelessness.''
    As we will hear today and as Ms. Fluker states, there are real 
people behind these statistics and these concerns. For example, Mrs. 
Mallory, an African American grandmother on a fixed income in Detroit, 
wanted to take out a $4000 home equity loan to pay for a new furnace 
for her house. She had lived in that house for almost 20 years and had 
almost finished paying for it. But she was pushed by a loan company 
broker to instead take out a larger loan, which he insisted she would 
have no trouble paying back. That was true for six months, but then the 
rate jumped way up, as so many predatory loans do. Soon her house was 
put into foreclosure.\4\
---------------------------------------------------------------------------
    \4\ See Race and Recession at 35.
---------------------------------------------------------------------------
    We will hear today about more stories like Mrs. Mallory's, and 
about efforts to get justice for victims like her. As we listen to 
today's testimony, three important issues should be considered.
    First, what is our federal Department of Justice doing about this 
serious problem? Previous hearings by our Committee have found that the 
Department was not vigorously and effectively enforcing fair housing 
laws, particularly with respect to predatory lending. We have all been 
gratified to hear the public announcements this year and last that the 
Department will take effective action. We look forward to hearing the 
details today from Assistant Attorney General Perez of the Civil Rights 
Division.
    Second, I applaud the efforts of private attorneys and cities like 
Memphis to pursue fair housing claims against lenders charged with 
reverse redlining and predatory lending practices. But individual 
lawsuits are not enough. What can be done to better coordinate efforts 
at the federal, state, and local level to use the fair housing act to 
combat predatory lending?
    Third, what can and should Congress do? Earlier this month, the 
Fair Housing Act, which I was proud to help through Congress in 1968, 
celebrated its forty-second birthday. Are any changes needed in the 
law? Would more hearings like this one be helpful? Are there particular 
programs that Congress should appropriate funds for to better combat 
predatory lending?
    I join Chairman Nadler in welcoming all our witnesses today and 
look forward to their testimony and their answers to these questions.
                               __________

    [The prepared statement of Mr. Johnson follows:]

 Prepared Statement of the Honorable Henry C. ``Hank'' Johnson, Jr., a 
   Representative in Congress from the State of Georgia, and Member, 
  Subcommittee on the Constitution, Civil Rights, and Civil Liberties

    Thank you, Mr. Chairman, for holding this hearing and giving 
Members the opportunity to examine the enforcement of the Fair Housing 
Act, the effect of subprime and predatory lending on the foreclosure 
crisis, and the work of the Justice Department's Civil Rights Division 
of its Fair Lending Unit.
    All Americans have the right to be treated equally and free from 
discrimination. We must ensure that our fair housing laws are strictly 
enforced to protect everyone, especially the most vulnerable, in our 
society.
    Although we have come a long way, many Americans still live in 
communities largely divided by race and ethnicity. Minorities have been 
disproportionately affected by the recent subprime mortgage crisis that 
has resulted in many families losing their homes, and their sense of 
well-being.
    Minorities with much lower home ownership rates have been 
struggling to become part of the home-owning middle class. 
Unfortunately, subprime lenders have taken advantage of that want and 
desire.
    Home Mortgage Disclosure Act data has shown that African-American 
and Latino borrowers were far more likely to receive subprime loans 
than white borrowers.
    There is increasing evidence that the causes of the foreclosure 
crisis include mortgage fraud, predatory lending, discriminatory 
lending, and reverse redlining practices.
    This issue is near and dear to my heart as Georgia ranks 8th in the 
nation for mortgage fraud. This is troubling as mortgage fraud played a 
big role in setting the housing crisis in motion, with mortgage 
professionals listing false income claims for borrowers, and 
overstating a home's appraised value.
    I am especially appalled at the reverse redlining practice. In 
reverse redlining, banks have systematically singled out minority 
neighborhoods for loans with terms like high up-front fees, high 
interest rates, and lax underwriting practices.
    I am anxious to hear from our witnesses today. The U.S. is already 
on course to lose more than a million homes to foreclosure this year, I 
want to know the steps that the Justice Department and HUD are taking 
to prevent predatory lending, and ensure that the Fair Housing Act is 
effectively enforced.
    I look forward to hearing from our witnesses today and yield back.
                               __________

    Mr. Nadler. Without objection, the Chair will be authorized 
to declare a recess of the hearing, which I anticipate doing 
only if there are votes on the floor necessitating such action.
    We turn to our first panel of witnesses numbering exactly 
one, one witness. As we ask questions of our witness, the Chair 
will recognize Members in the order of their seniority in the 
Subcommittee, alternating between the two parties, provided the 
Member is present when his or her turn arrives. The Chair 
reserves the right to accommodate a Member who is unavoidably 
late or only able to be with us for a short time.
    Our first panel consists of the Assistant Attorney General 
for the Civil Rights Division, Tom Perez, who was nominated by 
President Obama to serve in that position and was sworn in on 
October 8, 2009. Mr. Perez previously served as Secretary of 
Maryland's Department of Labor, Licensing, and Regulation, 
which protects consumers through the enforcement of a wide 
range of consumer rights laws, including the mortgage setting. 
From 2002 until 2006, he was a member of the Montgomery County 
Council.
    Earlier in his career, he spent 12 years in Federal public 
service, most of them as a career attorney with the Civil 
Rights Division. Mr. Perez later served as Deputy Assistant 
Attorney General for Civil Rights under Attorney General Janet 
Reno. He received a bachelors degree from Brown University, a 
masters of public policy from the John F. Kennedy School of 
Government and a juris doctorate from Harvard Law School.
    I am pleased to welcome you. Your written statement in its 
entirety will be made a part of the record, and I would ask you 
summarize your testimony in 5 minutes or less.
    And in case the members of the second panel are listening, 
I will ask them to do the same thing, and I will not repeat 
this boilerplate the second time.
    To help you stay within your time, there is a timing light 
at your table. When 1 minute remains, the light will switch 
from green to yellow and then red when the 5 minutes are up.
    Before we begin, it is customary for the Committee to swear 
in its witnesses. If you would please stand and raise your 
right hand to take the oath.
    [Witness sworn.]
    Mr. Nadler. Let the record reflect the witness answered in 
the affirmative. You may be seated, and you are recognized for 
5 minutes for an opening statement.

TESTIMONY OF THE HONORABLE THOMAS E. PEREZ, ASSISTANT ATTORNEY 
   GENERAL, CIVIL RIGHTS DIVISION, U.S. DEPARTMENT OF JUSTICE

    Mr. Perez. Thank you, Mr. Chairman. It is always a pleasure 
to be in front of your Committee, and good afternoon to the 
other Members your Committee and Ranking Member Sensenbrenner.
    We are all by now well aware that the nationwide housing 
crisis that has been a significant factor contributing to our 
Nation's economic unrest was fueled in large part by risky and 
irresponsible lending practices that allowed too many Americans 
to get unsustainable or unaffordable home loans. This crisis 
has overwhelmed families and communities of all kinds, but 
communities of color have been hit particularly hard.
    A study of foreclosures in the New York region by the New 
York Times that looked at neighborhoods with mortgage default 
rates of at least twice the national average found that 85 
percent of those neighborhoods have a majority of African 
American or Latino homeowners. The same study noted that an 
African American household in New York City making more than 
$68,000 a year was almost five times more likely to have a 
subprime loan than similarly situated White people.
    Home Mortgage Disclosure Act data has shown that African 
American and Latino borrowers were far more likely to be put in 
subprime loans, often without correlation to their 
creditworthiness. The more segregated that a community of color 
is, the more likely it is that homeowners who live there will 
face foreclosure because the lenders who peddled the most toxic 
loans targeted those communities. The result is a large number 
of foreclosures in close proximity to each other, with 
devastating consequences to communities.
    As a local elected official and then the State Secretary in 
charge of the department that oversaw the State-wide financial 
industry, I saw the realities of lending discrimination from 
the front row. I had the opportunity to work on solutions at 
the State level, and we did pass a sweeping package of reforms. 
But our reach was limited because large national players are 
not subject to State regulation.
    Perhaps the biggest lesson learned as a local and State 
official trying to address this crisis was that Federal 
oversight and enforcement is absolutely critical to ensuring 
responsible, nondiscriminatory lending. It is for this reason 
that we have established a fair lending unit in the Civil 
Rights Division.
    Both career attorneys, who have been there a while, and new 
hires will staff the unit, which will also have dedicated 
professional staff including economists and statisticians to 
assist in the work of this unit. The unit is focusing on the 
entire range of discriminatory practices seen in the market.
    We have currently have 39 open matters involving large, 
midsize, and small lenders, national lenders, regional lenders, 
local lenders. No single case will capture the full range of 
discriminatory conduct occurring in the mortgage market. 
However, what you see is a series of cases, each one targeted 
at specific discriminatory practices.
    We expect to see cases, for instance, that examine the 
following: discrimination in the underwriting and pricing of 
loans such as discretionary markup and fees, redlining through 
the failure to provide equal lending services to minority 
neighborhoods, reverse redlining through the targeting of 
minority communities for predatory loans, steering minority 
borrowers into less favorable terms such as the case that I 
will describe later, marital status, gender, and age 
discrimination in lending.
    Last month, we announced a settlement with two subsidiaries 
of AIG resolving a lawsuit that alleged that African American 
borrowers nationwide were charged higher fees on wholesale 
loans made by the lenders through contracted brokers. The $6.1 
million settlement marked the largest amount for damages for 
identified victims in a fair lending settlement ever secured by 
the Division, and the case marked the first time that the 
Department has held a lender accountable for failure to monitor 
brokers' fees to insure that the fees are not being charged in 
a racially discriminatory manner.
    Lenders had previously argued that they could not be held 
accountable for the discriminatory practices of brokers. That 
is incorrect, and this case sent an important signal of our 
direction in this area.
    The unit's work will not focus solely on mortgage lending. 
We are committed to tackling discrimination in auto loans and 
other areas of consumer credit as well as in business lending.
    Additionally, we are ramping up enforcement of the 
Servicemember's Civil Relief Act, which dictates that creditors 
may not take action to foreclose a lien against a servicemember 
on active duty without first obtaining a court order. We have 
two cases involving foreclosures against active duty 
servicemembers without a court order and also a number of cases 
involving unlawful repossession of cars belonging to 
servicemembers. This work is a part of a larger, 
Administration-wide effort to crack down on financial fraud so 
that we can eradicate those practices that helped lead to the 
financial meltdown.
    The President's Financial Fraud Enforcement Task Force is 
fostering unprecedented interagency collaboration, a critical 
need in the face of this unprecedented crisis. I am a co-chair, 
along with the HUD and the Fed, of the Task Force's 
Nondiscrimination Working Group. Our relationship with HUD is 
especially critical to ensuring effective enforcement, and we 
have been working closely with our counterparts there. We have 
regular meetings that involve career staff in addition to 
political leaders so that the resulting collaboration will be 
institutionalized as part of our agencies' respective cultures.
    We are also working with State officials. I spent a good 
part of last week with the Attorney General of Illinois working 
on a number of fair lending issues.
    Referrals from banking regulatory agencies are a key 
component of our fair lending enforcement program, and through 
our relationships with these agencies we will continue to 
ensure that we receive a steady flow of referrals and that we 
collaborate so that problems identified in these referrals can 
be addressed expeditiously.
    We also are working with our partners to identify potential 
fair lending violations where much of the lending is occurring 
today, and that is the mortgage modification context. We will 
be getting data soon from the Home Affordable Modification 
Program disaggregated by race and ethnicity, and our work group 
will be collaborating to analyze that and to hold wrongdoers 
accountable.
    There are some who claim that aggressive enforcement of the 
civil rights laws in the fair lending context will hurt the 
very people that we are trying to help and dampen the business 
climate. I have heard that argument many times, and I must 
confess this has not been my experience. Common sense consumer 
protection and promoting a sound climate for lending go hand in 
hand. The absence of effective consumer protections and the 
dearth of meaningful Federal enforcement in recent years not 
only hurt communities but brought about staggering losses in 
the industry.
    Through our efforts and partnerships, the Civil Rights 
Division will continue to ramp up fair lending enforcement to 
ensure that all Americans have equal access to credit without 
which the promise of equal opportunity remained unfulfilled.
    Thank you, Mr. Chairman, for the opportunity to be here; 
and I welcome any questions that you or other Members of the 
Committee might have.
    [The prepared statement of Mr. Perez follows:]

                 Prepared Statement of Thomas E. Perez













                               __________

    Mr. Nadler. I thank you, and I will begin the questions by 
recognizing myself for 5 minutes.
    Mr. Assistant Attorney General, the Fair Housing Testing 
Program was established within the Civil Enforcement Section of 
the Civil Rights Division in 1992 to assist with the 
Department's fair housing enforcement activities. Testing, 
according to the Department, can be a valuable tool to 
investigate housing market practices and to document illegal 
housing discrimination.
    Two years ago, the Department of Justice testified that in 
2006 they were improving and expanding the Fair Housing Testing 
Program; and they testified further 2 years ago that the tests 
were producing new cases and significant results. Can you 
describe the effectiveness of testing?
    Mr. Perez. Our testing program has been very, very 
effective. There is a case in Atlanta involving Coldwell Banker 
in which we used testers to uncover steering by real estate 
agents. And, among other things, the real estate agent, when he 
first met the person, he had said that he wasn't sure where to 
take him to look at potential homes because: I couldn't tell--
and I am quoting--I didn't know if you were a Caucasian or not 
over the phone. So he did not know where to take that person. 
And the testing----
    Mr. Nadler. He said that out loud?
    Mr. Perez. Oh, yes. And then we had another case in Alabama 
involving a rental in which the rental agent said to the White 
tester: You will love this place. There are no Black people 
here. Quote, unquote.
    So our undercover testing is a very, very important tool to 
eradicate discrimination. And, regrettably, a lot of the 
discrimination we see is not very subtle. Those two cases are 
illustrations of the fact that it is not very subtle, and that 
is why we will continue to have a robust testing program. 
Because it does enable us----
    Mr. Nadler. Have you expanded the testing program and can 
you cite improvements since the new Administration took over?
    Mr. Perez. Yes, I think what we are trying to do and what 
we have succeeded in doing--first of all, we reestablished 
partnerships with fair housing groups. There was very little 
communication with fair housing groups. These are the boots-on-
the-ground groups, and they enable us--for instance, I was in 
Birmingham, Alabama, about 2 weeks ago; and I heard from fair 
housing groups, here are some areas where we believe your 
testers should focus because this is what we have learned. What 
I found was that we were doing, frankly, a lot of testing, but 
I am not sure we were deploying our resources----
    Mr. Nadler. In the right areas.
    Mr. Perez [continuing]. As smart as possible because we 
didn't have those relationships with the frontline people who 
can help us.
    So what we are doing I think better now is the strategic 
deployment of our resources in an evidence-based fashion so 
that we can yield better results from tests that we do.
    Mr. Nadler. Thank you.
    In the past, Members of this Committee have expressed 
concern over the types of cases being pursued by the 
Department. Data suggests that the Department of Justice's 
enforcement of traditional civil rights cases sharply declined 
during the previous Administration. In the context of fair 
housing enforcement, DOJ filed fewer fair housing cases in 2007 
and 2006 in comparison to previous years: 35 fair housing cases 
in 2007, 31 in 2006, compared to 42 in 2005, and down from 53 
in 2001.
    In order to continue the rebuilding of the Civil Rights 
Division, can you talk very briefly about the professional 
credentials and backgrounds of the attorneys and the 
individuals? For example, how many attorneys have extensive 
experience in complex litigation?
    Mr. Perez. Sir, thanks to your leadership and the 
leadership of the President and the Attorney General, we have 
102 new positions in the Civil Rights Division in fiscal year 
2010. So your question is very timely, because the housing 
section is getting a significant complement of those new 
resources, and we have hired people who have extensive 
experience in fair lending. We are hiring people who have 
extensive experience in zoning. What we are finding is that a 
lot of the discriminatory barriers we are seeing in 2010 relate 
to zoning laws that are really subterfuges for discrimination.
    And, frankly, the other thing we are doing, in addition to 
hiring remarkable people--and we have something like 500 
applicants, Mr. Chairman, for roughly 8 or 10 attorney slots. 
And in addition to bringing in the new people we have got some 
remarkable people who were there throughout and done great 
work. And then, equally importantly, we are using every 
available tool in our arsenal.
    The AIG case I described was a case in which we used our 
disparate impact theory, which is a theory that every circuit 
in the Nation that has ruled on has ruled is a viable theory. 
That theory was not allowed to be put forward in those cases, 
and now we are using all of our arrows in our quiver.
    Mr. Nadler. Okay. Thank you.
    My time is going to run out shortly. I want to ask one more 
question on the question of discriminatory lending practices.
    In New York City, African American homeowners making more 
than $68,000--we are not taking about poor people here--were 
almost five times as likely to hold high-interest mortgages in 
comparison to Whites with similar or even lower incomes. An 
even greater disparity was reflected among Wells Fargo 
borrowers in New York, with subprime mortgages assigned to 16 
percent of African Americans and 2 percent of Whites, again 
people making more than $68,000.
    The Chicago Reporter found that, quote, African Americans 
earning $100,000 a year or more were three times more likely 
than their White counterparts to get high-cost loans, closed 
quote.
    The Wall Street Journal reports that, of subprime loan 
borrowers generally, by the end of 2006 61 percent of such 
borrowers had credit scores that were high enough to qualify 
for conventional loans with better terms.
    In your opening remarks, you discussed cases and 
investigations involving minorities paying more for loans than 
White borrowers or being steered into subprime loans. Can you 
discuss, first, why that would happen? Why are we seeing 
minority people who are capable financially, who have good 
credit scores and good incomes, who are capable of taking 
standard, relatively low-interest loans, why are they being 
steered into subprime loans and higher loans? And why is this 
happening and what can you do about it?
    And, A, why is it happening; two, what can you do about it; 
and, three, do you have any recommendations about what Congress 
might do to enhance your enforcement capabilities?
    Mr. Perez. Why is it happening? Because you can make more 
money by steering people into these toxic products that will 
give you a higher commission.
    Mr. Nadler. Of course, if you are a major bank, you can 
make more money by steering people into toxic--into these 
products. But why the racial discrimination? I am out to 
exploit people. Why should I care if they are Black or White? 
Why don't I exploit everybody if I can get away with it?
    Mr. Perez. Frankly, what we see in the lending context is 
we see behavior that that is predatory. Certain unscrupulous 
lenders are targeting everyone and anyone that they can 
bamboozle. We see behavior that is fraudulent. We see behavior 
that is discriminatory, that is targeting minority communities. 
So not all--when we talk about the wide panoply of abuses, some 
of the abuses are indeed predatory. They are equal opportunity.
    Mr. Nadler. Equal opportunity terrible?
    Mr. Perez. Yes, and some of the behavior is discriminatory, 
targeting low-income communities; and part of that targeting is 
you get somebody into a bad loan and then it is the gift that 
keeps on giving. Because a year later you come back to them and 
say, you know, that loan, I don't know if it is sustainable. 
Why don't we refinance? And then you get another set of fees. 
And given the securitization, the day after the loan is closed 
the broker has made their money; and it does not matter whether 
it is a sustainable loan. So that is part of the why.
    The what are we doing? We are doing quite a lot. You saw 
the AIG case. We have investigations ongoing against large and 
small borrowers. We have the national, State, and local 
borrowers--lenders, I should say. We have the capacity to do 
the regression analyses.
    Because what we often hear from critics is that, well, 
minority communities have problems with credit scores and 
things of that nature. And what we have found through the work 
that we have done is that when you control for all of those 
things, there is still discrimination at work.
    Your point about upper-income African Americans, it is true 
in New York. It is true where I live in Montgomery County, 
which is one of the 10 or 12 wealthiest counties in the United 
States. And we did the same analysis when I was on the county 
council there. It is very troubling problem.
    The last question about what to do, there are two issues I 
would like to bring to your attention, one of which relates to 
fair lending. When the alphabet soup of regulators, OCC, et 
al., are conducting reviews, they have the ability to subpoena 
documents. When HUD is conducting a review, they have the 
ability, pre-complaint, to subpoena documents. The only entity 
who has enforcement authority that does not have that similar 
subpoena power is the Civil Rights Division. So I would simply 
make that observation.
    Second observation I would make relates to how technology 
has not kept pace--civil rights laws have not kept pace with 
technology. If you go on line--and a lot of people will now 
rent their apartments or try to get loans, et cetera, through 
the Internet or through Craigslist or all of those various 
entities, and we don't have authority under our tools to do 
that because the Communications Decency Act exempts them. And 
there are a couple of Court of Appeals cases that say that 
Craigslist--the Fair Housing Act doesn't apply to Craigslist.
    Mr. Nadler. So we ought to amend the law to simply extend 
the jurisdiction of the Fair Housing Act and the Fair Credit 
Act to some of these other things?
    Mr. Perez. That would enable us to have a level playing 
field to root out----
    Mr. Nadler. We will be talking to you about this. Thank you 
very much. I have exceeded my time.
    The gentleman from Virginia is recognized.
    Mr. Scott. Good afternoon.
    I would like to follow up briefly on Craigslist. Is there a 
threshold number of units you have to have--be renting to be 
under the Fair Housing Act?
    Mr. Perez. Not for statements. So if you have a statement 
that says, no people with children need apply, it doesn't 
matter whether you have a 10-unit building or you have the 
garden apartment in the basement.
    Mr. Scott. Okay. You mentioned testing for real estate 
agents. Do you test on loans? Have testers go in and try and 
get a loan, somebody else similarly situated, variable only 
being race with a credit score being virtually identical to see 
what the difference looks like?
    Mr. Perez. We have authority to go in pre-application and 
test. If you attempt to do post-application testing, there are 
Federal laws that create barriers, in other words, the law 
being lying on an application. So that law does not prevent 
pre-application testing. In fact, pre-application testing can 
be very, very effective. It was used in the past in the 
Division, as I understand it; and it's one of the strategies 
that we are contemplating now in our fair lending work. But it 
has to be pre-application testing.
    Mr. Scott. You mentioned mortgage fraud--or the fraudulent 
way they are doing business. One of the things about these no--
these recourse loans where the mortgage broker does it and 
securitizes it and they get out of it, there is a period of 
time where the person who buys the mortgage does have recourse. 
If they don't pay it off right off the bat, the mortgage broker 
might get stuck with the loan, and it might come back.
    One of the things they have done to get past this little 
period is to have these teaser rates where the borrower 
actually pays a teaser rate a couple of months, gets past the 
recourse, and then when it gets jacked up, obviously, they 
never could have paid it. Is there something inherently 
fraudulent about that practice?
    Mr. Perez. I think every case is case specific, and I think 
the key to those situations is you need to qualify the person 
not at the teaser rate but at the rate that it will go up to.
    Mr. Scott. They obviously don't qualify for the jacked-up 
rate, but they don't care. Because if they can get them past 
the period of time with the teaser rate during that period of 
time, then there is no recourse and it is not their problem. 
Isn't that inherently fraudulent?
    Mr. Perez. I think it is irresponsible. And whether it 
rises to the level of fraudulent I think is a case-specific 
determination. But we tried very hard in Maryland to ensure 
that when you are trying to qualify someone that you are not 
qualifying them at these teaser rates, because those are 
invitations for failure.
    Mr. Scott. Does the mortgage broker have any fiduciary duty 
to the borrower?
    Mr. Perez. It often depends on what State you live in. Some 
States have a duty of good faith and fair dealing. The various 
duties basically are a State-by-State issue. And one of the----
    Mr. Scott. Is there any way we can do this federally? 
Because if the broker has no fiduciary duty, his incentive is 
just to rip them off the best you can. If there is a fiduciary 
duty, you can't do that.
    Mr. Perez. We have seen a lot of activity vis-a-vis 
brokers, and the majority of brokers are responsible. But there 
are a sufficient number of bad apples. That I think is an area 
where regulation is appropriate.
    Mr. Scott. Is there anything in Federal law, regulation, in 
terms of subprime loans that Congress encouraged in any way 
banks to get into this in such a way that it contributed to the 
economic collapse? There is some suggestion that because banks 
felt compelled to make these loans that were not getting paid 
back that that was the cause of the economic collapse.
    Mr. Perez. Well, I have heard it often said, and I heard 
this as recently as a week ago, the Community Reinvestment Act 
is the main reason or one of the main reasons why we have seen 
the crisis that we have seen. And, frankly, the evidence 
doesn't support that. The Community Reinvestment Act was 
originally passed, I believe it was, in 1977; and if indeed 
that was the impetus then we should have seen a problem 10, 20 
years ago.
    In fact, the evidence shows that the loans that have been 
underwritten under the Community Reinvestment Act are some of 
the most solid loans we have seen. And, in addition, the large 
lenders, like Countrywide and others that were most responsible 
for the meltdown, are not even subject to the Community 
Reinvestment Act.
    So that has really proven in my judgment, and I think the 
evidence demonstrates it, that that whole Community 
Reinvestment Act was the problem is the quintessential red 
herring.
    Mr. Scott. Are Community Reinvestment Act loans set aside--
can you tell which ones were made pursuant to the Community 
Reinvestment Act so they can be individually or as a category 
evaluated?
    Mr. Perez. Yes, there have been studies that have looked at 
that and the Community Reinvestment Act--lenders covered by the 
Community Reinvestment Act--there was a study in 2006 by the 
Fed. Lenders covered by the Community Investment Act originated 
about 6 percent of the subprime loans that were made in the 
area where the lender was assessed for CRA compliance.
    Again, the big dogs in this subprime mess, Countrywide, 
Wells Fargo, et cetera, they were not subject to CRA. And that 
is why I say--and Wells Fargo is slightly different because 
they are a bank. But they have so many operating subsidiaries 
that the operating subsidiaries that were doing the most toxic 
products were the operating subsidiaries that were not subject 
to CRA. So that is really a red herring. And frankly, if we had 
more responsible CRA lending, I think we would be in a much 
better place.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Nadler. I see the Chairman of the parent Judiciary 
Committee has arrived. Does the Chairman want to make an 
opening statement at this point?
    Mr. Conyers. No.
    Mr. Nadler. Do you want to question him now?
    Then I will recognize the gentleman from Georgia for 5 
minutes.
    Mr. Johnson. Thank you, Mr. Chairman.
    Mr. Chairman, I have been in Congress now for about 3\1/2\ 
years. This is the first Subcommittee hearing that I have 
attended where there are no Members from the other side of the 
aisle present. If I had control of the video processes of this 
Committee, of this Subcommittee, I would order them at this 
time to just take a shot to see all of the folks on this side 
of the aisle that are here versus zero folks on the other side 
of the aisle. But since I don't have that power, perhaps my 
words will suffice. But I will say that I find it strange that 
the other side is not here.
    I would ask, Mr. Perez, is it not true that the practices 
of various components of the financial services industry--
fraudulent practices of various segments of the financial 
services industry are what led to the financial meltdown that 
we have suffered from in this country since 2008?
    Mr. Perez. I think the fraudulent and at times predatory 
and at times discriminatory and at times all of the above 
practices and the failure to effectively regulate with the 
alphabet soup of Federal agencies that have authority to 
regulate were certainly factors--important factors that led to 
the crisis that we have been experiencing.
    Mr. Johnson. So in addition to housing discrimination and 
housing--unfair housing practices directed toward minorities, 
i.e., predatory lending practices, we have had the same kinds 
of problems with respect to the automobile lending industry, 
the student loan industry, particularly the private student 
loan industry, consumer lending in general, credit cards. All 
of these excesses, fraudulent activity, discriminatory 
activity, predatory lending activity have contributed to this 
meltdown, isn't that correct?
    Mr. Perez. Yes, sir.
    Mr. Johnson. And I am happy to note that your unit inside 
the Justice Department will be focusing on all of these areas, 
in addition to fair housing practices; correct?
    Mr. Perez. Yes, sir, especially--not especially, but 
including but not limited to protecting our men and women of 
the Armed Forces who are deployed abroad and then while they 
are deployed overseas they find that someone is trying to 
foreclose on their home or someone is trying to repossess their 
car and they haven't followed the proper process. When people 
are protecting our Nation, we owe it to them to protect their 
backs here at home, and that is precisely what we are doing 
through the tools that you have given us.
    Mr. Johnson. Well, I am certainly proud to bestow more 
resources upon your unit to clean up what got us into this 
horrendous financial meltdown that we continue to suffer from 
today that has resulted in people losing their jobs and their 
homes.
    But I do want to--in focusing on this fair housing 
situation that has--fair housing law that has been unenforced 
over the last decade, it has resulted in a number of children 
and families becoming homeless. So, in other words, as a result 
of these financial practices, one of the results is more 
homeless children and youth--2 million children, it has been 
reported, have been rendered homeless because of the 
foreclosure practice.
    With so many families and children, especially families and 
children of color, suffering greater impact in the foreclosure 
practice, is the Department of Justice increasing its renting 
testing, especially with African American and Latino families 
with children of all ages?
    Mr. Perez. We have a robust testing program. We test on 
issues of racial discrimination. We test on disability 
discrimination, ethnicity discrimination. And I described two 
cases that were the product of testing, and we have many 
others, and we will continue to do that, including family 
status, people who are losing their homes in many of the ways 
you described.
    Mr. Johnson. Well, with many people losing their homes, 
becoming homeless, maybe getting back on their feet, they need 
to go into rental housing.
    Mr. Perez. Correct.
    Mr. Johnson. And you are focusing on rental housing and 
testing in that market?
    Mr. Perez. We have a heavy focus in the rental market. In 
fact, the largest settlement in the history of the Fair Housing 
Act was a rental discrimination case in Southern California 
involving the owner of the Los Angeles Clippers, Donald 
Sterling, and that case involved discrimination in rental 
housing against African American and Latino would-be renters. 
And a big part of the settlement in that case in terms of 
compliance monitoring will be testing. Because it is one thing 
to reach a settlement, but then you have to got to make sure 
that you have truly stopped the discriminatory behavior. So we 
are not going away because we saw some serious pattern and 
practice problems in that particular area.
    Mr. Johnson. And last thing I would like to speak on are 
the Federal insured--is the federally insured private student 
loan market where you get a lot of private institutions of 
higher learning which really have no accreditation and they end 
up being steered--or they end up steering students into that 
private student lending market, as opposed to the traditional 
student loan market.
    That market is the subject of the legislation that Mr. 
Cohen out of Tennessee has proposed that would make those loans 
dischargeable in bankruptcy. In 2005, they were granted 
nondischargeability status; and I would want your unit to look 
into those types of lending practices within that market as 
well.
    They feature high-cost loans, adjustable rates, and since 
they are not dischargeable, that means lenders are insisting 
upon strict repayment terms without regard to the debtor's 
ability to repay the loan. So I want you to take a close look 
at that. This legislation of Mr. Cohen is pretty important.
    So I will close with that. Thank you, Mr. Chairman.
    Mr. Nadler. Thank you.
    I now recognize the gentlewoman from California.
    Ms. Chu. Thank you, Mr. Chairman.
    Well, I am particularly shocked by the blatant 
discriminatory practices of Wells Fargo Bank and their clear 
intent to steer Blacks to more expensive, riskier loans, 
despite the fact that there is a Fair Housing Act, and that 
they even instructed loan officers to place African American 
borrowers who had excellent credit into subprime mortgages and 
fired employees who didn't comply.
    Now, the State of Illinois sued Wells Fargo for doing this; 
and, in their case, they state that Wells Fargo lacked policies 
to prevent borrowers from being purposefully steered into high-
cost subprime and risky mortgages. Are banks required to have 
such policies in place?
    Mr. Perez. Yes, ma'am.
    Ms. Chu. What kind of actions can DOJ make to ensure that 
lending institutions do carry out these policies?
    Mr. Perez. We have two primary tools, Congresswoman, and 
they are the Fair Housing Act and the Equal Opportunity Act. We 
have, again, a robust docket of cases involving large and small 
lenders alike; and we are looking at origination practices. Was 
there discrimination? Were people steered into high-cost loans 
on account of their race when they could have qualified for 
conventional loans that would have saved them a lot of money? 
Were the lending practices targeting minority communities, as 
we talked about before, the phenomenon of reverse redlining 
where the minority community is being targeted for these toxic 
products?
    We have the capacity under the Equal Credit Opportunity Act 
and the Fair Housing Act to eliminate both intentional 
discrimination and policies and practices that may be neutral 
on their face but have the effect or a disproportionate adverse 
impact based on race. And we are actively looking at----
    Again, I mentioned we have a docket of about 39 cases right 
now. And we just settled the AIG case that I talked about, 
which was a case about the relationship between lenders and 
brokers. That is one form of discrimination that we see, but we 
see many different forms, and I think what you will see in the 
months ahead as we move forward are cases that address varying 
aspects of the discrimination that we have seen.
    Ms. Chu. Are you certain that every lending institution 
does in fact have a policy in place?
    Mr. Perez. Well, I think it makes sense for a lending 
institution as a matter of safety and soundness and as a matter 
of sound compliance with both civil rights obligations and fair 
lending obligations relating to anti-predatory lending and 
consumer protection ordinances to ensure that every part of 
their process from soup to nuts is a process designed to ensure 
that there is no discrimination and that people--that you are 
lending to people who have the ability to repay and that you 
have taken steps to monitor your own internal practices.
    I do a lot of police work, and it is really no different, 
making sure you have continuous internal quality control. And 
if those controls are not in place, you see in police 
departments and you see in lending institutions a lot of the 
excesses that we, from time to time, observe.
    Ms. Chu. Well, I guess what I am wondering is how do you 
know that they have those internal mechanisms in place?
    Mr. Perez. What we are finding in some of our 
investigations is those mechanisms are not in place. I am not 
here to contend that they are in every case. That is actually 
one of the critical factual questions that is often the focus 
of our investigations.
    I apologize. I think I misheard your question.
    Ms. Chu. It is monitoring.
    Mr. Perez. I apologize.
    Ms. Chu. You are actively looking at that?
    Mr. Perez. Absolutely.
    Ms. Chu. And providing some oversight on that?
    I also have a question about HAMP. Of course, they are a 
large part of dealing with foreclosure issues, making sure that 
our Home Affordable Modification Program is addressing the 
needs of people out there that are facing foreclosure. The 
Treasury Department said that it will collect information to 
make sure that this program is not practicing discrimination, 
but so far none of this information has been released. Do you 
know whether this information is even being collected?
    Mr. Perez. It is my understanding that the information is 
being collected, and I believe they began collecting the 
information as of December of 2009, the information 
disaggregated by race and ethnicity. We are working very 
closely with our partners at Treasury to access the data so 
that we can conduct an analysis to ensure that the program is 
being administered in a nondiscriminatory fashion.
    We are also looking at other aspects that are perhaps not 
discrimination per se but are very problematic, practices such 
as entities who are examining somebody's application for a 
modification. Under the terms of the HAMP program, you are not 
allowed to initiate foreclosure proceedings during the pendancy 
of that review; and what we are finding anecdotally--and I 
heard this as recently when I was in Wisconsin and I heard it 2 
weeks ago in Birmingham--that there are case after case after 
case where foreclosure proceedings are being initiated when the 
homeowner hasn't even gotten an answer to the question.
    At a minimum, if those facts are accurate, that is a breach 
of contract, because those who signed up in the HAMP program 
made a commitment not to do that. And that is one of the most 
frequent problems that we are seeing.
    So we are doing our level best to, obviously, keep our 
radar up for the discrimination issues, but as we hear other 
concerns with the implementation of HAMP we are working closely 
with our partners at Treasury and HUD and elsewhere to address 
those situations.
    Because people who are--people in trouble need four things: 
They need time, they need money, they need a good advocate, and 
they need government regulators who are actually doing the 
regulating that they are supposed to be doing. That is our role 
and what we are trying to do.
    Ms. Chu. So you are saying you are getting the information 
from the Treasury in terms of the discriminatory practices. It 
is just that it has not been made public to----
    Mr. Perez. The data--right--the data was collected 
beginning in December of 2009. That is my understanding. The 
data is still being scrubbed, and we hope to get the data that 
is being collected in the very near future. We have very 
regular conversations with our partners over at Treasury on 
this issue because we are, obviously, very interested in 
monitoring compliance.
    Ms. Chu. Thank you.
    Mr. Nadler. Thank you. And we thank the witness.
    Mr. Perez. Thank you, Mr. Chairman. Always a pleasure to be 
here.
    Mr. Nadler. We will now proceed with our second panel. I 
would ask the witnesses to take their place and, in the 
interest of time, I will introduce the witnesses while they are 
taking their seats.
    A C Wharton, Jr., was elected the mayor of Memphis in a 
special election held on October 15, 2009--in other words, last 
October--to complete the term of the former mayor, Willie 
Herenton. Mayor Wharton previously served as the mayor of 
Shelby County, Tennessee. First elected in August of 2002 and 
reelected in August of 2006.
    Mayor Wharton attended the Tennessee State University. He 
received a bachelor's degree in political science, and later 
earned his law degree from the University of Mississippi.
    Roger Clegg is the President and General Counsel for the 
Center for Equal Opportunity. From 1982 to 1993, Mr. Clegg held 
a number of positions in the U.S. Department of Justice, 
including Assistant to the Solicitor General and the number two 
official in the Civil Rights Division and Environment Division. 
From 1992 to 1997, Mr. Clegg was the Vice President and General 
Counsel of the National Legal Center for the Public Interest. 
He is a graduate of Rice University and Yale Law School.
    Gillian Miller is a single mother of three from Boston, 
Massachusetts. In 2005, she purchased a home, but, despite her 
good credit score, Mrs. Miller was only offered a subprime 
adjustable rate mortgage by her lender. Like many Americans in 
her position, Mrs. Miller eventually found herself unable to 
make the increasing payments on her loan, resulting in the loss 
of her home in 2006. She is currently a plaintiff in a 
discrimination lawsuit against Countrywide Financial Mortgages.
    Gary Klein is currently a principal at the firm of Roddy, 
Klein & Ryan. He has litigated cases involving predatory 
lending and servicing and mortgage charging and wrongful 
foreclosure. From 1991 to 2000, Mr. Klein was a senior attorney 
at the National Consumer Law Center and Director of the Center 
of Sustainable Homeownership Initiative. He is a graduate of 
Yale University and Rutgers University Law School.
    I am pleased to welcome all of you. Your witness statements 
will be made a part of the record in their entirety.
    I would ask each of you to summarize your testimony in 5 
minutes or less. To help you stay within that time, there is a 
timing light at your table. When 1 minute remains, the light 
will switch from green to yellow and then red when the 5 
minutes is up. I trust you heard that when I said that to the 
first panel.
    Before we begin, we will swear in the witnesses, which is 
our custom. If you would stand and raise your right hands to 
take the oath.
    [Witnesses sworn.]
    Mr. Nadler. Let the record reflect the witnesses answered 
in the affirmative, and you may be seated.
    I recognize for 5 minutes the Honorable Mayor Wharton.

         TESTIMONY OF THE HONORABLE A C WHARTON, JR., 
                       MAYOR, MEMPHIS, TN

    Mr. Wharton. Thank you, Mr. Chairman.
    Again, Chairman Nadler, Ranking Member Sensenbrenner, and 
Members of the Subcommittee, I want to thank you for the 
opportunity to address you on this afternoon.
    Also, I wish to extend a special thanks to my Congressman 
and friend, the Honorable Steve Cohen--who met me earlier and 
said that he had to be away from this hearing--for his 
graciousness and his fierce engagement on this most important 
issue.
    I am indeed delighted to be present today. Although I am 
currently the mayor of Memphis, I feel that my words will not 
only represent the struggles of my own city and county with 
respect to this issue but they will also echo the frustrations 
of other mayors and local officials grappling with the serious 
consequences of predatory lending.
    In his address before the signing of the landmark Civil 
Rights Act of 1968, President Lyndon Baines Johnson recognized 
Dr. Martin Luther King, Jr., and Dr. King's involvement on the 
subject of nondiscrimination in housing. This legislation, 
inclusive of Title VIII of the Fair Housing Act, as it is 
commonly known, was signed into law by President Johnson on 
that day, April 11, 1968. And while this event was historic and 
memorable, a truly seminal moment in civil rights, this signing 
ceremony was overcast by the long shadow of Dr. King's 
assassination in my home City of Memphis, Tennessee, exactly 1 
week earlier. It is altogether befitting that Memphis, inspired 
by the legacy of Dr. King, has taken on the updated fight for 
nondiscrimination in housing with the reverse redlining lawsuit 
that our city and county filed against Wells Fargo on December 
30, 2009.
    We allege in that lawsuit that Wells Fargo targeted 
minority citizens and communities in Memphis for predatory 
loans that offered a fragile opportunity for homeownership that 
was essentially a financial house of cards.
    As we have advanced this cause and found the voice for our 
grievance in the Fair Housing Act, we have been ever mindful of 
a larger context to be considered. Having taught law school for 
many years, I understand implicitly the sensitivity we all must 
have to the changing face of discrimination. The long and 
storied history of civil rights clearly shows us that one 
generation's Jim Crow is another generation's glass ceiling in 
corporate America. Outright police brutality was largely 
banished, only to be later repatriated under the identity of 
racial profiling.
    Against the changing backdrop of political and social 
realities, we must continue to ensure that the principles of 
fairness and equity do not fall victim to discrimination in new 
forms and with new names.
    It is our contention that the discriminatory acts that once 
kept African Americans from renting or owning homes in certain 
neighborhoods is hardly different from blatant actions from 
financial institutions that singled out African Americans with 
noxious agreements that were rotten to the core. Simply put, 
predatory lending is to this generation what no lending to 
Blacks and Latinos was a generation before.
    In Memphis, our reality is particularly unsettling as we 
see whole neighborhoods that have been picked apart and 
hollowed out by foreclosed properties. With State law that 
allows for nonjudicial foreclosures since the year 2000, 
foreclosures in Shelby County have increased by 180 percent.
    Now you know Memphis to be the city of the blues. Some 
might say you are just singing the blues. We are not. We are 
simply crying foul. And if you look at Wells Fargo foreclosure 
rate in predominantly African American neighborhoods in Shelby 
county, it is nearly seven times as high as its foreclosure 
rate in predominantly White neighborhoods. It is particularly 
acute in minority neighborhoods in South Memphis, Hickory Hill, 
Orange Mound, and other neighborhoods with African American 
populations exceeding 80 percent.
    As I sum up, I will simply go back to a few years back, a 
few decades back, when we, after the following of the many 
riots in our cities, we had the Kerner Commission that 
concluded that America was moving to two societies, one Black, 
one White. If this situation is not remedied, we will soon be 
moving to a different kind of dual society, one in which 
homeownership is a dream, the other in which it is a nightmare.
    Thank you.
    [The prepared statement of Mr. Wharton follows:]

                 Prepared Statement of A C Wharton, Jr.

































































































































































































































                               __________

    Mr. Nadler. I thank you.
    I recognize Mr. Clegg for 5 minutes.

TESTIMONY OF ROGER CLEGG, PRESIDENT AND GENERAL COUNSEL, CENTER 
                     FOR EQUAL OPPORTUNITY

    Mr. Clegg. Thank you very much, Mr. Chairman, for the 
opportunity to testify this afternoon before the Subcommittee.
    My name is Roger Clegg. I am President and General Counsel 
of the Center for Equal Opportunity. I should also note that I 
was a Deputy in the Justice Department's Civil Rights Division 
from 1987 to 1991, and during part of that time I supervised 
the housing and public accommodations section.
    My written statement today, Mr. Chairman, makes four 
points. Just briefly, it is and should be illegal for lenders 
to treat people differently on the basis of race or ethnicity.
    Second, lending practices that do not discriminate in their 
terms, application, or intent on the basis of race or ethnicity 
but simply have disproportionate effects on that basis are not 
and should not be illegal.
    Third, I have no opinion on whether bans on subprime 
lending are a good idea as a matter of macroeconomic policy, 
but I would note that one likely effect of such a ban is to 
make loans of any kind unavailable to people who will be viewed 
by lenders as unacceptable default risks unless they are 
charged higher interest rates.
    Fourth, nobody knows exactly what role racial and ethnic 
discrimination played in the mortgage meltdown, but it is at 
least as likely that politically correct rather than 
politically incorrect discrimination played a serious role; 
and, accordingly, it would be quite foolish for the Federal 
Government to repeat its policies during the Clinton and Bush 
administrations of pressuring lenders to make more home loans 
to people whose creditworthiness is marginal.
    In that regard, Mr. Chairman, I want to commend to the 
Subcommittee's reading a report that was put out by the United 
States Commission on ``Civil Rights last year on Civil Rights 
and the Mortgage Crisis.'' It is quite evenhanded. In fact, it 
is so evenhanded that in many respects it does not draw 
conclusions. But it is, nonetheless, I think a very useful 
compilation of information in a disinterested way on the role 
that race and ethnicity may have played in mortgage policies 
and in the mortgage crisis.
    For the balance of my time I would like to make a few other 
points that are not in my written statement but that are 
prompted by the statements that the other witnesses have made; 
and, of course, I didn't get those statements until after my 
own statement was due, so that's why I'm playing catch-up here.
    One point I would make is something that, Mr. Chairman, I 
think you've already sort of, you know, hinted at. And that is 
that even if subprime loans were evenly spread among racial 
groups there would still be a problem if they were unfair or if 
they had dangerous macroeconomic effects. That's one reason why 
I think that, in looking at this issue, it's important to bear 
in mind that, in some instances, there might be problems 
whether or not there is discrimination on the basis of race and 
ethnicity.
    Reading the other witnesses' narratives, the basic point 
seems to be that there are these evil moneylenders out there 
that are targeting African Americans and African American 
communities for subprime loans because they are gullible enough 
to accept them. I'm skeptical that most lenders are 
deliberately deciding to charge higher interest rates on the 
basis of race rather than on the basis of creditworthiness. I 
don't think that most lenders like to make loans that are going 
to be defaulted on, and there are plenty of lenders out there 
so that competition among them will keep interest rates at a 
reasonable level.
    Even if this is true, even if African Americans or other 
groups are being targeted, I want to go on and offer one other 
observation. This is not a new claim, and it's not limited to 
the home loan area. In fact, we've already heard that this is a 
problem or an allegation that's made in other areas, too--auto 
loans and so forth.
    In our economy, it is not very efficient to say that the 
government has to go around and investigate every business that 
has price variations from day to day, from place to place, and 
from customer to customer. And I hasten to stress that racial 
discrimination in lending is wrong, and it is illegal. But, 
ultimately, the best way for customers, for consumers to 
protect themselves is by shopping around and by maybe making 
the decision that they should not buy. Don't buy a car at the 
first dealership that you walk into. Check the newspaper, the 
real estate section, every day as to what the going rate is for 
real estate loans. Don't validate the Black-people-are-gullible 
stereotype.
    I know I'm going to be accused of blaming the victim, but 
sometimes the victim does have to shoulder some of the blame. 
I'm happy for the government to bring race discrimination cases 
if it can really show race discrimination. But part of the 
solution is for consumers to be more careful, more skeptical. 
They need to shop around, and they may decide that they really 
can't afford to buy a house right now.
    Thank you.
    [The prepared statement of Mr. Clegg follows:]

                   Prepared Statement of Roger Clegg


















                               __________
    Mr. Nadler. I now recognize Ms. Miller for 5 minutes.

                 TESTIMONY OF GILLIAN N. MILLER

    Ms. Miller. I'm here to share my homeowner experience. I 
became aware of a program in a local newspaper assisting first-
time home buyers with a down payment on a home. I wasn't 
certain I qualified because I had previously owned a home in 
another State. Nonetheless, I met with the person and found 
they were a combined mortgage broker and realty firm. I was 
told I didn't qualify for this down payment program because of 
one negative account on my credit report. I believe they would 
have found anything negative just so they wouldn't have 
qualified me for a down payment, and I realized the add was a 
ploy to get people in the door.
    As such, I decided to work for the realtor from that office 
and a mortgage broker at Summit Mortgage instead. Our initial 
meeting was at a Dunkin' Donuts and subsequent meetings were 
made at places of similar nature, rather than in an office 
setting.
    My credit score, as it turned out, which was above 660, was 
high enough that it qualified me for a hundred percent 
financing. I must admit I was not entirely sure of what a 
hundred percent financing meant. The broker informed me that it 
qualified me for no down payment.
    Our second meeting was to give her my financial 
information, bank statements, and pay stubs. I was also asked 
if I had any retirement savings, although I found it odd that 
the broker would ask me about a 401. It wasn't something I 
questioned until much later, when I found out it was counted as 
part of my income.
    At a later meeting, I learned that I would receive an 80/20 
loan and that it meant the loan would be split. However, I 
still was not really clear on what that meant until closing 
where I had two sets of documents to sign and what appeared to 
be two mortgages. This is when my eyebrow was first raised.
    During closing, I read through as much of the huge number 
of documents as I could, but there were so many documents I 
couldn't read through everything. I asked the broker why I 
received this kind of mortgage. The broker stated this was the 
best deal we could do for you; and I responded, with my credit 
score, this is the best deal?
    At the end, I decided to trust her. I am a consumer. It is 
not my job to know what a broker does. All I can do as a 
consumer is ask the right questions and hope that the answers 
given are truthful based on the nature of that person's 
profession and trust that that person knows what he or she is 
doing.
    I was apprehensive in signing the documents and voiced this 
to the broker and to the broker's closing attorney, but it was 
stressed to me that my closing was imperative so that the 
sellers could close on time, which was the same day.
    In essence, I was coerced into signing the papers due to 
the sellers needing to have the money from my closing to attend 
their closing and because I was worried about losing the home 
and my deposit. It was during closing that I learned for the 
first time that my two loans would be sold to Countrywide.
    At the end of the day, I did receive two mortgages. The 
first loan, despite my good credit, was a variable rate with an 
APR of 11.52 percent. The loan included more than $8,500 in 
settlement charges. The second loan was at 11.317 percent. 
Under that loan, after making 179 payments of $629.38, I would 
have a balloon payment of more than $55,000 due in a lump sum.
    As I had no way of knowing the rates paid by White 
borrowers with similar credit to me, it wasn't until much later 
that I learned that it was very likely that my loans were at 
rates and on terms that were worse than those available to 
White borrowers who are similar to me.
    While I am not a person who cries discrimination whenever a 
problem arises, I do think that the system needs to be designed 
so that people with the same credit ultimately get the same 
rates and all borrowers should be able to rely on a system that 
allows them to get loans with understandable terms at 
affordable rates.
    In the end, the loan, despite my best efforts, were 
unaffordable. Three months after I moved into the home, I lost 
my job. I lived off of a small savings until I ran into 
financial difficulty. I reached out to a nonprofit. They paid 
the second mortgage, and it was during this meeting in which 
the woman I met saw discrepancies with the fees on my loan 
documents.
    I also reached out to Countrywide to inform them of my 
financial situation and asked if the loan could be modified.
    It is imperative that I emphasize that I am very marketable 
in terms of job skills, and I did not anticipate being out of 
work for too long. I took whatever job I could, but I could not 
manage the high payments. I worked a series of temp jobs with a 
decrease in pay and worked with several employment agencies to 
find permanent employment. I tried refinancing with another 
lender. I contacted several non-profits to assist me in paying 
the mortgage or to help me negotiate a modification with 
Countrywide, to no avail. I eventually had to take two jobs, 
one working 11 p.m. To 7 a.m., the other working from 11 a.m. 
To 7 p.m., in addition to attending classes two evenings a week 
to obtain my bachelor's degree.
    I sent all of the necessary paperwork to the modification 
department at Countrywide. It was 2 weeks before I spoke with 
anyone, and that was only after I initiated contact to find out 
the status. I was told they hadn't received the paperwork. I 
resubmitted it for the second time, where I was informed that I 
did not qualify for the modification. I fought with them, 
stressing the combined income from the two jobs, and they 
resubmitted the paperwork for a third time.
    When I finally heard back from a representative from the 
modification department, it was via voicemail. As such, we 
played phone tag and never spoke. And a few days later, I 
received a notice to foreclose.
    I was still willing to fight for the house, and my last 
effort to keep the house was to file Chapter 13. But with the 
new bankruptcy laws in place, the payments to the trustees 
pushed me over my monthly income limit and, sadly, I was forced 
to convert to Chapter 7 a few months later. I was told by a 
court clerk that I would have to vacate the premises because 
the stay would be lifted and the foreclosure procedure would 
commence immediately. Not wanting to be homeless with my 
children, I rented a townhouse within walking distance from the 
said property.
    The house was supposed to foreclose in 2007, 2008, and 
again in 2009, but as of date, it is still sitting there.
    When President Obama passed the stimulus package, I was 
told by Countrywide that my status was placed on hold and this 
is why the house had not foreclosed. Yet they were unwilling to 
work with me on getting the house back, because, according to 
the person I spoke with, I have to reside in the home in order 
to get help.
    In closing, I'd like to say that we speak about having the 
American dream, and as an immigrant to this country from 
Barbados, it was something to look forward to achieving, having 
an education, a great career, home ownership, a family. I 
worked hard in achieving my educational goals. This fall, I 
will be enrolled in a master's degree program. And, in spite of 
being divorced, I have managed to single-handedly raise three 
great children who excel in academics, civic duties, and 
sports.
    I once had home ownership. The experts say when you fall 
into financial difficulty, the first thing you should do is 
contact your creditors. Well, I did just that. I took all of 
the necessary steps. I did everything right, and, in the end, 
that American dream was taken from me. I was victimized by the 
lender, the broker, and the courts.
    However, even through this ordeal that has caused me great 
angst and stress, if it means that my story will help the next 
person not be a victim of someone's pre-judgement based on 
their skin color or their status, then my attempts to fight for 
my home, something I worked very hard at attaining, has not 
been in vain.
    [The prepared statement of Ms. Miller follows:]

                Prepared Statement of Gillian N. Miller















                               __________
    Mr. Nadler. Let me ask you something on that bankruptcy, 
Ms. Miller.
    You couldn't do Chapter 13 because, including your 
payments, it was more than the court figured you could afford?
    Ms. Miller. Correct.
    Mr. Nadler. So, in other words, you were too poor to 
qualify for chapter 13 under the new bill?
    Ms. Miller. Probably so. Right.
    Mr. Nadler. I just note that because, when we considered 
that bill, which some of us here were very much opposed to at 
the time, the whole idea of the bill was to get more people 
into Chapter 13, away from Chapter 7, and some of us raised the 
question at that point that by putting on these additional fees 
and so forth we would make some people too rich for chapter 7 
and too poor for Chapter 13 and they wouldn't be able to go 
bankrupt at all. And we were told don't worry about that. That 
will never happen. But, obviously, it did.
    I'm sorry for that digression.
    Mr. Klein is recognized for 5 minutes.

          TESTIMONY OF GARY KLEIN, RODDY, KLEIN & RYAN

    Mr. Klein. I want to thank you, Chairman Nadler, and the 
distinguished Members of the Subcommittee for the opportunity 
to testify today.
    I am lead counsel in several class actions that seek 
remedies for minority victims in mortgage lending 
discrimination.
    Some of you may remember that a number of years ago during 
the 1990's, when I was working at the National Consumer Law 
Center, I would darken doorways on Capitol Hill talking about 
subprime lending problems even then and consumer protections 
for homeowners, including the bankruptcy system. The issue I'm 
here to talk about today, mortgage discrimination, is a direct 
consequence of some of the abuses of the subprime lending 
market that have been in place for at least 10 years and 
haven't been fixed.
    As discussed in my written testimony, the data is now 
irrefutably clear that minority homeowners, due to a variety of 
lender practices, pay more for their homes than White 
borrowers. Date shows that Black and Hispanic homeowners are 
significantly more likely than White homeowners to have high-
cost mortgages. When the data is drilled down, rates for 
minority borrowers are about one-half of 1 percent higher than 
for Whites. On a $125,000 mortgage loan, that represents an 
extra $500 per year in interest costs. Over the life of a 30-
year loan, that's about $15,000 more. This has a significant 
impact on people's lives.
    That is, by itself, of course, wrong. The additional 
borrowing costs paid by minority homeowners means that those 
borrowers use more of their income each month than Whites to 
cover their housing costs. The resulting budgetary strain leads 
to additional foreclosures, especially in these troubled 
economic times.
    From a legal perspective, though, the question is, are 
these rate disparities driven by real credit differences 
between minority and White borrowers or do they result from 
discriminatory practices? Stated another way, are there 
legitimate business justifications for charging African 
American and Hispanic borrowers more for their home loans?
    In recent years, statisticians have looked at this issue 
using straightforward regression analysis. Buyer regression 
analyses have looked at many millions of home mortgage 
transactions and can control for differences in credit 
characteristics such as credit score, home values, debt, and 
income. And to the surprise of no one in the civil rights 
community, it turns out that minority borrowers do pay more 
than similarly situated Whites, even after controlling for an 
extensive array of credit factors.
    In the case of one lender, the data shows that African 
American and Hispanic borrowers as a group were obligated to 
pay $102.5 million more than similarly credentialed White 
borrowers, and that's just in the first 5 years of their loan. 
Discrimination in this context is highly profitable.
    I note, too, that it is not just civil rights lawyers that 
have reached the conclusion that African American and Hispanic 
borrowers pay more than similarly situated Whites. As noted in 
my written testimony, there is a body of academic evidence that 
finds disparities after controlling for credit and loan 
characteristics; and analysts working for lenders themselves 
have reached similar conclusions in self-testing programs. Yet 
the problem is still not fixed.
    So why do these disparities arise and what can be done to 
fix the problem?
    Ms. Miller testified eloquently about her personal struggle 
with loans made to her by Countrywide at APRs in excess of 11 
percent, despite good credit. The high cost of her loan made 
her vulnerable to even a short period of underemployment. How 
is it that she became a target for subprime credit and why 
didn't she have the tools to protect herself?
    The first and most prevalent problem is the dirty little 
secret of the mortgage industry. Loan prices at the end of the 
day are not set entirely based on objective credit factors but 
rather are discretionary with the sales force. That is, loan 
officers and loan brokers have discretion to attempt to 
convince borrowers to sign up for loans at rates above the 
rates determined by objective credit factors like credit scores 
and debt-to-income ratios. In fact, loan officers and loan 
brokers get paid more when they jack up the interest rate.
    Similarly, loan officers and loan brokers have discretion 
to add to the many fees and charges that are now part of any 
home mortgage loan. A broker, for example, can add certain 
charges to a loan which have the effect of increasing that 
broker's compensation. The unfortunate reality is that these 
discretionary charges disproportionately affect minority 
borrowers.
    The second problem is that minority borrowers--even 
borrowers with excellent credit--are more vulnerable to be 
targeted for and steered into subprime loans. That is, when a 
lender has a choice, some borrowers are more likely to be 
pressed into subprime because subprime is more profitable.
    The third problem contributing to mortgage discrimination 
is the sheer complexity of the modern mortgage loan. Closings 
involve hundreds of pages of paperwork describing often 
incredibly complex loan terms.
    Ms. Miller just testified about a loan made in an 80/20 
format. Her first mortgage had a teaser rate and variable rate 
that only the first 2 years were fixed. After the end of the 
first 2 years, the rate could increase from 6.75 ultimately up 
to as high as 12.75 percent. It can be virtually impossible for 
even a well-educated consumer to decipher variable interest 
rates, pre-payment penalty terms, rate change provisions, and 
other similar issues. Borrowers simply don't have the tool in 
the current lending environment to protect themselves.
    Finally, it's fair to ask what needs to be done. Most 
obviously, we need to rebuild a functional marketplace that 
does not leave in place the discretion to discriminate. All 
loans should be made at rates grounded only in objective credit 
qualifications without discretionary markups and fees. Equally 
importantly, borrowers who are suffering under the weight of a 
loan bearing discriminatory term need remedies.
    Loans should be reformed to make rates charged to minority 
borrowers consistent with those charged to Whites; and when 
real hardship has already been manifest, as it is in Ms. 
Miller's case, in delinquencies and foreclosures, where victims 
of discrimination may lose their homes, nondiscretionary 
mortgage workout loans terms are necessary. Failure to act to 
prevent foreclosures will not lead just to loss of home 
ownership but also to property abandonment, abandonment in 
minority communities, decay, reduction of property values, and 
to a renewed sense of despair.
    Thank you very much for the opportunity to testify.
    [The prepared statement of Mr. Klein follows:]

                    Prepared Statement of Gary Klein
























































                               __________
    Mr. Nadler. Thank you.
    I will begin the questioning by recognizing myself for 5 
minutes.
    Mayor Wharton, the City of Memphis and Shelby County is 
seeking redress for the injuries caused by Wells Fargo, 
allegedly caused by Wells Fargo, and you contend they have 
engaged in a practice of illegal and discriminatory mortgage 
practice lending. What assistance do cities like yours need in 
battling the practices of banks like Wells Fargo? What should 
the Civil Rights Division do that it's not doing? What should 
we in Congress do what we haven't done?
    Mr. Wharton. Thank you, Mr. Chairman.
    With respect to the lawsuit, we certainly need the 
assistance and the investigative powers that the Federal 
Government has. We reached into our meager funds to retain 
counsel. We do not have the investigative authority that the 
government does.
    Mr. Nadler. Excuse me. You don't have the resources or the 
State doesn't have the subpoena or other authority or the city 
doesn't? Which is it?
    Mr. Wharton. With respect to preparing for the lawsuit, 
taking the statements of witnesses, the Federal Government has 
many more investigative resources than those of us at the city 
level. This is a municipal lawsuit.
    Additionally, with respect--and some of the suggestions 
that have been made even before we get to the lawsuit, more in 
the way--I will not say by way of legislation--more in the way 
of financial literacy, perhaps some stopgaps as consumers start 
down this long and treacherous path, as was the case with Ms. 
Miller, some intervention there before--there is just no 
daylight in there. Before the consumer finds out anything, they 
are already in danger.
    I know in some consumer practices there are rights to 
rescind before the whole process is complete. And the relative 
positions that the parties share, there should be some--and 
perhaps this goes to your question at the beginning--some 
fiduciary responsibility. The relative positions of the 
purchaser and the lenders here are just so out of balance. 
These are amazingly complex transactions.
    This is not a matter of buying an MP3 player, whatever, you 
go home, and that's it. These are transactions that even--I did 
not practice real estate law, but I made a real estate 
transaction the other day, and I haven't the slightest idea of 
what I did. They said sign, and I signed. I shouldn't have done 
that.
    But if there could be legislative, many more protections as 
we go through this almost raising to the level of the lender 
having the fiduciary responsibility.
    And I might--just one other thing. If these were situations 
in which this was just a benign set of circumstances and the 
lender goes in and makes a transaction, that's one thing. I 
perhaps would not be here. This is more than just taking 
advantage of a maligned--of a benign situation. This is a 
malignant, intentional act that we're complaining about. Those 
ought to be outlawed.
    Mr. Nadler. Thank you.
    Let me ask Mr. Klein. You've represented people in this 
situation. Talk about malignant acts. Ms. Miller testified one 
of the mortgages was I think she said $597 a month or something 
like that for X number of months and then a $50,000 balloon. 
Now, is there any way that a lender could expect a person to be 
able to--a middle-class or moderate-income person be able to 
pay a $50,000 balloon coming one day? Should such practices be 
outlawed entirely?
    Mr. Klein. Put simply, Mr. Chairman, there is no way that a 
lender could expect that to have been paid.
    Mr. Nadler. Could he have been expecting refinancing at 
that point?
    Mr. Klein. That's exactly why those kinds of loans are 
made, Mr. Chairman. They are made so the borrower will be in a 
position to have no choice other than to refinance at a higher 
interest rate.
    And I should mention as well that Ms. Miller's loan 
included a prepayment penalty. So had she chosen to refinance 
fairly early on in the process, she would have incurred that 
penalty and had to pay even more in order to get out of the 
situation where the balloon came due.
    Mr. Nadler. Let me ask you, Mr. Klein, what further steps 
are needed to enforce the law in order to combat and prevent 
these practices, like similarly situated borrowers subjected to 
discriminatory practices?
    Mr. Klein. There are a number of arguments that Mr. Clegg 
made based on a body of opinion I think that disparate impact 
shouldn't be applicable to cases under the Fair Housing Act; 
and I think that's just dead wrong, Mr. Chairman.
    First of all, as a lawyer, I take comfort in saying that 
there are 12 courts of appeal, all of whom have decided that 
disparate impact analysis does apply under the Fair Housing 
Act.
    Mr. Nadler. Wait a minute. I would certainly agree with 
you. But putting aside the question of disparate impact, if you 
find that a company, Wells Fargo or somebody else, is generally 
offering differing mortgage terms to African Americans or to 
Hispanic people than they are to White people of the same 
income level, it's not a disparate impact analysis. That's out 
and out straight discrimination.
    Mr. Klein. Well, it is and the issue from the court's 
perspective is that you can't establish the treatment being 
different without looking back toward the policy that would 
lead to disparate impact. So, in this particular context, it's 
the discretionary pricing policy allowing markup by loan 
officers and loan brokers that's being challenged in these 
cases. So they are disparate impact cases and probably 
appropriately so.
    When someone speaks of eliminating disparate impact 
analysis under the Fair Housing Act, what they're really saying 
is there shouldn't be a remedy for any discrimination.
    Mr. Nadler. I'd like you to reply to that, Mr. Clegg.
    Mr. Clegg. I don't think that's true at all. I think the 
testimony that Mr. Klein gave and that we've heard here and 
that Mr. Perez gave earlier shows that bringing disparate 
treatment cases is quite straightforward, and those cases can 
be brought and won.
    The racist comments that Mr. Perez quoted----
    Mr. Nadler. Let's assume nobody is stupid enough to make 
racist comments.
    Mr. Clegg. Well, people are stupid enough to make them.
    Mr. Nadler. Sometimes.
    Mr. Clegg. And even when they aren't, you can use 
statistical evidence and circumstantial evidence in order to 
prove--in order to show--disparate treatment.
    So I don't--I am not somebody who thinks that it ought to 
be okay for people to discriminate on the basis of race in 
lending and get away with it. But the government needs to be 
able to--I think the government should have to prove disparate 
treatment, and I do think they can do that.
    Mr. Nadler. My time is running out.
    Would you comment on that, Mr. Klein?
    Mr. Klein. Sure, Mr. Chairman.
    Mr. Clegg is simply dead wrong on the issue. The proof 
required is proof of disparate impact. There is no treatment 
issue when everyone is treated facially the same. Everyone is 
subject to the same possibility of discretionary pricing so 
that minority homeowners and White homeowners are both subject 
to discretionary pricing. It's the application of that policy 
which leads to a disparate impact evaluation which is this 
fiscal analysis under which you can evaluate what happens to 
similarly situated Blacks.
    Mr. Nadler. Which you need in the absence of an e-mail 
saying, give a different rate to Black people, or something.
    Mr. Klein. Absolutely right, Your Honor. And what these 
cases show is that when you do do the analysis--did I call you 
Your Honor? Mr. Chairman.
    Mr. Nadler. I like to think I'm honorable.
    Mr. Klein. What the analyses do show when you drill down is 
that after you take out every conceivable credit characteristic 
and loan characteristic such that you're looking at the exactly 
similar situation that Black payers pay more.
    Mr. Nadler. Thank you. My time has expired.
    The gentleman from Virginia is recognized.
    Mr. Scott. Mr. Clegg, when you do find discrimination, what 
is the remedy when there is discrimination in lending?
    Mr. Clegg. Well, the Fair Housing Act has been violated and 
the Equal Credit Opportunity Act has been violated. Of course, 
if a State agency is involved, then the Constitution has been 
violated. And I believe, in some instances, Title II of the 
1964 Civil Rights Act is implicated as well.
    There are a variety of--those are just the Federal laws 
that have been violated. There are also frequently State and 
local laws as well.
    Mr. Scott. Are there any class-action lawsuits pending that 
you're aware of on this issue?
    Mr. Clegg. I'm sorry?
    Mr. Scott. Are there class-action lawsuits pending on this 
issue?
    Mr. Clegg. I believe so. I think Mr. Klein is bringing----
    Mr. Scott. Mr. Klein, can you give us a review of some of 
those pending lawsuits and some that perhaps may have been 
concluded?
    Mr. Klein. Yes, Congressman Scott.
    There are a number of cases pending in various 
jurisdictions. Some of them have been consolidated. There are a 
series of cases pending against Wells Fargo Home Mortgage, 
pending in a multi-district litigation proceeding in San 
Francisco. There are also a series of cases pending against 
Countrywide, pending in a multi-district litigation proceeding 
in the Western District of Kentucky. There are similar cases 
against other lenders, including HSBC, Chase, and many of the 
big subprime lenders like Green Point, 1st Franklin, which is 
owned by Bank of America.
    Mr. Scott. What is the basis of the lawsuits?
    Mr. Klein. They are disparate impact cases based on the 
discretionary pricing policies of those lenders. What those 
cases allege is that lenders allowed brokers and loan officers 
to mark up loans and that that discretion was used in a 
differential way to mark up loans of minority customers more 
than White customers.
    Mr. Scott. Have any of those gone through trial?
    Mr. Klein. None of them have gone through trial. Several of 
them are in the process of class certification. One of them, 
the earliest one for class certification, is pending before 
Judge Henderson, Judge Thelton Henderson in the Northern 
District of California.
    Mr. Clegg. Can I make an observation?
    I think it's very interesting that the claim here is that 
the process should be made more mechanical because the lack of 
mechanicalness has a disparate impact. We hear precisely the 
opposite claim in other contexts--for instance, college 
admissions. You know, the claim is that, well, universities 
should not mechanically make admission decisions just based on 
SAT scores and grades. It needs to be more ``holistic.'' And 
that the failure of a university to engage in that kind of 
holistic review has a disparate impact.
    Now, in this context, we are hearing just the opposite. I 
think that what this, I think, indicates is the whole problem 
with the disparate-impact approach. I think that this shows 
that--the touchstone should always be whether there is 
disparate treatment. It's certainly possible that using a very 
discretionary touchy-feely standard in this area, in the 
mortgage area, can facilitate racial discrimination. But I 
think the challenge should be against the racial 
discrimination--not saying that, well, because the 
discretionary standard has this result that we should win this 
lawsuit even if we are not able to show----
    Mr. Scott. Well, sometimes, as you call it, touchy-feely 
results in discrimination. Sometimes a mechanical approach, if 
you're not using the right standard, can--I mean, if you're 
using SAT scores, what you're doing is not evaluating the 
student's potential but the discriminatory education they were 
subjected to.
    Mr. Clegg. But, see, I think the same sort of argument can 
be made here, too. You can say, look, why shouldn't the 
individual be treated as an individual rather than simply 
looking at his credit score. Maybe----
    Mr. Scott. There's nothing wrong with the approach. I think 
what Mr. Klein is complaining about is, when they have that 
discretion, they used it in a discriminatory way. If they use 
it in a fair way, then we wouldn't be here.
    Mr. Clegg. Right. And what I'm saying, is when you bring 
that kind of a lawsuit, the ultimate question should be whether 
in fact disparate treatment has been proven or not.
    Mr. Scott. I think you can look at the numbers.
    If I can ask one more question.
    Mr. Mayor, can you tell us--you're testifying as a mayor of 
a city. Can you tell us what damage is done when there's 
widespread discrimination in housing, what it does to a city?
    Mr. Wharton. Certainly.
    Forty percent of the operating revenues for the City of 
Memphis come from property taxes. It has certainly had a 
damaging effect on our major source of revenue. The police 
calls--I'm getting into detail. Police calls to boarded-up 
homes, the effect on neighboring properties of homes that are 
now vacated, boarded up, and neglected, all of those drive down 
property values in the immediate neighborhood; and then it 
tends to spread. Those are very precise, damaging effects that 
these practices have had on our neighborhoods.
    As I indicated in my prepared remarks, they are all 
racially identifiable. This was not just something that they 
stumbled upon, but it has had a very damaging effect on 
property values in those areas that have been hard hit by these 
practices.
    Mr. Scott. Some cities have sued because of the damage 
inflicted on the city for lending practices. Has Memphis filed 
a lawsuit, or are you aware of other cities who have filed 
lawsuits?
    Mr. Wharton. We have filed such a lawsuit.
    Mr. Scott. What is the basis of your lawsuit?
    Mr. Wharton. The Fair Housing Act, and in an amended 
complaint we are alleging violations of certain State laws.
    As I indicated earlier pursuant to the Chair's question, 
what are we asking, your question brings us to the question of 
whether we really have the standing for the United States 
government to become involved in that through the Attorney 
General's Office. That question would be out of the way.
    It would be horrible for our lawsuit to be thrown out 
simply because the city, for whatever reason, at the early 
stage could not demonstrate damages, although we know the 
practices are there. It would seem sort of a miscarriage of 
justice to say, well, there may be something out there, but 
you're not the one to come in here and tell us about it. And 
this is why we are seeking help from the United States 
Government on this.
    Mr. Scott. Mr. Chairman, if we could get copies of the 
lawsuits or any briefs that have been filed, that would be 
helpful.
    [The information referred to follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                               __________

    Mr. Nadler. I thank the gentleman.
    The gentleman from Georgia is recognized.
    Mr. Johnson. Thank you, Mr. Chairman.
    About an hour or so ago, I sent out a clarion call for my 
brethren and sisters on the other side of the aisle to appear 
so that they can defend Mr. Clegg. And, thus far, no one has 
appeared. And I wonder if that is related to the effort by 
Congress to pass Wall Street reform. I will note that on the 
other side of the Capitol, the folks over there have been 
filibustering Wall Street reform, and I think they have now 
relented, and they will argue their case on the floor.
    But I would like to ask you, Mr. Clegg, you mentioned 
earlier about the lending industry being pressured to make 
loans to non-creditworthy individuals. You did say that, 
correct?
    Mr. Clegg. That is correct.
    Mr. Johnson. What kind of pressure was it?
    Mr. Clegg. Well, again, I would commend to your-all's 
reading the report by the U.S. Commission on Civil Rights. And 
also in my testimony I cite that report and also some other----
    Mr. Johnson. That report is not a Federal law that compels 
the lending industry to do something. I guess you cited Federal 
laws in your paper or in that paper that would act to 
pressurize or pressure banks or lending institutions to grant 
lending, to grant loans to non-creditworthy individuals. What 
laws are you talking about?
    Mr. Clegg. I'm talking about the Community Reinvestment 
Act. I'm talking about lawsuits that were brought during the 
Clinton administration, in particular, using the disparate 
impact approach. Private lawsuits, you know, in that area as 
well. And Administration policies that I think were, in the 
Clinton administration, policies that were well intended.
    Mr. Johnson. Did they actually pressure--I mean, did they 
pressure the lending institutions to make loans to non-
creditworthy individuals?
    Mr. Clegg. Yes. Let me just read you something.
    Mr. Johnson. Give me some examples.
    Mr. Clegg. Let me read you from this report.
    It says, ``at the root of the real estate crisis was a 
misguided notion that home ownership should be available to all 
people--what President Bush has called the `ownership society.' 
`The ``I told you so'' here is that home ownership is a nice 
thing, but it is not suitable for everyone.' ''
    Mr. Johnson. You're not telling me anything about how 
lending institutions were pressured to make these predatory 
loans to get people in houses when they really knew that the 
folks were uncreditworthy. I think that's a false argument. It 
puts the Wall Street debacle on--it blames the consumer for the 
Wall Street debacle, when, in fact, what was happening was 
these substandard predatory loans were packaged as securities. 
They were bundled together, packaged as securities, and sold on 
Wall Street.
    Mr. Clegg. I am not going----
    Mr. Johnson. For exorbitant interest rate profits, correct?
    Mr. Clegg. I am not going to defend the practices on Wall 
Street. But what I'm saying is----
    Mr. Johnson. Hold on now. Because those same Wall Street 
banks owned outfits like Countrywide and all of the others. And 
then those very banks who bundled the securities together, or 
bundled the mortgages together, sold them as securities which 
then became non-performing loans, with the securities becoming 
worthless. Those same Wall Street banks are buying a short 
position from AIG so that they could not lose; and then the 
taxpayers end up bailing out AIG $160 billion, I believe it 
was.
    Where are my friends on the other side of the aisle to come 
down and help you and defend you in the onslaught of my 
questions? I shouldn't say ``onslaught''. You deserve some 
protection.
    Mr. Clegg. I will do my best, Congressman, to defend 
myself.
    I think if there was an uptick in subprime lending in the 
recent past, it may have come about--and, again, I'm not an 
economist, I'm just suggesting this--it may have come about 
because lenders were being pressured by government and quasi-
government agencies like Freddie Mac and Fannie Mae to make 
more loans to individuals with marginal creditworthiness. The 
response of the lenders might have been to say, okay, fine, we 
are getting this pressure----
    Mr. Johnson. We don't want to make that money that we've 
been making where we can't lose whether or not the mortgages 
are good or whether or not they are bad loans. We went anyway.
    Mr. Klein, you said something about Mr. Clegg being dead 
wrong about some other topic during this hearing. Is he dead 
wrong about this?
    Mr. Klein. Yes, Congressman, he is dead wrong again. No one 
in the civil rights community or in the consumer community or 
in the housing community ever created any pressure on the 
lending community to make loans that borrowers couldn't afford. 
It's absurd.
    The whole idea was to go in and make loans at prime rates 
to give people home ownership opportunities. And what happened 
was the banks looked around, in my view, and said, oh, there's 
a vacuum there in those communities that we haven't been 
filling. And instead of filling them by building new brick-and-
mortar branches and sending in mortgage representatives to make 
loans on the same terms as was made in White communities, they 
filled the vacuum by buying loans from brokers and sending in 
subprime units in order to make loans on different rates, and 
that's where the steering came in.
    So that what happened was that, instead of going in and 
helping people fulfill the promise of home ownership, they went 
in sensing a profit-making opportunity to make high-rate 
subprime loans on terms that people couldn't afford; and it was 
exactly for the reason that you suggested, Congressman, because 
they knew that the secondary market would buy these things. 
They would be able to make their profit and leave the investors 
down the road somewhere holding the bag when things went sour. 
And that's exactly what happened, and that's a big part of the 
problem with the economy today.
    Mr. Johnson. And that's pretty much what the Federal 
Government is alleging against Goldman Sachs in terms of 
selling long and buying short.
    And I appreciate it, Mr. Chairman. I might close out by 
just saying that, after amending the Bankruptcy Code back in 
2005 to make it more difficult and expensive for aggrieved 
homeowners to file Chapter 13 to save their homes and being 
successful at it and then failing to oversee these practices 
that we just discussed in the financial services industry, I 
believe I know why no one showed up from the other side.
    Thank you.
    Mr. Nadler. Thank you.
    Let me just ask one question of Mayor Wharton before we 
close the hearing.
    The Federal Government is collaborating with a lot of 
cities and States to address the problem of predatory lending 
and reverse redlining. Has Memphis or Shelby County 
collaborated either with other cities or with the Federal 
Government to address these practices?
    Mr. Wharton. Yes. We have communicated on a number of 
occasions with Deputy Attorney General Perez, also with our 
State Attorney General, and in any way possible we will work 
with other cities. But, as I indicated earlier, there are some 
limits because of certain jurisdictional questions that cities 
are faced with that the Federal Government does not have to 
deal with when it comes to standing and other issues.
    Mr. Nadler. Thank you very much; and, with that, I want to 
thank our witnesses.
    Without objection, all Members will have 5 legislative days 
to submit to the Chair additional written questions for the 
witnesses which we will forward and ask the witnesses to 
respond as promptly as they can so that their answers may be 
made part of the record.
    Without objection, all Members will have 5 legislative days 
to submit any additional materials for inclusion in the record.
    With that, again, I thank the witnesses; and this hearing 
is adjourned.
    [Whereupon, at 3:35 p.m., the Subcommittee was adjourned.]


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