[Senate Hearing 111-371]
[From the U.S. Government Publishing Office]
S. Hrg. 111-371
PREDATORY LENDING AND REVERSE REDLINING:
ARE LOW-INCOME, MINORITY AND SENIOR
BORROWERS TARGETS FOR HIGHER-COST
LOANS?
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
JUNE 25, 2009
__________
Printed for the use of the Joint Economic Committee
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
HOUSE OF REPRESENTATIVES SENATE
Carolyn B. Maloney, New York, Chair Charles E. Schumer, New York, Vice
Maurice D. Hinchey, New York Chairman
Baron P. Hill, Indiana Edward M. Kennedy, Massachusetts
Loretta Sanchez, California Jeff Bingaman, New Mexico
Elijah E. Cummings, Maryland Amy Klobuchar, Minnesota
Vic Snyder, Arkansas Robert P. Casey, Jr., Pennsylvania
Kevin Brady, Texas Jim Webb, Virginia
Ron Paul, Texas Sam Brownback, Kansas, Ranking
Michael C. Burgess, M.D., Texas Minority
John Campbell, California Jim DeMint, South Carolina
James E. Risch, Idaho
Robert F. Bennett, Utah
Nan Gibson, Executive Director
Jeff Schlagenhauf, Minority Staff Director
Christopher Frenze, House Republican Staff Director
C O N T E N T S
----------
Members
Hon. Carolyn B. Maloney, Chair, a U.S. Representative from New
York........................................................... 1
Hon. Kevin Brady, a U.S. Representative from Texas............... 2
Hon. Elijah E. Cummings, a U.S. Representative from Maryland..... 4
Hon. Michael C. Burgess, M.D., a U.S. Representative from Texas.. 5
Hon. Maurice D. Hinchey, a U.S. Representative from New York..... 6
Witnesses
James Carr, Chief Operating Officer, National Community
Reinvestment Coalition, Washington, DC......................... 8
Gregory Squires, Professor of Sociology and Public Policy and
Public Administration, and Chair of the Department of Sociology
at George Washington University, Washington, DC................ 10
Sarah Bloom Raskin, Commissioner of Financial Regulation, State
of Maryland, and Chair of the Conference of State Bank
Supervisors (CSBS), Baltimore, MD.............................. 12
Robert Strupp, Director of Research and Policy, Community Law
Center, Baltimore, MD.......................................... 15
Submissions for the Record
Chart titled ``As Bubble Bursts, Subprime Foreclosures
Skyrocket''.................................................... 34
Prepared statement of Representative Carolyn B. Maloney, Chair... 35
Prepared statement of Representative Kevin Brady................. 35
Prepared statement of Representative Elijah E. Cummings.......... 36
Prepared statement of James Carr................................. 37
Prepared statement of Gregory Squires............................ 39
Prepared statement of Sarah Bloom Raskin......................... 45
Prepared statement of Robert Strupp.............................. 48
PREDATORY LENDING AND REVERSE
REDLINING: ARE LOW-INCOME, MINORITY
AND SENIOR BORROWERS TARGETS
FOR HIGHER-COST LOANS?
----------
THURSDAY, JUNE 25, 2009
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The committee met, pursuant to call, at 11:05 a.m., in Room
2118, Rayburn House Office Building, The Honorable Carolyn B.
Maloney (Chair) presiding.
Representatives present: Maloney, Hinchey, Cummings,
Snyder, Brady, Burgess, and Campbell.
Staff present: Gail Cohen, Nan Gibson, Colleen Healy, Aaron
Kabaker, Barry Nolan, Aaron Rottenstein, Justin Ungson, Andrew
Wilson, Chris Frenze, Rachel Greszler, Robert O'Quinn, Jeff
Schlagenhauf, and Jeff Wrase.
OPENING STATEMENT OF THE HONORABLE CAROLYN B. MALONEY, CHAIR, A
U.S. REPRESENTATIVE FROM NEW YORK
Chair Maloney. Good morning. I would like to welcome all of
our distinguished panel members here for the hearing that we
are having today. We are here to examine the economic impact of
reverse redlining where minority borrowers and senior citizens
have been targeted to receive unnecessarily expensive
mortgages.
I thank Congressman Cummings and his staff for their help
in bringing witnesses here from Baltimore, Maryland, one of the
several states and localities that is investigating or have
recently brought suits against lenders over practices that may
have violated fair lending or civil rights laws by deliberately
steering minorities and the elderly into more costly subprime
loans.
Two years ago, problems in the subprime mortgage markets
touched off an economic crisis that is still unfolding. Today,
almost one-in-six subprime mortgages is in foreclosure,
compared to one-in-40 prime mortgages in the United States, and
this chart is there to reflect this for the audience.
[The chart titled ``As Bubble Bursts, Subprime Foreclosures
Skyrocket'' appears in the Submissions for the Record on page
34.]
As subprime foreclosures have risen over the past two
years, minority homeownership rates have fallen at a much
faster pace than for non-minority homeowners. The pain of
rising foreclosures is being felt in communities all across the
country as the ripple of mounting losses spreads to borrowers,
lenders, governments, and neighborhoods.
In some areas, once thriving neighborhoods have been
transformed into boarded-up ghost towns. Concentrated
foreclosures have spillover effects on neighboring properties,
increasing crime and vandalism and lowering surrounding
property values.
A fundamental problem is that the financial incentives of
mortgage companies and mortgage brokers are not aligned with
the best interest of their borrowers. Higher commissions for
higher interest loans creates the incentive for mortgage
brokers to sell the most expensive products to those who can
least afford them.
Low or no documentation loans, which rely on stated income
rather than a W-2 form, provide an avenue for lenders to evade
state laws by making loans appear affordable even when they are
not. Evidence continues to come to light that many of the
subprime borrowers who had paystubs to prove their employments
and may have qualified for prime loans were steered into more
costly no-doc loans by some lenders.
In my home state of New York, Brooklyn and Queens have the
highest concentrations of low and no documentation subprime
loans compared to other parts of the state. There is a
particularly high concentration of these loans in Astoria,
which I have the honor of representing.
Congress and the president have taken steps to strengthen
the economy, keep families in their homes, expand affordable
mortgage opportunities for families, and rein in abusive
lending, but more must be done to stop bad loans from being
made in the first place. We need to return to sensible
principles that require lenders to assess borrowers' ability to
pay over the whole life of the loan, but we also need to strike
a balance between making sure borrowers can repay the loans
they get and helping borrowers who can repay a loan get one.
I have high hopes that the president's proposed Consumer
Financial Protection Agency will play a key role in
strengthening consumer protections against predatory practices
in the future. The administration's proposal to eliminate the
current preemption of state laws regarding anti-predatory
lending for national banks, thrifts, and federal credit unions
will allow steps to adopt and enforce stricter laws for
institutions of all types regardless of the charter.
Stopping abusive lending practices that have contributed to
the current foreclosure crisis and returning to healthy, fair
lending principles will provide a sound basis for economic
growth and recovery. I look forward to the testimony of our
witnesses today, and I thank my colleagues for coming. And I
recognize the ranking member, Mr. Brady, for 5 minutes.
[The prepared statement of Representative Maloney appears
in the Submissions for the Record on page 35.]
OPENING STATEMENT OF THE HONORABLE KEVIN BRADY, A U.S.
REPRESENTATIVE FROM TEXAS
Representative Brady. Thank you, Chair Maloney, for calling
this hearing. I am pleased to join with you in welcoming the
panel of witnesses testifying before the committee this
morning.
Racial discrimination lending is immoral. It is also
illegal under the Equal Credit Opportunity Act.
Recent studies suggested discrimination is generally
limited to minority applicants with low incomes or poor credit
and employment history. Moreover, discrimination occurs
primarily in the price of credit rather than its availability.
This practice is known as reverse redlining.
Nevertheless, distinguishing between racial discrimination,
misguided efforts to shoehorn marginal borrowers into subprime
mortgage loans to buy homes as prices escalated, and simple
greed by unethical lenders is not easy.
From 1995 to 2007, the federal government encouraged
mortgage lenders to loosen underwriting standards and offer
exotic alternatives to fully amortizing fixed-rate 30-year
mortgage loans in order to increase the rate of homeownership
among low-income and minority families.
Mortgage lenders obliged knowing that they did not have
responsibility for the performance of mortgage loans they had
extended once these loans were sold to issuers for
securitization. The deterioration of underwriting standards and
the development of subprime mortgage loans combined with an
overly accommodative monetary policy to inflate a huge housing
bubble.
As in past bubbles, both borrowers and lenders became
increasingly reckless. In some cases, individuals misled
lenders to secure subprime mortgage loans to speculate in
housing. In other cases, lenders took advantage of
unsophisticated families by placing them in subprime mortgage
loans they didn't understand and couldn't afford.
In either case the results are the same: Many families
found themselves under water and a tidal wave of defaults and
foreclosures followed once the housing bubble burst. This has
been especially difficult for low-income and minority families.
Individuals must be fully aware of mortgage terms and the
financial burden they are assuming before closing. Improving
financial education would help families to understand mortgages
and other financial products and to avoid credit problems in
the future.
In conclusion, exploiting the complexity of mortgage
contracts to please borrowers is not an acceptable business
practice. Full disclosure and transparency should be part of
the solution. Loan originators and issuers of mortgage-backed
securities should also be required to retain skin in the game
to discourage lenders from knowingly extending mortgage loans
that aren't likely to be repaid and to discourage issuers from
placing such loans in mortgage-backed securities.
And finally, excessive debt burdens, although all too
common, make it very hard for families to get ahead over the
long run. Better financial education could help people to avoid
at least the most financially burdensome kinds of loans
available.
And I yield back, Madam Chair.
[The prepared statement of Representative Kevin Brady
appears in the Submissions for the Record on page 35.]
Chair Maloney. I thank you.
And the chair recognizes Congressman Cummings for 5
minutes. Congressman Cummings was instrumental in putting this
hearing together. He helped bring many of the witnesses from
Baltimore, Maryland, which is one of the several states that is
investigating and recently brought suit against practices that
have allegedly violated civil rights and fair lending
practices.
I would also like to state that I have several amendments
on the floor and may have to be on the floor, and Mr. Cummings
has agreed graciously to chair this committee in my absence.
So, Mr. Cummings, for 5 minutes, and thank you for your
work in this area and for helping me with this hearing.
OPENING STATEMENT OF THE HONORABLE ELIJAH E. CUMMINGS, A U.S.
REPRESENTATIVE FROM MARYLAND
Representative Cummings. Thank you very much, Madam
Chairlady. And I want to thank you and staff for bringing about
this hearing.
I requested this hearing following a New York Times report
on June 7th detailing new developments in the lawsuit filed by
my hometown of Baltimore against Wells Fargo. The article
described affidavits that were recently filed by the City of
Baltimore that included staggering claims about Wells Fargo
employees steering African-American citizens toward high-cost
loans loan products to boost company profits and reward
employees with monetary bonuses and trips.
The affidavits also claim that the true opinion of the
Wells Fargo firm toward their clients was reflected in their
use of racial epithets to describe African Americans. The
city's contention is that the discriminatory lending practices
pursued by Wells Fargo promoted high-cost loan instruments
which led to foreclosures far in excess of what the rate of
foreclosure might otherwise have been.
That, in turn, has led to declines in property values in
many neighborhoods as well as in increased crime, increased
costs for city services, loss of tax revenues, all on the backs
of an increasingly burdened city and population. With home
values still falling and the national unemployment rate now
exceeding 9 percent, there has been a seemingly unending flood
of foreclosures that has taken and continues to take an
immeasurable toll on all of our communities and on the overall
economy, and on our tax base.
Obviously the proliferation of subprime and other
alternative loan products in communities across this nation
contributed significantly to the foreclosure crisis. So in
order to progress toward a complete economic recovery, we need
to fully understand exactly what got us where we are today, and
that means that we need to understand both the specific
financial transactions and the regulatory failures as well as,
frankly, the assumptions and the attitudes that led firms to
target certain groups for some of their most questionable
transactions.
The subprime loans, which were created to increase
homeownership in low-and middle-income sectors, turned into
vehicles for enriching lenders, brokers, and investors. We also
know, from research done by Mr. Carr and the National Community
Reinvestment Coalition, that there is a racial and ethnic
disparity in the distribution of these high-cost loans.
They found that low-to moderate-income African Americans
were at least twice as likely as low-to moderate-income whites
to receive high-cost loans in the 47.3 percent of areas they
examined. The disparity continued into the higher income
brackets as well.
Dr. Squires has read very eloquently--written very
eloquently--that, ``clearly not all subprime loans are
predatory, but virtually all predatory loans are in the
subprime market.'' That is why it is so important for us to
ensure the protection of homebuyers, and President Obama has
taken a decisive first step in this direction with the proposed
Consumer Financial Protection Agency.
As I say so often, I live in the inner, inner city of
Baltimore, and the people on my block are my neighbors, my
constituents, my friends, and they are struggling and they need
help. And they need help now. I am determined to do everything
I can to do for them for--from hiring dedicated staff to deal
with constituent mortgages to getting people a seat at the
table with their lender, as we did recently, putting 1,000
borrowers together with 19 lenders at our foreclosure
prevention event. And I am glad to say we were able to save a
lot of people from losing their homes.
The witnesses before us have also done their part. I
commend all of them for their work protecting the interests of
home borrowers and communities. I am particularly pleased to
have Commissioner Raskin with us. She remains vigilant in
exercising all the rights she has under the Maryland law and
her efforts have lead to the enactment of new mortgage fraud
protections by the Maryland General Assembly.
And again, Madam Chairlady, I am very pleased to be here,
and I am going to be a little bit in and out myself because I--
called for another hearing with Bernanke, which we are doing
also, and I have an amendment on the floor. But I will be in
and out. But thank you.
[The prepared statement of Representative Elijah E.
Cummings, appears in the Submissions for the Record on page
36.]
Chair Maloney. Thank you.
Congressman Burgess for 5 minutes.
OPENING STATEMENT OF THE HONORABLE MICHAEL C. BURGESS, M.D., A
U.S. REPRESENTATIVE FROM TEXAS
Representative Burgess. Thank you, Madam Chair, and I too
want to welcome the witnesses here this morning and thank them
for testifying before us today. Certainly the topic of reverse
redlining and mortgage discrimination is one that is important,
and hearings like this are an important part of understanding
all of the factors that contributed to the breakdown in the
mortgage market. And I appreciate the opportunity for
additional examination of that today.
The area in Texas that I represent has generally been
spared by some of the more severe consequences of the
nationwide recession, but not entirely. And part of my
district--that part that is represented by the southeast
quadrant of the city of Fort Worth--certainly could fall into
the description of being underserved.
We have many low-income residents; we have very high infant
mortality rates, falling property values, and crime. It is a
part of my district that continues to struggle and an area that
I have expended a great deal of effort in trying to assist in
my capacity as their Representative.
The foreclosures in southeast Fort Worth are high. It is
difficult to obtain the data, but the sense I get is it is less
from the aberrances in the loan market and more from the
consequences of the economic downturn and increasing
unemployment. Then the lack of recovering a job after someone
has lost a job--very difficult for someone without income to
maintain house payments, and certainly going to be difficult
for someone without a job to initiate a mortgage in the first
place, especially given what we have recently been through.
Southeast Fort Worth certainly meets the description of the
type of community at risk for the behavior that is being
examined today, so I am anxious to hear more and learn more
about the topic. And Madam Chairman, I will yield back my time
and I thank you for the consideration.
Chair Maloney. Thank you.
Maurice Hinchey, from the great state of New York, is
recognized for 5 minutes.
OPENING STATEMENT OF THE HONORABLE MAURICE D. HINCHEY, A U.S.
REPRESENTATIVE FROM NEW YORK
Representative Hinchey. Well, thank you, Madam Chairman,
for holding this hearing. It is on a very important subject.
And I want to thank all of you for being here--the four of
you--for joining us. And I am very anxious to hear what you are
going to say.
The economic circumstances that this Congress is attempting
to deal with is probably the most serious and severe since the
1930s, and the way in which it is being addressed is, to a
large extent positive, but I don't think it is nearly going as
far as it needs to. There is an awful lot more work that needs
to be done.
The predatory lending--and that predatory word, I think, is
very appropriate--is a major part of the problem, and the so-
called subprime mortgage lending reached its peak just 3 years
ago. The effects of that are now very, very prominent across
the board and they have had a very negative impact on a whole
host of people.
And in addition to that negative impact, what we have seen
over the course of the last several years--even a little bit
longer than that--is a larger separation of income between the
very wealthy and the very poor, and a decline in the number of
middle-income people. The middle-income population of this
country shrank, and we know that the middle-income people are
the ones who drive most of the economic progress here.
So we have a major problem ahead of us. We are now
addressing it in the context of a bill called the Consumer
Financial Product Safety Commission Act of 2009, which, like so
many of the other things that have been done so far, proceeds
to move us in the right direction, but I don't think it does so
nearly far enough.
There is an awful lot of work that needs to be done, and
any insight that you have--and I know that you have a lot-- to
this particular problem would be very helpful to us,
particularly how this bill might be improved.
What are some of the additions that could be added to it?
What are some of the strengths that could be included within
this legislation to help us deal more effectively with this
very serious and deepening economic problem?
So I thank you all very much for being here, and I am very
anxious to listen to what you say. Thanks very much.
Chair Maloney. Thank you very much.
And Congressman Snyder, from the great state of Arkansas,
for 5 minutes. Thank you.
Representative Snyder. Thank you, Madam Chair. And thank
you for putting together this hearing. I think this is a great
opportunity to talk about these issues, and I believe that I am
more interested in hearing the witnesses than hearing myself,
so I will yield back. Thank you.
Chair Maloney. Okay. I would now like to introduce our
panel of witnesses and thank them again for being here.
Jim Carr is the chief operating officer for the National
Community Reinvestment Coalition, an association of 600 local
development organizations across our nation dedicated to
improving the flow of capital to communities and promoting
economic mobility. He is also a visiting professor at Columbia
University in New York City.
Prior to his appointment to NCRC, Mr. Carr was senior vice
president for financial innovation, planning, and research for
the Fannie Mae Foundation and vice president for housing
research at Fannie Mae. He has also held important posts as
assistant director for tax policy with the U.S. Senate Budget
Committee and research associate at the Center for Urban Policy
Research at Rutgers University.
He holds a bachelor of architecture degree with honors from
Hampton University, a master's of urban planning degree from
Columbia University, and a master's of city and regional
planning from the University of Pennsylvania.
Welcome also to Dr. Gregory D. Squires. He is a professor
of sociology and public policy and public administration at
George Washington University. Currently he is a member of the
advisory board of the John Marshall Law School Fair Housing
Legal Support Center in Chicago, Illinois, and the Social
Science Advisory Board of the Poverty and Race Research Action
Council in Washington, D.C.
Prior to joining the faculty at George Washington, he
taught at the University of Wisconsin, Milwaukee, and served as
a research analyst for the U.S. Commission on Civil Rights. He
received his M.A. and Ph.D. in sociology from Michigan State
University, and his B.S. in journalism from Northwestern
University.
Welcome also to Sarah Bloom Raskin. She has been Maryland's
commissioner of financial regulation since 2007. Commissioner
Raskin was previously banking counsel to the U.S. Senate
Committee on Banking, Housing, and Urban Affairs. She also
worked at both the Federal Reserve Bank of New York and the
Joint Economic Committee of Congress.
Welcome back.
Commissioner Raskin is on the board of directors of the
Conference of State Bank Supervisors and serves as the chair of
the Federal Legislation Committee. She also was recently named
as chair of the Regulatory Restructuring Task Force, a group of
state banking commissioners who are developing principles for
evaluating regulatory restructuring proposals.
Commissioner Raskin received her law degree from Harvard
Law School. She received her undergraduate degree in economics
from Amherst, and she is a recipient of the James R. Nelson
Award in Economics.
Robert J. Strupp is the director of research and policy
with the Community Law Center in Baltimore, Maryland, which
provides legal representation and advocacy to grassroots
organizations, nonprofits, and small businesses. Mr. Strupp
serves on the Homeownership Preservation Coalitions in
Baltimore and Prince George's County and chairs the Coalition's
Enforcement Committee.
Mr. Strupp has served on numerous real estate fraud work
groups including the Maryland Governor's and Attorney General's
working groups on foreclosure and lending law reforms.
I thank all of you for being here, and please proceed Mr.
Carr.
STATEMENT OF JAMES CARR, CHIEF OPERATING OFFICER, NATIONAL
COMMUNITY REINVESTMENT COALITION, WASHINGTON, DC
Mr. Carr. Chairman Maloney and other distinguished members
of the committee, good morning. My name is James H. Carr, and I
am the chief operating officer of the National Community
Reinvestment Coalition. On behalf of our coalition, I am
honored to speak with you today.
NCRC is an association of more than 600 community-based
organizations that promotes access to basic banking services
for working families and communities. NCRC is also pleased to
be a member of a new coalition of more than 200 consumer,
civic, labor, and civil rights organizations called Americans
for Financial Reform that is working to cultivate integrity and
accountability within the U.S. financial system.
Members of the committee, a major reason for the continuing
and protracted economic downturn we are experiencing is that
the problem that precipitated the collapse of the credit
markets and the economy is a foreclosure crisis that continues
to worsen. Already this year more than a million homes have
been lost to foreclosure and 5 million more homes are at risk
over the next 3 years, and that is assuming that the new Making
Homes Affordable program achieves all of the successes expected
by the administration.
Many blame the foreclosure crisis on the Community
Reinvestment Act and on arguments that financial institutions
were forced to lend to unqualified low- and moderate-income and
minority households. Both these assertions have no basis in
fact or logic.
According to the Federal Reserve Board, only 6 percent of
high-cost loans to low- and moderate-income households were
covered by CRA regulation, and the Center for Responsible
Lending has found that less than 10 percent of subprime high-
cost loans were to first time homeownership. Failure to
regulate adequately the U.S. mortgage market allowed deceptive,
reckless, and irresponsible lending to grow unchecked until it
eventually consumed the financial system.
Almost every institutional actor in the mortgage finance
process played a role, including brokers, lenders, appraisers,
Wall Street bond rating agencies, investment banks, and more.
This is not an equal opportunity economic crisis. Although the
national unemployment rate is an uncomfortable 9.4 percent, the
rate for African Americans is still, for example, 15 percent,
and for Latinos approaching 13.
The unemployment rate for non-Hispanic whites, by
comparison, remains under 9. Because African Americans and
Latinos have so few savings, they are poorly positioned to
survive a lengthy bout of unemployment. As a result,
potentially millions of African-American and Latino middle-
class households could see themselves falling out of the middle
class before this economic crisis is over.
Moreover, African Americans and Latinos were targeted
disproportionately for deceptively high cost loans. According
to a study by the U.S. Department of Housing and Urban
Development, subprime loans are five times more likely in
African American communities than in white communities, and
homeowners in high-income black neighborhoods are twice as
likely as borrowers in low-income white neighborhoods to have a
subprime loan.
The result is that blacks and Latinos are overrepresented
in the foreclosure statistics. African Americans, for example,
have experienced a full 3-point drop in--3 percentage point
drop--in homeownership since this crisis began.
Further, research by the National Community Reinvestment
Coalition found that predatory lenders aimed their toxic
products particularly at women of color. And because African-
American children are more likely to reside in female-headed
households, children--black children--are disproportionately
harmed as a result of the foreclosure crisis and its attendant
stresses.
In separate research, ``The Broken Credit System,'' NCRC
also found that predatory lenders targeted the elderly.
Although African Americans and Latinos on average have lower
credit scores than do non-Hispanic white consumers, the extreme
levels of lending disparity in the U.S. mortgage market have
little to do with differences in the credit quality of the
borrowers.
Fannie Mae has estimated that roughly 50 percent of
consumers in the subprime market could have qualified for prime
loans. In fact, in 2006 more than 60 percent of subprime
borrowers had credit scores that could have qualified for prime
mortgages. In response to the magnitude and complexity of the
current crisis, a three-fold response is essential.
First, we must stem the current foreclosure crisis. The
Making Home Affordable program is the most comprehensive and
effective program that has been enacted to date since the
crisis began, but success there is still measured in the
thousands and the problem is growing in the millions. We need a
broader response.
Second, we need to focus on those communities that were
disproportionately harmed as a result of unfair, reckless
lending and help to rebuild them rather than just stabilize
them so far behind where they are today. And third, we need to
enact comprehensive anti-predatory lending legislation. We need
to expand and enforce the CRA law. And we need to enact a
financial consumer protection agency.
In conclusion, Nobel Prize-winning economist Joseph
Stiglitz has observed the financial system discovered that
there was money at the bottom of the wealth pyramid and it did
everything it could to ensure that it did not remain there.
Stated otherwise, the business model for many financial
institutions was to strip consumers of their wealth rather than
build and improve their financial security.
Ironically, most solutions to date have focused on
rewarding the financial firms and their executives that created
the crisis, but in spite of more than $12.8 trillion of
financial support in the form of loans, investments, and
guarantees, this approach is not working because consumers
continue to struggle in a virtual sea of deceptive mortgage
debt and with a financial system that remains unaccountable to
the American public. Now is the time to shift the focus away
from Wall Street and onto Main Street in order to put America
back on the firm financial footing.
Thank you very much. I have a longer extended written
statement that I would like to submit to the record.
[The prepared statement of James Carr appears in the
Submissions for the Record on page 37.]
Chair Maloney. Thank you very much for your testimony.
Dr. Squires.
STATEMENT OF GREGORY SQUIRES, PROFESSOR OF SOCIOLOGY AND PUBLIC
POLICY AND PUBLIC ADMINISTRATION, AND CHAIR OF THE DEPARTMENT
OF SOCIOLOGY AT GEORGE WASHINGTON UNIVERSITY, WASHINGTON, DC
Mr. Squires. Chairperson Maloney and all members of the
committee, I want to thank you for holding this hearing and for
addressing what is, unfortunately, one of the most challenging
sets of issues that we have to face today, and I want to thank
you for inviting me to participate. I actually have one very
simple message that I would like to leave with you today.
To date, most of the discussion of subprime lending and the
economic fallout has focused on the sins of various individual
actors--homeowners who have bought too much house, lax if not
fraudulent underwriters; incompetent if not corrupt appraisers
and rating agencies; lax regulators; greedy investors and more.
What is lost in much of this discussion is the critical role
that has been played by the broader context of surging economic
inequality and persistent racial segregation, which has
incubated the rise in subprime lending and the economic
fallout.
So my basic message is that any response to these
problems--the sets of problems that we are all taking about--
requires that we address this broader context of economic
inequality and racial segregation as well as the lending
practices of particular lenders and the regulatory actions of
our regulatory agencies.
Just a couple of revealing statistics on inequality: Since
the mid-1970s, compensation for the 100 highest paid chief
executive officers increased by $1.3 million, or 39 times the
pay of the average worker, to $37.5 million, or more than 1,000
times the pay of a typical worker.
Perhaps more interesting for our discussion today, in 2007
the 25 top hedgefund managers took home a combined $22 million,
compared to the $14 million that they took home in 2006, while
thousands of people were losing their jobs in financial
services; and in 2007, the top five each took home $1 billion.
Perhaps more significant is what is happening at the
neighborhood level. Between 1970 and 2000, the number of high-
poverty census tracts grew from 1,200 to 2,500 and the
population of these neighborhoods grew from 4 million to 8
million. The number of middle-income tracts has declined from
about 58 percent to 40 percent of all tracts, and many poor
people who used to live primarily in middle-income tracts are
now living primarily in poor tracts.
In terms of segregation, we see that racial segregation has
declined in recent years between blacks and whites, but in
those big cities like Baltimore, Detroit, Chicago, New York,
and so forth, where the black population is concentrated,
segregation has persisted at hyper-segregated levels and
Hispanics and Asians have actually become more segregated from
whites in recent years.
Just a few numbers showing how loan patterns have followed:
The percentage of high-cost loans--this is in 2006, when
subprime lending was at its peak--the percentage of borrowers
who took out high-priced loans, it was 46 percent in low-income
areas, 16 in high-income. It was 49 percent in minority areas,
18 percent in white areas. And subsequent research has shown
that these disparities persist after we control on credit
rating, income, and other economic characteristics.
And it is no accident. We have heard about Wells Fargo.
There are many other incidents where people were targeted and
steered from one set of loans to another. The New York Times
report that was referred to earlier pointed out that the
targets of these loans were ``mud people,'' and the loans were
characterized as ``ghetto loans.''
But in research I have done with colleagues we have found
that levels of segregation have an impact above and beyond the
level of racial concentration and racial composition of
neighborhoods. For example, we found in the 10 most segregated
metropolitan areas, the share of borrowers who took out high-
priced loans was 31 percent, compared to 20 percent in the
least segregated areas.
Far more significant is that race and ethnicity remain a
statistically significant predictor of the level of subprime
lending after you control on credit rating, poverty,
employment, percent minority, and level of education. So
segregation itself is not just a reflection of the subprime
lending, it is one of the factors that has contributed to the
level of subprime lending.
So what do we do? I would like to suggest several policy
responses in each of three different areas--one set of policies
to deal with the broader economic inequality, one set to deal
with housing and segregation, and finally, a set of policies to
deal with lending practices.
In terms of the broader patterns of inequality, the first
thing I would recommend is that the Congress enact the Employee
Free Choice Act to strengthen the role of unions. We need to
index the minimum wage so that it keeps up with increases in
the cost of living. We should increase the earned income tax
credit to bring more working families above the poverty line.
We should expand living wage programs where recipients of
government contracts, and economic development subsidies, are
required to pay their employees a wage that will rise them
above that which requires further government support. We should
enact the Income Equity Act, which was proposed by former
Minnesota Congressman Martin Sabo, which would deny the
corporate tax deduction when executive compensation exceeds 25
times the pay of the lowest paid employee.
There are a number of land-use and housing policies that
could be implemented. In the Twin Cities, they have used tax-
based revenue sharing, whereby the property tax increases in
the wealthiest neighborhoods are used in part to finance
development throughout the metropolitan area. Inclusionary
zoning laws, which require developers to set aside a share of
new homes for low-and moderate-income families, have been
developed in literally hundreds of communities in the United
States. We need more.
We need more mobility programs to help families who want to
move to low-poverty areas to be able to do so. HUD should be
required to steer more of its Housing Choice Voucher program to
people who are interested in moving to low-poverty
neighborhoods.
We could require recipients of the low-income housing tax
credit to provide incentives to families so that more can move
to low-poverty neighborhoods. And Congress could enact the
Housing Fairness Act of 2009, which would dramatically increase
the power of nonprofit fair housing organizations which have
been so critical for enforcing the Fair Housing Act.
Let me just say a couple of things specifically about
lending and lending regulation. The National Mortgage Reform
and Anti-Predatory Lending Act would go a long way towards
eliminating the kinds of-- abuses that we have talked about
here.
The Community Reinvestment Modernization Act of 2009 would
bring the non-depository lenders who are responsible for the
subprime problem under the authority of the CRA and would
dramatically reduce the likelihood of foreclosure and related
types of economic fallout from occurring in the future. The
creation of a Consumer Financial Protection Agency, if in fact
given appropriate rulemaking and enforcement authority and
given the ability, the authority to hire adequate, competent
staff, would go a long way in moving us in the right direction.
So finally, let me just say that while much attention has
been and should be focused on the behavior of lenders and other
housing providers and the regulatory agencies, we need to spend
more time looking at the broader context of inequality that has
nurtured the predatory lending policies and practices that have
brought our economy to the state that it is in today. Thank
you.
[The prepared statement of Gregory Squires appears in the
Submissions for the Record on page 39.]
Chair Maloney. Thank you. Ms. Raskin.
STATEMENT OF SARAH BLOOM RASKIN, COMMISSIONER OF FINANCIAL
REGULATION, STATE OF MARYLAND, AND CHAIR OF THE CONFERENCE OF
STATE BANK SUPERVISORS (CSBS), BALTIMORE, MD
Ms. Raskin. Chairman Maloney and members of the committee,
thank you for inviting me to testify today at this important
hearing. I am especially honored to return to the Joint
Economic Committee where I was an intern and which first
provided me with the standards of good policymaking that I have
kept as a touchstone throughout my career.
Now, as the chief financial regulator for the state of
Maryland I am pleased to share information about our state's
challenges in responding to the subprime lending crisis as it
has manifested itself in Maryland. Our state is ravaged by the
fallout from irresponsible lending--too many loans that never
should have been made, poorly underwritten, if at all, with
features and loan terms that make it clear that the chance for
success was limited. And all too often, these loans have had a
disproportionate impact on minority communities.
The Urban Institute published a study last month of
subprime lending in 100 metropolitan areas. The study
controlled for income levels and concluded that the
neighborhoods hardest hit by the subprime crisis have been
those where minority residents predominate. The fallout is
evident in foreclosures throughout our state, particularly
Baltimore City and Prince George's County.
Under a new law reforming the foreclosure process in our
state, secured parties must send a notice of intent to
foreclose to homeowners at least 45 days prior to docketing the
foreclosure. My office receives copies of these notices, and
they come in by the box load.
In the past 12 months, over 100,000 notices of intent to
foreclose have been sent to Maryland borrowers and to our
office. Each day we struggle to input the information into our
database and to send early outreach letters to the borrowers
regarding options for assistance and warning about foreclosure
scams.
As the Commissioner of Financial Regulation, it is my
obligation to pursue, within the boundaries of my authority,
those who engage in violations of all our laws, including our
anti-predatory lending laws. State regulators have a long
history as the first line of protection for consumers. It was
the states that first sounded the alarm against predatory
lending and brought landmark enforcement against some of the
biggest subprime lenders.
While the big cases have received most of the recognition,
success is sometimes better measured by those actions that
never receive media attention. In 2007 alone, states took
almost 6,000 enforcement actions against mortgage lenders and
brokers, and this number doesn't include the unreported
investigations and referrals for criminally-punishable fraud
and other crimes.
When most people talk about predatory lending, they think
about the mortgage context. However, it is worth noting that
the span of predatory lending practices includes consumer loans
and lending transactions that have nothing to do with mortgages
but contain features and terms that are high-cost and have
confusing, if any, disclosure. Payday loans, payday loan
brokering, and refund anticipation loans are but some of the
set of ever-evolving predatory practices.
In addition to investigating and taking enforcement actions
against predatory lending behavior, we have also taken
innovative regulatory and legislative action. For example, we
have implemented anti-steering regulatory changes that require
mortgage lenders and brokers to provide information about prime
loans to borrowers who are being offered high-cost loans.
The span of our legislative and regulatory changes are
detailed in my written testimony, which I submit for the
record. Suffice it to say that these are all important steps.
Unfortunately, national banks are not subject to any of them.
Despite these enforcement and legislative successes, state
actions have been hamstrung by the dual forces of preemption of
state authority and lack of federal oversight. The authority of
state banking commissioners to craft and to enforce consumer
protection laws of general applicability was challenged at
precisely the time it was most needed, when the amount of
subprime lending exploded and riskier mortgage products came
into the marketplace.
The laws passed by state legislatures to protect citizens
and the enforcement actions taken by state regulators should
have alerted federal authorities to the extent of the problems
in the mortgage market and should have spurred a dialogue
between state and federal authorities about the best way to
address the problem. Unfortunately, this didn't occur. Had the
federal regulators not adopted preemptive policies, I suggest
we would have fewer home foreclosures and may have avoided the
need to prop up our largest financial institutions.
At the same time that preemption of state consumer
protection powers gained ground, federal agencies failed to
fill the gap in regulation with uniform market-wide standards
that ensured lenders did not engage in fraudulent, deceptive,
or unfair lending practices and to respond to the crisis.
Congressman Cummings has seen this close-up effort in his
efforts to gather information about mortgage modification. My
office gathers modification data, and when this data indicated
that loan modifications were not sustainable, we required
servicers to report the impact of modification on the
borrower's monthly payment.
It was clear to us that this topic should be aired.
Unfortunately, the federal regulators resisted. They dutifully
reported that modifications were re-defaulting at high rates,
but resisted drilling into the nature of these modifications.
Thankfully, congressional action led by Congressman Cummings
helped change things, and earlier this year the OCC began
collecting similar data regarding monthly payments.
The void created by preemption and the failure of federal
oversight added a number of impediments for state banking
commissioners in crafting legislation and in pursuing
enforcement actions against predatory lenders. While it is too
late to remove some of these impediments, there are some
obstacles that can be eliminated to restore to state bank
commissioners the ability to successfully regulate lending in
the future.
Congress should promptly eliminate federal preemption of
the application of the state consumer protection laws to
national banks. The magic of federalism is that if one level of
government falls asleep at the wheel or has too much to drink
at the party, another can drive everybody home safely. But when
the federal regulators preempt the states' best laws, you take
away the keys to the car and our license to drive.
Together, with our nation's 50 banking commissioners and
with the Conference of State Bank Supervisors, I am supportive
of provisions contained within President Obama's recently
proposed financial regulatory reform plan that would grant
state authorities the ability to promulgate statutes and
regulations that would apply to all financial firms operating
in our state, to examine for compliance of these statutes and
rules, and to take enforcement actions against those entities
that were found to be out of compliance with these statutes.
This structure would create a floor for all lenders but still
permit states to protect their citizens through more robust
legislation and regulation.
To sum up, there are lessons to be learned. The movement to
erode state authority to enforce state and federal consumer
protection laws must cease. Attempts to exclude state bank
regulators from enforcing consumer protection laws has
significantly contributed to the distress our residents have
endured as a result of these difficult economic times.
Thank you for the opportunity to testify.
[The prepared statement of Sarah Bloom Raskin appears in
the Submissions for the Record on page 45.]
Chair Maloney. Thank you. Mr. Strupp.
STATEMENT OF ROBERT STRUPP, DIRECTOR OF RESEARCH AND POLICY,
COMMUNITY LAW CENTER, BALTIMORE, MD
Mr. Strupp. Good morning, Madam Chair, members of the
committee. I am honored to have this opportunity to testify
before you this morning. I am the director of research and
policy with the Community Law Center in Baltimore, Maryland,
and for over 22 years the Community Law Center has been a
leading voice in Baltimore for preventing and eradicating
blight and returning vacant and abandoned property to
productive use.
The Community Law Center seeks solutions to the predatory
and deceptive real estate transactions that have caused
foreclosures and that have led to many of the housing
challenges facing communities throughout Maryland. While I will
try and focus my remarks this morning on Baltimore, I did want
to share at the beginning a study from Chicago that exemplifies
why this is a redlining issue, why this is an issue of concern
with regard to discrimination.
Research conducted by the Chicago Reporter, an online
magazine in Chicago, showed that African Americans earning more
than $100,000 a year were more than twice as likely to receive
high-cost loans than white homeowners earning less than $35,000
a year, and this would be true in any urban area--any part of
our country. And so this is an example of what is going on.
In 2000, at the behest of Senator Barbara Mikulski and
Senator Paul Sarbanes, the United States Department of Housing
and Urban Development established a Baltimore City Flipping and
Predatory Lending Task Force, and I am proud to say that the
Community Law Center was the staff for this task force, which
had served as a laboratory to develop creative solutions to
problems arising in Baltimore and nationwide from the abuses in
the FHA mortgage program.
In the beginnings of the 1990s, foreclosures in Baltimore
were running at about $1,500--1,500 a year, excuse me. In 1999,
that number rose to 6,000 a year as a result of the FHA fraud.
The task force was instrumental in cleaning up some of the
fraud that was going on with regards to FHA transactions, but
as that was happening, the subprime loan products were emerging
and providing an entirely new problem for Baltimore and around
the country, specifically since a drop in foreclosures as low
as 829 for the city of Baltimore in 2005. Unfortunately, in the
first quarter of 2007, that number was 941. In 2008 it had
risen to 1,474. And in 2009, 1,471.
Currently, Baltimore is on track for over 5,000
foreclosures once again for the year 2009, so there has been a
steady increase in the foreclosures following the emergence of
the subprime and predatory lending practices.
This committee, actually, in 2007, had commissioned a
report that showed that in Baltimore there would be a--I am
sorry, in Maryland there would actually be a $2.73 billion loss
in property values related to the wealth of Maryland residents
and a $19.1 million loss in property taxes due to the subprime
mortgage crisis. Between 2004 and 2006, subprime lending for
the purchase of homes and refinancing continued to rise, and by
the fourth quarter of 2006 and the third quarter of 2007 the
growth in Maryland's prime and subprime foreclosure inventories
was more than twice the national average.
In 2000 there were 1,474 foreclosure filings, and as I
said, the numbers have risen considerably now since the
subprime mortgage crisis. Based on filings from part of 2007,
the study that was done by the Baltimore Homeowner--
commissioned by the Baltimore Homeownership Preservation
Coalition from the reinvestment fund showed that a
disproportionately large share of foreclosure filings--73.5
percent--were found in communities that are more than 60
percent or more African American in Baltimore.
These are just part of the story showing that African
Americans and others of minority class, people of color, are
being directed to loans that they didn't necessarily need to be
placed into, and that is the key of the predatory part of this,
is that folks were preyed on.
There were many who were put into subprime loans who may
have qualified for a better loan based upon credit reports,
based upon job status, but there was a clear pattern in
practice, as has been evidenced by the Wells Fargo case, of
placing people who would have qualified for better loans into
these dangerous high-risk loans based upon their color. And
this is reverse redlining.
There was a study done and a statement made by a mortgage
lender in the late 1990s that predicted that low-income
borrowers are going to be the leading customers going into the
21st century. This was a target. This was a plan of lenders
that these homeowners--minority homeowners--would be the focus
of their profit. And they did that by placing minority
homeowners into loans that they didn't necessarily need to be
placed into, and either they could have qualified for much
better loans or they were not ready to be homeowners at all,
and I suggested that is certainly possible in some cases, where
homeowners were given loans before they really were ready to be
homeowners. And of course, that has somewhat been exemplified
through the increase of housing counseling and pre-purchase
counseling that we now see in the industry.
But clearly, the Wells Fargo case and the statements of the
mortgage officers who have come forward is suggestive that the
discriminatory practices were well deep into the practices of
this lender, and the statements of other lenders and others
representing the lending industry clearly acknowledge that
there was a targeted focus on African Americans, in particular.
And the allegations in the Wells Fargo case specifically
relate, as articles have indicated--news articles have
indicated--on the bank's mortgage resource division, which was
set up in 2001, and one of their former employees has said that
this unit was targeting black communities by sending out
fliers, visiting churches, and hiring minority employees to
close deals.
This was a tactic of trying to earn the trust of African
Americans by essentially affinity--affinity relationships--and
coming and speaking in churches on Sunday evenings at barbeques
and picnics and what have you, and saying, ``We can help you
own a home and we can bring you--come to our office or we will
come to you and we will show you how you can own a home, too,
and you can own a larger home than you might even think you can
own because we can place you into one of these exotic
products.''
And this was going on throughout Baltimore and throughout
the state of Maryland. Prince George's County, as many of you
know, leads the state of Maryland in foreclosures, and in the
first 3 months of 2009 Prince George's County has actually had
about 3,000 homeowners who are either late in their payments or
facing foreclosure. This is an across-the-state problem----
Chair Maloney. Would you summarize? Your entire statement
will be in the record----
Mr. Strupp [continuing]. Thank you.
Chair Maloney [continuing]. And we are under tight time
constraints with the legislative agenda on the floor, so if you
could summarize quickly.
Mr. Strupp. So in closing, there is ample evidence that
the--that redlining was going on, that targeted lending to
African Americans of high-risk loans was going on. And we
believe that this, you know, clearly requires regulation. It
requires better law enforcement.
And if I might just conclude by saying that in the current
legislation, one of the things that I would ask to be looked at
is improved regulation of the modification process--the loan
modification process. Thank you.
[The prepared statement of Robert Strupp appears in the
Submissions for the Record on page 48.]
Chair Maloney. Absolutely. That is part of what we are
looking at in Congress. Thank you for your testimony.
Commissioner Raskin, you touched upon this in your
testimony, but I would like some more information on this
important issue: The OCC preempted state anti-predatory lending
laws on the bases of fostering competition between state and
national banks and to create a better and more innovative
banking system.
I, for one, voted against this preemption because the
leadership on the state level in New York, and the city level,
were doing a very fine job in combating predatory lending
practices and were very active in that area, so to me it was
very disturbing that this action took the place of our laws.
And I would like your comments from the ground in
Baltimore, Maryland. Do you think that this preemption has had
that effect? Can you explain further what this preemption
meant? And you mentioned in your testimony your support for
President Obama's decisions to change this direction in his
proposed regulation, so from your perspective, could you give
us some examples and better understanding of this? Thank you.
Ms. Raskin. Sure. The preemption policies of the OCC and
OTS, which are the federal agencies that regulate national
banks, have been in place, really, for quite a number of years,
and they have been moving in such a way that they have become
ever more expansive and growing.
So while there is complete, you know, settlement in the law
regarding operating subsidiaries of national banks and whether
those operating subsidiaries are subject to state or federal
supervision, the problem with preemption is that the underlying
law has been expanded way beyond the boundaries of what it was
originally intended to do, and this creeping preemption, as we
like to call it, has had the effect, really, of cutting off all
efforts at the state level to do any meaningful consumer
protection.
So, for example, at the state level we will see bills
regarding consumer protection efforts on credit cards, consumer
protection efforts regarding payday lending, consumer
protection efforts regarding refund anticipation loans, and to
the extent any of those legislative initiatives touch upon or
have anything to do with a national bank, you will hear from
the federal agencies that those actions are preempted. And that
has had a chilling effect at the state level and has kept
states from being more robust, in my opinion, in the area of
consumer protection.
Chair Maloney. Thank you.
And the fact--and I believe it was you, Dr. Squires, who
brought up the fact that African American women are more likely
to be mortgage-holders.
Or was it you, Mr. Carr? Yes. Mr. Carr.
I thought it was interesting when you said that they were
more likely to be mortgage-holders compared to other women of
color, or non-minority women, as well as the fact that these
same women are more likely to be steered into higher-cost
loans, regardless of income group. I found that statement quite
disturbing.
And according to a study that we recently did in the Joint
Economic Committee, African American female householders are
experiencing a very high level of unemployment during this
recession, more so than other categories.
And do you expect foreclosure rates to rise even more
sharply due to these unemployment numbers, and are there
additional measures, other than the increases in unemployment
benefits and food stamps in the stimulus package, that we
should consider to help the families that are considerably
stressed because of their being exploited in the subprime loan
market and also the unemployment that they are experiencing
now?
Mr. Carr. Thank you.
Mr. Carr. Yes. Absolutely.
First of all, this foreclosure crisis is nowhere near over.
What has happened over the last year is it has morphed in its
character and it is much more difficult to address now, so
where we were mostly dealing with loans that were going to
foreclosure because of the product, we are now dealing with
loss of income or absolute loss of job through unemployment. So
for every new 100 unemployed people we can expect up to 40 new
foreclosures, and so that is an extraordinary number if you
look at just the first quarter of the year in terms of
unemployment. That added another 800 potential foreclosures to
the statistics, which is why they are growing so large.
Even to the extent that they look not so--I mean, even to
the extent they look bad now, if you dig in and look at some of
the underlying data, you will see that a lot of homes are in
default but in fact they are not actually going through the
foreclosure process, which means there is even a backlog of
foreclosures that is waiting to happen, probably during the
second half of this year, which is why we have been advocating
a much broader approach--something like a Homeowners Loan
Corporation, because there really isn't a response to the
foreclosure crisis to the extent that it is driven by
unemployment.
To the extent that an individual actually becomes evicted
from their home, that is where real damage occurs at a
community level and at a national house price level.
So we need to address keeping people in their homes through
modifications that can be made on a much broader scale, and we
also need to address the impact of foreclosures that are going
to occur where people just simply can't afford a mortgage
because they are unemployed.
With respect to the female-headed household, the study that
we did showed that African-American female-headed households
were disproportionately targeted for predatory loans, and
because African-American children tend to live
disproportionately in the female-headed household, they will be
disproportionately hurt, in terms of potentially needing to
change schools, lose their social networks, and have long-term
socioeconomic damage, as well as loss of wealth.
As we all know, African-American households and Latino
households can't afford to lose any more wealth. On average,
they have about $10 and $12, respectively, to every $100 of
wealth of non-Hispanic white households, and that wealth gap is
growing. It is estimated that African Americans could end up in
this recession experiencing the greatest loss of wealth since
Reconstruction.
Chair Maloney. Thank you very much.
The chair grants herself an additional 2 minutes on a very
important question. Many economists have come before this
committee and told us that if we don't put a floor on the
foreclosures and the tumbling house prices and the, really,
freefall in the housing market, that we will not turn around
this economy.
As you know, Congress has stepped forward with a number of
efforts to allow loan modifications, including more assistance
to the servicers and many steps to help people stay in their
homes. And very briefly, I would just like to go down, if any
of you have any comments on what we could do additionally to
help this foreclosure crisis that is in our country.
And why don't we start with you, Mr. Strupp, and go down
very quickly? And this is a critical issue that policymakers
are studying and grappling with. And we have made many efforts
to try to stop it, but it hasn't been able to have the impact
that we had hoped.
Mr. Strupp. Thank you very much. Actually, this is a pet
project of mine, and what is strikingly missing from, I think,
all the proposals and the legislation that have been submitted
to date is a moratorium on foreclosures--a federal moratorium.
The FHA did do that in Baltimore as a result of the discovery
of the fraud. It has been done in the past, and I believe it
should be done here.
And you are right, Madam Chair, until we actually stop the
foreclosures, we are going to continue to see deterioration of
home values, the continued deterioration of the economy.
And a foreclosure moratorium coupled with an attempt at
loan modifications, such as what Sheila Bair has proposed,
along with some percentage of 31, 35 percent, what have you, of
income being paid monthly by homeowners--some combination of
that is my recommendation, and we do need to have that
moratorium. And it was proposed by Senator Obama when he was
running for president, and I think it should be part of the
package.
Chair Maloney. Thank you.
Commissioner.
Ms. Raskin. Yes. Clearly the number of foreclosures
continues to increase. There have been a number of efforts put
in place to try to address the rising numbers.
One initiative that we took in Maryland that had some
traction was to put in place servicer agreements with various
mortgage servicers which held servicers to different
obligations regarding the way they negotiate with homeowners
and taking certain steps regarding getting those loans
modified. And that is one thing we have been able to do which
has had some success.
Chair Maloney. Thank you.
Dr. Squires.
Mr. Squires. I think reforming the bankruptcy law would be
one important step. Up until now, almost all these loan
modification programs have been strictly voluntary, and the
fair housing groups--consumer groups--have been advocating this
for years, but so far that has not been an option.
Many states do have moratoriums in place. I think there is
something like 14 or 15 states at least that have them in place
right now, but that leaves most states unprotected. And I don't
know if this is--maybe this isn't related to your question, but
I think one of the issues we need to think about is what is
happening to renters in the process. According to the Low-
Income Housing Coalition, as many as 40 percent of the people
who are losing their homes in urban areas because of
foreclosures are renters, and they are obviously, you know,
innocent victims of this process.
Chair Maloney. I want to thank you, and I am sure you are
aware that the House passed a bankruptcy bill and passed it to
the Senate, where it is awaiting movement forward. Thank you.
Mr. Carr. Yes. I would like to just reinforce the need for
bankruptcy reform. It was part of the president's Making Home
Affordable proposals, and it is one of the weaknesses. That is,
the stick is left out; only the carrots are in.
What we have proposed in the National Community
Reinvestment Coalition way back in January of last year in
testimony to Congress was the establishment of an emergency
homeowner loan program that was built on the basis of the
original homeowner loan corporation. We called it HELP Now--
Homeowner Emergency Loan Program.
Essentially, we had proposed a reverse auction program
whereby the federal government buy from financial institutions
toxic assets and modified them in mass, in bulk. In other
words, eliminate this voluntary process where a consumer has to
come forward, but the federal government actually take those
loans and proceed to contact the borrowers and modify the
loans.
We don't believe that that would work now because the
generosity of the financial subsidies to the financial system
have been so great that we don't think financial institutions
would take part in a reverse auction. So we have since modified
that proposal and suggested that the federal government
exercise the right of eminent domain, to buy those loans at a
reasonable discount.
The reason the reasonable discount is important, because
that subsidy comes out of the lenders who actually made those
loans and profited from them, and we would use that discounted
amount from the sale, transfer that to the actual cost of loan
modification, rather than sending the cost all to the federal
taxpayers, which is what happens now. We----
Chair Maloney. Thank you so very much. My time is expired.
Mr. Brady, for 7 minutes?
Representative Brady. Thank you, Chair. I think clearly
greed drove this foreclosure crisis, all along the line from
investors to lenders to borrowers, and I think that it was
combined with good intentions over the past 2 decades by
lawmakers to try to move people into homes, and who later sort
of turned a blind eye to some of the consequences of these
regulatory and statutory provisions.
I don't think, honestly, that the answer to predatory
lending is to strip the workers' rights to secret ballot. Under
that thinking, we would pass cap and trade because we would all
grow better looking and would learn a second language
immediately.
I do think that there is no simple solution. I think that
is why Congress' efforts last session--HOPE for Homeownership
program--was a failure. We have made some changes, but again,
we are seeing even those loans modified a very high default
rate on it. This is a tough problem to solve.
Two questions I wanted to ask, the first one to Mr. Carr
and the rest of the panel get your view on something.
Looking at ways to prevent in the future--according to the
Government Accountability Office, with the exception of loans
covered under the Homeownership and Equity Protection Act,
there are no federal statutes that expressly prohibit making a
loan that a borrower will likely be unable to pay, other than
generally under the Safety and Soundness set of requirements.
For loans that are covered under the Homeownership and
Equity Protection Act, making a loan without regard to a
borrower's ability to repay isn't prohibited unless it can be
demonstrated that an institution has engaged in a pattern of
practice of doing so. The Office of Comptroller of Currency
prohibits national banks or their operating subjects from
making consumer loans based predominantly on the foreclosure or
liquidation value of a borrower's collateral.
Here is the question, Mr. Carr: Should Congress prohibit
all lenders from intentionally making loans to consumers that
lenders know ex-ante, before the event, that consumers cannot
repay except by foreclosure or liquidation value of the
collateral? So should we expressly prohibit lenders from making
loans that they know will not be repaid?
Mr. Carr [continuing]. Yes. Absolutely. If, in fact, the
financial institution has the information to understand that a
consumer cannot repay the loan, they shouldn't extend it.
But I would go even further than that. I would say that on
the very front end of the process, the broker who is actually
offering that loan should have a fiduciary responsibility to
tell the truth and give the best advice they can to the
consumer.
One of the things that is so interesting about this
foreclosure crisis is that at almost any point in the process
we could have eliminated the crisis we had. So, for example, if
we simply had not had Wall Street bond rating agencies stamping
triple A on bonds that we knew were junk bonds, it would not
have happened. So yes, I would agree.
Could I make just one quick point, though, on the loan
modifications, because this is important? Many people have been
scratching their heads to try and understand why loans, once
they were modified, were still going to foreclosure. And there
was such a paucity of information on that until the very end of
last year, when it was revealed that more than half of the
loans that were being modified were actually either leaving the
payments the same or increasing them; a very small amount were
actually lowering them.
So it was a process that made no sense.
Representative Brady. Well, I think, too, part of it is
trying to figure out how you can help people who found
themselves in tough situations--lost a job or lost valid
income. How do you help them? And how do you address a
colleague back home I talked to whose retired mother in Nevada
took out three zero down payment, adjustable rate balloon
payment notes to make investments in three homes she hoped
would, you know, make money? And obviously these--our answers
and solutions haven't fit those groups very well. So thank you
for your comments.
There are a lot of things that contribute to this. I want
to ask the rest of the panel--in 1992 there was a landmark
study published by the Federal Reserve Bank of Boston. It found
that minority applicants for home mortgage loans in Boston were
more likely to be rejected than white applicants, even after
adjusting for a number of differences.
In response to that study, the Federal Reserve Bank issued
regulatory guidance to encourage banks to adopt more flexible
underwriting standards for home mortgage loans.
Among other things, banks should be willing to consider
ratios above the standard 28, 36, you know, the net--gross net
income devoted to the house payment, that they should allow
gifts, grants, or loans from relatives, nonprofit
organizations, or municipal agencies to help cover the down
payment and closing costs. They should accept unemployment
benefits, which are by definition temporary, as a source of
income in covering those debts.
Other federal regulators soon adopted this guidance, which
became standard for evaluating the CRA performance of banks.
The question is, however unintentional, did this Federal
Reserve guidance contribute to the deterioration of
underwriting standards? Did it deteriorate--contribute to the
spread of subprime residential mortgage lending, inflation,
ultimately, of the housing bubble, and the large number of home
foreclosures among those low-income minority families probably
least able to weather a tough economy or make the payments in
the first----
And why don't we start with you, Mr. Strupp, and we will
work it down the panel?
Mr. Strupp. Well, thank you, Congressman. I think that--
remember, there is a difference between subprime and predatory,
and of course a lot of what we are talking about today is what
was predatory, but----
Representative Brady. Not always----
Mr. Strupp [continuing]. But not always. There certainly
are predatory subprime loans. And I think that there was--
certainly making loans more available and relaxing underwriting
standards made more people able to borrow, but that did not
suggest--does not suggest that irresponsible lending was being
condoned or should have been condoned. And I think that is the
distinction, is that it was still expected that lenders who
were going to be making these more relaxed loans--FHA was
making more relaxed loans as well--that that was the whole
purpose of the FHA by its creation, was to make low-and
moderate-income families available--make loans available to
them. But that did not mean that what they were going to be
borrowing was going to be something that they----
Representative Brady [continuing]. Right.
Mr. Strupp [continuing]. Could not sustain----
Representative Brady. No, I agree with you. I can't think
of a lawmaker, a regulatory body, a reserve bank who said,
``Let us set out to inflate the housing bubble and get people
into mortgages they can't afford.'' I don't think that occurred
throughout the process.
But trying to identify things that contributed to it that
we ought to go back and revisit as a way to prevent them in the
future in a reasonable way.
Mr. Strupp. And I think it may well be fair to say that
certainly the creation of more relaxed loan products was--
contributed to the problem, and those products were then
abusively given to borrowers who should not have been given
them. So I think that you could connect those dots and say that
subprime loan products were abusively given to borrowers to
whom they were not designed for. So yes.
Representative Brady. Good point.
Commissioner.
Ms. Raskin. Yes. I think that more flexible standards
should not have ever been equated with weak regulatory
standards. In other words, once the more flexible guidance was
put in place, it was incumbent upon the regulators, as
examiners, to examine for those standards.
So I think that the breakdown occurred at the regulatory
oversight piece of the, you know, of the equation, which ties
back into your question regarding ability to repay and the
ability to repay standard, which is something we have adopted
in Maryland. It is law in the state of Maryland now. And
ability to repay standard must be shown for every loan, and our
examiners examine against that law. So we----
Representative Brady. When did you put that law in place?
Ms. Raskin [continuing]. We put that in place in 2007--
early 2008, yes--that is exactly right, but it also goes to the
question about what we can do to keep this from happening
again.
Representative Brady. Yes. I appreciate that. And you have
a unique perspective, so thank you.
Yes, sir, professor.
Mr. Squires. I don't think the increase in flexibility was
any kind of meaningful contribution to this problem. The fact
that lenders were encouraged to be more flexible is not an
invitation to be irresponsible, to not verify income, to not do
sound underwriting.
We have long had character lending that people have used to
help out friends and people that they knew. It seems to me
there is nothing wrong with encouraging people to try to reach
out--lenders to reach out to communities that they had not
traditionally served, but to do so in a responsible way.
It is important to keep in mind that the CRA, which has
gotten some criticism, has in the statute language requiring
safe and sound lending. Lenders have an affirmative obligation
to ascertain and be responsive to the credit needs of their
entire service area, including low-and moderate-income
families, consistent with safe and sound lending.
So there is nothing in the call for flexibility that
requires irresponsibility. Now, lenders, knowing that they
weren't going to keep a loan in their portfolio and they were
going to immediately sell it and turn it around, that clearly
contributed to the problem, but it is not because of the
flexibility.
And I also want to point out--semi-related--that the
Employee Free Choice Act does not deny any worker the secret
ballot. It provides workers with the opportunity to exercise a
choice as to whether or not they want to have a secret ballot
or a card check.
Representative Brady. That is not how my workers see it,
but I appreciate the point. I do think one thing we have
noticed in this foreclosure crisis is that everyone offends the
good intentions in policy that they set out to accomplish.
How those were interpreted, used, regulated, invested,
ultimately borrowed from a wide range of borrowers, both from
some out of need, from some for a hope of actually owning a
home, some for making a quick buck--although I am not pointing
to any single one; there were a whole lot of host of different
issues that we have to deal with.
And again, I really think this is a good panel. We
appreciate you, Chairman.
Mr. Carr. Could I respond to that? Could I respond to that
question about the study, because I think that study was a
watershed. That was actually at a high point in them actually
trying to promote affordable, sustainable homeownership.
The study didn't say become more reckless; it said be more
careful in looking at the details of these consumers who,
historically, have been outside of the system, so that you can
bring them in. And that is not what broke down the system.
Using alternative sources of income is not what happened. It
was using no source of income, called no-doc mortgages.
It was not giving them a fixed-rate mortgage that was a
percentage point higher; it was giving them a--it was putting
them into an adjustable loan that had payment shock that was
about 50 to 80 percent and in some cases 100 percent higher. It
was qualifying a person at a teaser rate rather than the actual
adjusted rates that----
Representative Brady. Although you have to admit, Federal
Reserve Board followed up that study with specific guidance to
banks--said, loosen, you know, the income ability to repay, the
standard 28, 36 figure. It said, you know, loosen up how you
get the down payment, closing costs, and loosen up using income
like unemployment benefits. Again, I am not saying that caused
a cascade of all of this----
Mr. Carr [continuing]. Exactly. But they don't use income
at all.
Representative Brady [continuing]. What is that?
Mr. Carr. My point is that they didn't say, underwrite
consumers for the adjustable starting teaser rate and not for
the cost of a loan. They did not say, use pre-payment penalties
that would lock a consumer in. But once they were in the system
and they actually perform well after the first year or year and
a half, and they realize, ``Wow. This homeownership stuff
works. I can get into a low-rate, fixed-rate mortgage.'' They
couldn't because they were penalized and held into that
mortgage.
They didn't say, charge them $12,000 to $17,000 more----
Representative Brady. But I do point out, there really were
significant changes as a result of that study that had an
impact down the road, whether intentional or not. Thank you.
Chair Maloney. Mr. Hinchey.
Representative Hinchey. Thank you very much, Madam
Chairman.
And thank you very much for your very excellent testimony
and the very candid responses that you have given to the
questions that have been asked of you.
This is a very complicated situation, and it is something
that really needs to be dealt with. We have seen a manipulation
of the lending practices in this country now going back for
almost a decade.
And to a large extent, they originated with the repeal of
the Glass-Steagall Act, which was a very conscious repeal that
was engaged in and caused by people who wanted to engage in
predatory lending and the manipulation of the lending system,
going back to the circumstances that caused the depression of
the 1920s, what enabled them to make a huge amount of money,
and they didn't care what the outcome was going to be. That is
the circumstances that we are dealing with.
It strikes me as a kind of modern version of the con jobs
of the 1930s. You go around establishing confidence in people,
and then after you establish the confidence you manipulate them
and take away as much money from them as possible. That is what
we have seen, and we need to deal with this effectively. This
Congress and this administration needs to deal with it
effectively.
A lot of things have come forward now that are attempting
to deal with it, but there are a host of other things that
really need further dealing with. One of the aspects of the
past that interests me, frankly, was that January 7th, 2004 act
of the Office of the Comptroller of the Currency, which issued
a final rule identifying types of state laws that are preempted
for national banks, including mortgage lender broker licensing
laws, escrow account laws, credit score disclosure laws, and
anti-predatory lending laws.
That was just a brilliant move by the part of the OCC back
in the Bush administration, and I am sure that they were
advised to do that by a lot of the people who wanted to engage
in these practices that we have seen that have caused so much
of the damage.
So we are seeing efforts now that are attempting to engage
these problems, and I hope I am not too right about this, but
in my opinion what is being suggested is not nearly enough. It
is going to go some part of the way; it is going to deal with
some aspects of the problem. But it is not going to deal with
it all the way.
So I am wondering if you might suggest to us what might be
done with the Consumer Financial Product Safety Commission Act
of 2009, which is the big bill which is upcoming and is
supposed to deal with this problem. What should the Congress
think about adding, consider adding? What should we do to
strengthen that?
And what should we do to really deal with some of the
underlying problems here, which were set up intentionally to
manipulate this national economic financial system, bring about
predatory lending and the whole host of things that have caused
these deep economic problems?
And what can we do to deal with those, and not just deal
with them in the context of the circumstances that are existing
now, but what are we going to do to try to--to make sure to
prevent this kind of thing from happening again in another 10
years? Maybe you might have some suggestions, so let me start
with Mr. Squires and ask him.
Mr. Squires. Not being familiar with the statute that you
are talking about, I would say that if there isn't a private
right of action, there ought to be. You ought to make it easy
for fair housing organizations, consumer advocates, private
attorneys around the country to use the statute to take action
on their own.
We see with the Fair Housing Act, for example, HUD can only
do so much, Justice can only do so much. Most of the major
path-breaking decisions that we have gotten from the courts
have been as a result of private lawsuits leading to decisions
or settlements.
So I think that you want to try to energize as many
different organizations around the country so you are not
relying simply on a federal regulatory agency to enforce the
law.
Mr. Carr [continuing]. Yes. I would offer just some broad
comments. I think one of the most powerful things that can be
done is collect information on the abuses that are occurring in
the system. Without taking any action to eliminate abuses, just
shining a spotlight on where the disparities in lending are
happening and how and making it clear to the American public
would go a long way, I think, to addressing a lot of problems,
because just like at this hearing today, there are many who
disagree with, for example, the--you know, where the
disparities come from in the lending market. And we shouldn't
be debating, you know, the facts; we should be debating how do
we resolve them.
A second thing I would say is, I would really encourage
looking at the full panoply of institutions that serve
consumers across the spectrum and asking, do they have the
responsibility and do they have a perspective on how most to
achieve financial mobility and economic--upward economic
movement?
One of the things that I find striking is these
conversations between safety and soundness on one side and
consumer protection on the other. We should know now very
clearly that safety and soundness means promoting the economic
mobility of consumers, and if that is not happening, the system
is neither safe nor sound.
Ms. Raskin. Yes, well I certainly concur with you that the
causes of this are much broader than the proposed solutions
appear to be. And when I look at this crisis I see, as you do,
problems not just with the repeal of Glass-Steagall, which,
after all, validated the growth and complexity of these
institutions which are now too big to fail and which have
devoted so much of our federal taxpayer dollars to help bail
out, but also the absence of any meaningful antitrust
enforcement as well as a general deregulatory impulse that
has--that has sort of gripped the regulators in the last couple
decades.
To speak primarily to the question of the consumer
protection proposal and suggestions for making it work, I would
offer the following: First of all, I think that we want to make
sure that we keep it from being captured. We think about how
you create an agency--a federal agency--in this environment
that is not captured by the industry that it is supposed to be
regulating.
Secondly, I think we want to look and make sure that we can
keep it from being slow and reactive. In other words, what can
we build into this agency that will keep it nimble and keep, in
essence, what we do at the state level, which is the ability to
respond very quickly and nimbly and in a tailored way to new
developments as they emerge, because as this whole panel has
pointed out, the predatory practices completely morph and
change at a very constant, rapid-fire kind of way, and the last
thing we want is a federal agency that is supposed to be
overlooking these practices responding too slowly and too late.
And finally, I would say that this protection agency should
be studied with an eye towards understanding why other consumer
protection agencies at the federal level have failed, have not
been as strong as they could have, and what lessons have been
learned from the other federal agencies that are supposed to be
doing consumer protection.
Representative Hinchey. Thank you very much.
Mr. Strupp.
Mr. Strupp. I am going to focus on your original, or
initial, comments about preemption----
Representative Cummings. And be brief.
Mr. Strupp [continuing]. And I will be brief. Thank you,
Congressman.
I am a member of the Bar in the state of Virginia and in
the District of Columbia. If I choose to practice law in New
York, I have to get a New York license. I think this agency
will set--should set minimum standards, but if I am a lender,
and I choose to go into another state and it may have higher
standards, I should adhere to that state's higher standards. I
think that that is an important structure for this agency.
Representative Cummings. Thank you very much.
Mr. Campbell.
Representative Campbell. Thank you, Mr. Chairman.
And thank you all. First question: There is a proposal out
there for a federal requirement of a single-page disclosure
that would be very simple, very clear, that would have to
outline if there is a change in payments what the maximum
payment could be, et cetera, et cetera. Good idea, bad idea?
Ms. Raskin. I think it is a great idea. If it can happen,
if people can sit down and come up with a single form of
disclosure that makes sense to people, I am all for it. It has
bedeviled people in the past, but it is something that is
worthwhile.
Representative Campbell. Okay. I see nodding, I think,
general agreement.
Mr. Carr. I would agree.
Representative Campbell. Okay. Fannie and Freddie--we
haven't talked about them much. Do you all see Fannie and
Freddie as having contributed to the problem, as having
contributed to a solution, or as having been neutral in all the
ills that we are currently experiencing?
Mr. Carr. Well, as a former employee of Fannie Mae who was
paid for many years to develop affordable loan products that
were sustainable and to talk about and try to get predatory
lending out of the market, I can say that Fannie Mae was a
major player in trying to right what was happening wrong.
In fact, going all the way back to 2001, I published two
studies while still a Fannie Mae Foundation employee. I
published an entire journal, called ``Predatory Lending,''
looking at every aspect of the mortgage market, again, funded
by Fannie Mae.
Going all the way back to 1999, 1998, 1997, I was giving
lots of speeches around these issues. The problem is that those
subprime loans were allowed to percolate through the markets,
and ultimately it affected the entire mortgage finance system,
and ultimately the finance system itself.
But Fannie Mae was not a major player in the subprime
mortgage market. And even to the extent that it did buy
subprime mortgages, it did not contain the predatory features
that in fact were the cause of the collapse of the market.
Representative Campbell. Other thoughts from the panel? No
other comments around that?
Okay. One last question that I have, then. We talked about
changes in the bankruptcy laws, and there is something--I have
opposed that, and there is something that I just don't get and
don't understand, and perhaps you can explain your position.
Home loans are secured loans, and if under a bankruptcy
loan, basically that security--the ability to tap that security
can go away in bankruptcy, then doesn't that make--as a lender,
doesn't that make you then say, ``All right, this is
effectively a personal loan, which will''--and when you talk
about underwriting standards and so forth and, you know,
somebody wants to make a $200,000, $300,000, $400,000 personal
loan that a very--a great number of people who currently are
able to qualify for loans won't under that scenario? I mean,
what am I missing?
Mr. Carr. I think the key to the bankruptcy reform--the
real key--was to actually get loans retroactively, loans that
had already been originated, to allow people going to
foreclosure to have those loans modified. And to the extent----
Representative Campbell. And not going forward?
Mr. Carr [continuing]. Not going forward, no. Because
hopefully going forward we will be making loans that people
won't need to go to bankruptcy court to maintain.
Representative Campbell. Okay. So--you see it only as a
solution to deal with the current crisis--and going forward
that you would not be able to discharge that debt in bankruptcy
and keep the security?
Mr. Carr. Not for newly-originated loans.
Representative Campbell. Okay.
Mr. Carr. I am saying this would be a problem trying to
clean out this exceptional problem that already exists and for
which no other solution has been found. And what is helpful
about this proposal, bankruptcy reform allows the cost to be
borne by the individuals who were the two parties to the
process--the borrower and the lender.
Representative Campbell. I get that. And actually I think
that is a reasonable point and I appreciate it. The only
concern I would have--and then I will yield back my time--but
the only concern I would have is that there is one thing going
on in the marketplaces right now, that the rules of the game
change in the middle of the game, and so still--if you did that
now you would, in fact, be changing the rules of the game in
the middle of the game.
Now, you can argue that there is justification for doing
that, that some people cheated, and I get that and I understand
it. But the question becomes, there are a lot of people who
didn't cheat, and do they say, ``Well, wait a minute, you know,
I don't know how to play this game in the future because now
the rules might change after we enter the game.'' So it is just
a concern.
I yield back my time. Thank you.
Mr. Carr. Yes. I think that that, you know, that the
institutions that are arguing that giving a homeowner access to
bankruptcy court that is equivalent with something they could
get for their luxury yacht in a time of national crisis is
completely frivolous.
The federal government is standing on the hook for about
$12.8 trillion. If that is not a national disaster--and the
taxpayers at the end of the day will have paid more than $1
trillion of subsidies.
So to open the window on a temporary law that will allow
the cost to come out of the people who were actually investors
in what was a lot of fraudulent mortgage product rather than
shoving all of those costs on the backs of the American
taxpayer I think makes reasonable sense. And I think it is
important to recognize that all of us are paying, not just
homeowners--all of us, because that foreclosure crisis is
destroying the U.S. economy, and the crisis in foreclosures is
getting worse.
Representative Snyder. Thank you, Mr. Chairman. This is a
Maryland-related hearing today, and I am from Arkansas.
I think I want to direct my question to you, Ms. Raskin.
This is my 13th year, but I suspect since about 12\1/2\ years I
have been hearing from the local affiliate of Acorn back home
about the potential problem with predatory lending. You had
mentioned in your written statement that some banking
commissioners have been warning about these problems for some
years, and I think there were other people that were, too.
Last night I got an e-mail from--in response to our
questions from the Acorn group back home, and this is one of
the things that they said, part of their e-mail: ``About 2005
we began seeing lots of first-time homebuyers who were getting
80-20 loans--two loans, one for 80 percent and the other for
the 20 percent down payment. All of these loans had ARMs and
most were loans that had a 2-year fixed rate before the ARM
kicked in.
``Almost everyone received a loan through a mortgage
broker. Most loans had a sizeable yield spread premium, the
backend compensation that goes to the broker. The overwhelming
majority of the people we have been seeing live in zip codes
72204 and 72209. Those zips have the highest number of
foreclosure filings in Pulaski County, Arkansas, as well.
``Almost everyone says they were never given any
alternative products. Many reported being pressured into
signing the paperwork. Of the 50 or 60 people we have had in
counseling over the last year, no one fully understood the
terms of the loan, no one was aware of the yield spread premium
or even what it was, everyone was told that they could
refinance during the 2-year period. When the ARM kicked in, the
loan became more and more difficult to handle,'' end of quote.
Is that about the kind of problem that you all have been
seeing in Maryland, as well as Arkansas?
Ms. Raskin. Yes. That pretty much sums it up. And I would
venture to say that that description holds true in a lot of
states in our country.
Representative Snyder. Right. I wanted to ask, I am the
father of four boys under the age of four, which means anything
I learn now I learn from either the ``Jungle Book'' or ``Mary
Poppins,'' and, you know, the staid old bankers in ``Mary
Poppins'' that look like they have been very content with their
4 percent earning, or whatever. I want to ask about the ethic
of banking in general and financial services.
We look at this predatory lending as an outlier, but in
fact, when you look at some of the practices of mainstream
banking, it doesn't seem so much like an outlier.
Computer programs that, you know, if I go down and take
$100 out of my account on Friday afternoon--sorry, take $10 out
of my account on Friday afternoon and Monday morning early I
take $100 out, it will be processed in my bank account so that
$100 comes out first with the goal being to drive me into more
overcharge fees. Our mainstream banks who put out credit cards
are doing all this nefarious stuff that the Congress and the
fed finally had to act.
I put--two mornings ago deposited $13,000 in my bank
account on June 23rd and received back my deposit slip that
said half of it will not be credited till July 2nd. And I am
pleased with that one because, apparently, my bank is saving
gas money by sending the checks by Pony Express to the other
state and then bring the cash back by Pony Express. It is the
only way I can account for like, 11 days, to see if a check
cleared or not.
So what is happening? You have been in the industry a while
from a different perspective, Ms. Raskin, from the policy for
spending. What has happened to the banking and financial
services industry that we can't really trust anyone? I mean,
you really can't trust anyone in the banking industry that at
some level they don't have predatory practices? What has
happened to the ethic of financial services?
And to my personal friends who are bankers back home, you
all are excluded from my question.
Ms. Raskin. Well, I mean, excellent observations, and it
has been fascinating, really, to watch the evolution of banking
over--really over the last couple decades. And I think----
Representative Snyder. Worse than fascinating--it has been
just, I mean, horrible.
Ms. Raskin [continuing]. Right. But what we are talking
about--what we have been talking about, you know, prior to your
question, has been mostly predatory behavior on the mortgage
side, not that that includes the whole universe of predatory
behavior.
But if you look at the small community banks, the Main
Street banks, as you have talked about them, they generally
were not--and obviously I can't speak with absolute
quantitative precision here--but they were not the institutions
that were heavily engaged in subprime lending.
The subprime problem and the predatory behaviors associated
with part of the subprime problem were associated really with
the fact of the mortgage broker industry being inserted into
the chain of relationships that used to be just a banker-
borrower kind of relationship, and then the corresponding
securitization of loans and lending that financed this
incredible new retail kind of operation.
So when we look at mainstream banking we clearly look for
the practices that you describe. I mean, we very much are
sensitive to overdrafts, overdraft charges, the accumulation of
fees that don't seem to bear any relationship to cost, and
those are clearly things that need to be examined and kept an
eye on.
I would like to think that this doesn't represent a
fundamental erosion of a community banking ethic. I tend to
think, from the community banks that I see in my state, that
that ethic remains strong, that the notion of charging
excessive fees or acting in a predatory way is not the norm and
is not the way that banks really want to move in terms of being
sustainable engines of growth for our local economies.
Representative Snyder. I agree with you on the community
banks, and maybe that ``too big to fail'' is synonymous with
``too big to be ethical'' also. Thank you.
Representative Hinchey. Let me just ask you one more
question: The original House bill on bankruptcy modification--
would allow bankruptcy courts to modify mortgages on primary
residences. These loans are the only asset that a consumer has
that can't be changed in bankruptcy court--second homes,
whatever it might be.
All of this can be modified. This doesn't mean that the
value of the house, of course, doesn't matter in the context of
the bankruptcy. But given the fact that the Senate version of
the bankruptcy bill--is weak, let me ask you what you think we
can do to give mortgage companies the incentive to modify these
mortgages properly without forcing homeowners in the context to
go bankrupt?
Mr. Carr. I think the big problem is that we are already
paying their bills, and so they are not incented to agree to
bankruptcy or anything else because they know that they are too
big to fail and we are going to subsidize, and the taxpayers
are doing, and unfortunately I think our approach to propping
up the financial system with an unlimited draw on the U.S.
Treasury is what is hurting us in every type of loan
modification, bankruptcy, and everything else.
I mean, just the idea that the financial institutions are
allowed to lobby while holding taxpayer funds, to lobby against
the interest of the American taxpayer is, in and of itself, it
is just a bizarre circumstance, and that needs to change in
order to move forward in a positive way.
Mr. Squires. And I would endorse that, and I think part of
the problem is we have seen so many examples just in the last
couple of years of where we are prepared to bail out these
entities.
There has always been this thought in the back that places
like, you know, Fannie and Freddie had this implied
relationship with the federal government and they would be
protected, but now we have seen very concrete evidence that,
you know, except for Lehman Brothers, we are prepared to step
in and help out almost any entity, and so we have gone in the
opposite direction and we have provided disincentives to
institutions to sit down and work out these modifications.
Mr. Strupp. I think the incentive is to mandate it and make
them in noncompliance with the law if they don't, because I
think that the problem is that the loan modification process we
currently have is largely voluntary, and so the incentive
should be, this is the law, this is what the lenders or the
note-holders must do.
Representative Hinchey. Well, once again, let me express my
gratitude and appreciation to you for being here and for the
things that you have said, which are very helpful, and again,
the candid responses that you have provided to the questions,
and my appreciation for Mr. Cummings, who had to leave to go
back to the floor, for inviting many of you to be here.
Thanks very much. We deeply appreciate it.
[Whereupon, at 12:45 p.m., the committee was adjourned.]
SUBMISSIONS FOR THE RECORD
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Prepared Statement of Representative Carolyn B. Maloney, Chair, Joint
Economic Committee
Good morning. I would like to welcome our distinguished panel of
witnesses who are here to examine the economic impact of reverse
redlining, where minority borrowers and senior citizens have been
targeted to receive unnecessarily expensive mortgages.
I thank Congressman Cummings and his staff for their help bringing
in witnesses from Baltimore, Maryland, one of several states and
localities that is investigating or have recently brought suit against
lenders over practices that may have violated fair lending or civil
rights laws by deliberately steering minorities and the elderly into
more costly subprime loans.
Two years ago, problems in the subprime mortgage markets touched
off an economic crisis that is still unfolding. Today, almost 1 in 6
subprime mortgages are in foreclosure compared to 1 in 40 prime
mortgages in the United States.
As subprime foreclosures have risen over the past two years,
minority homeownership rates have fallen at a much faster pace than for
non-minority home owners.
The pain of rising foreclosures is being felt in communities all
across the country, as the ripple of mounting losses spreads to
borrowers, lenders, governments, and neighbors. In some areas, once
thriving neighborhoods have been transformed into boarded-up ghost
towns. Concentrated foreclosures have spillover effects on neighboring
properties, increasing crime and vandalism, and lowering surrounding
property values.
A fundamental problem is that the financial incentives of mortgage
companies and mortgage brokers are not aligned with the best interest
of their borrowers.
Higher commissions for higher interest loans, creates the incentive
for mortgage brokers to sell the most expensive products to those who
can least afford them. Low or no documentation loans, which rely on
stated income rather than W-2 forms, provide an avenue for lenders to
evade state law by making loans appear affordable, even when they are
not.
Evidence continues to come to light that many of the subprime
borrowers who had paystubs to prove their employment--and may have
qualified for prime loans--were steered into more costly no doc loans
by some lenders.
In my home state of New York, Brooklyn and Queens have the highest
concentrations of low and no documentation subprime loans compared to
other parts of the state. There is a particularly high concentration of
these loans in Astoria, which I represent.
Congress and the President have taken steps to strengthen the
economy, keep families in their homes, expand affordable mortgage
opportunities for families, and rein in abusive lending. But more must
be done to stop bad loans from being made in the first place.
We need to return to sensible principles that require lenders to
assess borrowers' ability to pay over the whole life of the loan. But
we also need to strike a balance between making sure borrowers can
repay the loans they get and helping borrowers who can repay a loan get
one.
I have high hopes that the President's proposed Consumer Financial
Protection Agency will play a key role in strengthening consumer
protections against predatory practices in the future.
The Administration's proposal to eliminate the current preemption
of state laws regarding antipredatory lending for national banks,
thrifts, and federal credit unions will allow states to adopt and
enforce stricter laws for institutions of all types, regardless of
charter.
Stopping abusive lending practices that have contributed to the
current foreclosure crisis and returning to healthy, fair lending
principles will provide a sound basis for economic growth and recovery.
I look forward to the testimony of our witnesses.
__________
Prepared Statement of Representative Kevin Brady, Senior House
Republican
I am pleased to join in welcoming the panel of witnesses testifying
before the Committee this morning.
Racial discrimination in lending is immoral. It is also illegal
under the Equal Credit Opportunity Act. Recent studies suggest that
discrimination is generally limited to minority applicants with low
incomes or poor credit and employment histories. Moreover,
discrimination occurs primarily in the price of credit rather than in
its availability. This practice is known as ``reverse redlining.''
Nevertheless, distinguishing between racial discrimination, misguided
efforts to shoehorn marginal borrowers into subprime mortgage loans to
buy homes as prices escalated, and simple greed by unethical lenders is
not easy.
From 1995 to 2007, the federal government encouraged mortgage
lenders to loosen underwriting standards and offer exotic alternatives
to fully amortizing, fixed rate, thirty-year mortgage loans to increase
the rate of home ownership among low-income and minority families.
Mortgage lenders obliged, knowing that they did not have
responsibility for the performance of mortgage loans they had extended
once these loans were sold to issuers for securitization.
The deterioration of underwriting standards and the development of
subprime mortgage loans combined with an overly accommodative monetary
policy to inflate a huge housing bubble.
As in past bubbles, both borrowers and lenders became increasingly
reckless. In some cases, individuals misled lenders to secure subprime
mortgage loans to speculate in housing.
In other cases, lenders took advantage of unsophisticated families
by placing them in subprime mortgage loans that they did not understand
and could not afford. In either case, the results were the same--many
families found themselves underwater, and a tidal wave of defaults and
foreclosures followed--once the housing bubble burst. This has been
especially difficult for low-income and minority families.
Individuals must be fully aware of mortgage terms and the financial
burden that they are assuming before closing. Improving financial
education would help families to understand mortgages and other
financial products and to avoid credit problems in the future.
In conclusion, exploiting the complexity of mortgage contracts to
fleece borrowers is not an acceptable business practice. Full
disclosure and transparency should be part of the solution. Loan
originators and issuers of mortgage-backed securities should also be
required to retain ``skin in the game'' to discourage (1) lenders from
knowingly extending mortgage loans that are unlikely to be repaid, and
(2) issuers from placing such loans in mortgage-backed securities.
Finally, excessive debt burdens, although all too common, make it very
hard for families to get ahead over the long run. Better financial
education could help people to avoid at least the most financially
burdensome kinds of loans available.
__________
Prepared Statement of Representative Elijah E. Cummings
Madam Chair,
Thank you for holding this critical hearing to examine the targeted
predatory lending practices that have ravaged our communities and our
economy.
I requested this hearing following the New York Times report on
June 7th detailing new developments in the lawsuit filed by my hometown
of Baltimore, against Wells Fargo.
The article described affidavits that were recently filed by the
City of Baltimore that included staggering claims about Wells Fargo
employees steering African-American citizens toward high-cost loan
products to boost company profits and reward employees with monetary
bonuses and trips.
The affidavits also claim that the true opinion of the Wells Fargo
firm toward their clients was reflected in their use of racist epithets
to describe African Americans.
The city's contention is that the discriminatory lending practices
pursued by Wells Fargo promoted high-cost loan instruments which led to
foreclosures far in excess of what the rate of foreclosure might
otherwise have been.
That in turn has led to declines in property values in many
neighborhoods as well as increased crime, increased costs for city
services, and lost tax revenues, all on the back of an increasingly
burdened city.
With home values still falling, and the national unemployment rate
now exceeding 9 percent, there has been a seemingly unending flood of
foreclosures that has taken, and continues to take an immeasurable toll
on all of our communities, and on the overall economy.
Obviously, the proliferation of subprime and other alternative loan
products in communities across this nation contributed significantly to
the foreclosure crisis.
So in order to progress toward a complete economic recovery we need
to understand exactly what got us where we are today--and that means
that we need to understand both the specific financial transactions and
regulatory failures as well as, frankly, the assumptions and attitudes
that led firms to target certain groups for some of their most
questionable transactions.
The subprime loans, which were created to increase homeownership in
low and middle income sectors, turned into vehicles for enriching
lenders, brokers, and investors.
We also know, from research done by Mr. Carr and the National
Community Reinvestment Coalition, that there is a racial and ethnic
disparity in the distribution of these high-cost loans.
They found that low- to moderate-income African Americans were at
least twice as likely as low- to moderate-income whites to receive
high-cost loans in 47.3 percent of areas they examined. The disparity
continued into the higher income brackets as well.
Dr. Squires has written very eloquently that, ``clearly not all
subprime loans are predatory, but virtually all predatory loans are in
the subprime market.''
That is why it so important for us to ensure the protection of all
homebuyers, and President Obama has taken a decisive first step in this
direction with the proposed Consumer Financial Protection Agency.
As I say so often, I live in the inner, inner city of Baltimore.
And the people on my block are my neighbors, and my constituents, and
my friends. They are struggling, and they need help now.
I am determined to do everything I can for them, from hiring
dedicated staff for constituent mortgages to getting people a seat at
the table with their lender--as we did recently putting 1000 borrowers
together with 19 lenders at our foreclosure prevention workshop.
The witnesses before us have also done their part. I commend all of
them for their work protecting the interests of home borrowers and
communities.
I am particularly pleased to have Commissioner Raskin with us. She
remains vigilant in exercising all the rights she has under Maryland
law--and her efforts have led to the enactment of new mortgage fraud
protections by the General Assembly.
Again, I want to thank the Chair for holding this hearing and I
look forward to the coming discussion.
__________
Testimony of James H. Carr, Chief Operating Officer, National Community
Reinvestment Coalition
Good morning. My name is James H. Carr and I am the Chief Operating
Officer for the National Community Reinvestment Coalition. On behalf of
our coalition, I am honored to speak with you today.
NCRC is an association of more than 600 community-based
organizations that promotes access to basic banking services, including
credit and savings, to create and sustain affordable housing, job
development, and vibrant communities for America's working families.
NCRC is also pleased to be a member of a new coalition of more than 200
consumer, civic, and civil rights organizations--Americans for
Financial Reform--that are working together to restore integrity and
accountability to the US financial system.
the foreclosure and economic crises
Members of the Committee, recent reports of green shoots and signs
of an economic recovery offer hope to the American public that the
worst may have past. But when one reads the fine print and footnotes on
the optimistic headlines, the positive news is less than encouraging.
This is particularly true within the financial services industry.
The reason for the continuing and protracted economic downturn is
that the problem that precipitated the collapse of the credit markets
and erosion of the economy, namely the foreclosure crisis, continues to
worsen. Already this year, more than a million homes have been lost to
foreclosure and five million more homes are at risk of over the next
three years (assuming Making Home Affordable achieves the full success
expected by the Administration).
origins of the foreclosure crisis
Many blame the foreclosure crisis on a claim that financial
institutions that sought to improve homeownership among low- and
moderate-income households. A variation of this argument is that the
Community Reinvestment Act forced banks to lend in a reckless and
irresponsible manner.
Both of these assertions have no basis in fact or logic. According
to the Federal Reserve Board, only 6 percent of high-cost subprime
loans to low- and moderate-income households were covered by CRA
regulation. And, the Center for Responsible Lending finds that less
than 10 percent of subprime loans were for first-time homeownership.
Failure to regulate adequately the US mortgage markets allowed
deceptive, reckless, and irresponsible lending to grow unchecked until
eventually it overwhelmed the financial system.
Almost every institutional actor in home mortgage finance process
played a role, including brokers, lenders, appraisers, Wall Street bond
rating agencies, and investment banks.
not an equal opportunity crisis
While few have been able to escape the financial pain completely,
African Americans, Latinos, and Native Americans are bearing the brunt
of this current economic disaster.
Although the national unemployment rate is an uncomfortable 9.4
percent, that rate for African Americans is 15 percent, and for
Latinos, unemployment is approaching 13 percent. The unemployment rate
for non-Hispanic whites remains under 9 percent.
Because African Americans and Latinos have so few savings, they are
poorly positioned to survive a lengthy bout of unemployment. As a
result, potentially millions of African Americans and Latino middle-
class households could find themselves falling out of the middle by the
time the economy recovers.
Moreover, African Americans and Latinos were targeted
disproportionately for deceptive high cost loans. According to a study
by the US Department of Housing and Urban Development, subprime loans
are five times more likely in African American communities than in
white neighborhoods, and homeowners in high-income black areas are
twice as likely as borrowers in lower-income white communities to have
subprime loans.
The result is that blacks and Latinos are over-represented in the
foreclosure statistics. African Americans, for example, have
experienced a full three-percentage point drop in their homeownership
rate since the crisis began.
Further, research by the National Community Reinvestment Coalition
found that predatory lenders aimed their toxic products particularly at
women of color. And, because African-American children are more likely
to reside in female-headed households, black children are also
disproportionately harmed as a result of the foreclosure crisis and its
attendant stresses.
If a family lost their home to foreclosure and could not find a
suitable apartment in the neighborhood from which they were evicted,
children may be forced to leave their school, social networks, and
familiar community surroundings, all of which can hinder their
educational performance and long-term socioeconomic wellbeing.
In a separate NCRC study (The Broken Credit System, 2004), we found
that after controlling for risk and housing market conditions, the
portion of subprime refinance lending increased solely when the number
of residents over the age of 65 increased in a neighborhood. If a
borrower were a person of color, female, and a senior, she was the
``perfect catch'' for a predatory lender.
These levels of disparity have little to do with differences in the
credit quality of the borrowers. Fannie Mae has estimated that 50
percent of consumers with subprime loans could have qualified for prime
loans. In fact, in 2006, more than 60 percent of subprime borrowers had
credit scores sufficient for them to have received a prime loan.
Failure to provide adequate consumer and civil rights protections
explain the exceptional damage from the foreclosure crisis now being
felt overwhelmingly in communities of color.
fixing the problems
In response to the magnitude and complexity of the current crisis,
a three-fold response is essential.
1. Stem the Rising Tide of Foreclosures
Although the new ``Making Home Affordable'' program is the most
comprehensive plan to date to address the foreclosure crisis, its
success is measured in the thousands while the foreclosure crisis grows
by the millions. The result: more is needed.
A ``new'' vintage Great Depression-era Homeowners Loan Corporation
(HOLC) is warranted. The new entity would more aggressively pursue loan
modifications using exceptional governmental powers to purchase high-
risk loans at reasonable discounts in order to accomplish millions of
loan modifications, in a relatively short span of time, and at a
limited cost to taxpayers.
The new HOLC could also take possession of properties and structure
foreclosure moratoria based on workers' unemployment benefits. In the
event of foreclosure, this new entity could also allow families to
remain in their homes under rental agreements.
2. Rebuild Communities Harmed by the Crisis
Government action also should help communities rebuild. Economic
recovery funding should be focused on communities with a convergence of
three factors:
1. Areas with the highest levels of unemployment
2. Areas with the greatest concentrations of foreclosures
3. Areas with historically under-funded, inferior, or poorly
maintained infrastructure
3. Enact Comprehensive Anti-Predatory Lending Legislation
Comprehensive anti-predatory lending legislation should be
immediately enacted. It should apply consumer financial protections to
all of the institutional players in the mortgage market. In addition to
purging previous predatory lending practices, the establishment of a
financial consumer protection agency should be enacted. Already, in the
midst of this crisis, new predatory practices are emerging.
conclusion
In the words of Nobel Prize-winning economist Joseph Stiglitz, the
financial system discovered there was money at the bottom of the wealth
pyramid and it did everything it could to ensure that it did not remain
there. Stated otherwise, the business model for many financial
institutions was to strip consumers of their wealth rather than build
and improve their financial security.
Ironically, most solutions to date have focused on rewarding the
financial firms (and their executives) that created this crisis. But in
spite of more than $12.8 trillions of financial support in the form of
loans, investment, and guarantees, this approach is not working because
consumers continue to struggle in a virtual sea of deceptive mortgage
debt and a financial system that remains unaccountable to the American
public.
Now is the time to shift the focus away from Wall Street and on
Main Street by addressing, in a broader manner, the growing foreclosure
crisis and its contagion effects on national home prices and the
overall economy. This includes introducing a more robust foreclosure
mitigation program, focusing recovery dollars on the communities most
negatively impacted by the crisis, and enacting strong consumer
protections against deceptive and reckless lending practices.
__________
Prepared Statement of Gregory D. Squires, Professor of Sociology and
Public Policy and Public Administration, George Washington University
segregation as a driver of subprime lending and the ensuing economic
fallout
Few issues have posed the range and severity of challenges to the
nation as have recent developments in financial services. I want to
thank the Joint Economic Committee for conducting this hearing, for
taking on these difficult challenges, and for inviting me to
participate.
Dramatic changes have taken place in the nation's mortgage lending
markets in recent years. Passage of the Community Reinvestment Act
(CRA) in 1977, enforcement of the federal Fair Housing Act (FHA), and
compliance with a range of local, state, and national fair lending
rules have increased access to credit for many households and
communities long denied conventional financial services. But within the
past decade the rise in subprime and predatory lending has put many
families and neighborhoods in financial jeopardy as default and
foreclosure rates are skyrocketing, particularly in minority and low-
income areas. Fingers are pointed in several directions: greed on the
part of families trying to buy homes they could not afford, lax
underwriting by originators, inaccurate appraisals, fraudulent
practices by investment bankers, inattention by regulators, and more.
Community groups, elected officials, bank regulators and mortgage
lenders themselves are debating over how the nation should respond.
Lost amidst recent debates is the central role that surging
economic inequality and persistent racial segregation have played. The
concentration of income and wealth at the top coupled with the
concentration of poverty and persisting levels of segregation and
hypersegregation have nurtured significant increases in subprime and
predatory lending among vulnerable communities. Reforming the
regulation of financial services is a necessary but insufficient step
for ameliorating the crises created by recent lending practices.
Broader, macro-economic policies that directly address various
trajectories of economic inequality and dynamics of discrimination and
segregation must complement progressive banking and bank regulatory
reforms if emerging challenges are to be met.\1\ This comment examines
the impact of inequality on subprime and predatory lending and offers a
range of policy responses to the emerging problems confronting
metropolitan areas across the country.
---------------------------------------------------------------------------
\1\ Gregory D. Squires, Urban Development and Unequal Access to
Housing Finance Services, New York Law School Law Review 53(2): 255-268
(2008/9).
---------------------------------------------------------------------------
Surging Inequality
By virtually any measure economic inequality has increased in
recent decades. Between 1967 and 2007, the share of income in the U.S.
going to the top quintile of all households increased from 43.6% to
49.7%, while the share going to the bottom fifth dropped from 4.0% to
3.4%.\2\
---------------------------------------------------------------------------
\2\ Carmen Walt-Denavas, Bernadette D. Proctor, and Jessica C.
Smith, U.S. Census Bureau, Current Population Reports, P60-235, /
Income, Poverty, And Health Insurance Coverage In The United States:
2007/, Table A-3. Selected Measures Of Household Income Dispersion:
1967-2007, U.S. Government Printing Office, Washington, DC, 2008.
---------------------------------------------------------------------------
Since the mid 1970s, compensation for the 100 highest paid chief
executive officers increased from $1.3 million, or thirty-nine times
the pay of the average worker, to $37.5 million, or more than 1,000
times the pay of a typical worker.\3\ In 2004, those in the top one
percent enjoyed a 12.5% increase in their incomes compared to 1.5% for
the remaining 99%.\4\
---------------------------------------------------------------------------
\3\ Paul Krugman, For Richer, N.Y. Times Mag., Oct. 20, 2002, at
62, 64.
\4\ Paul Krugman, Editorial, Left Behind Economics, N.Y. Times,
July 14, 2006, at A19.
---------------------------------------------------------------------------
Wealth, of course, has long been much more unequally distributed
than income, and that inequality has increased over time. Between 1983
and 2001, the share of wealth going to the top five percent grew from
56.1% to 59.2%. While African Americans and Hispanics earn
approximately two-thirds of what whites earn, wealth holding for the
typical non-white family are approximately one-tenth that of the
typical white family.\5\
---------------------------------------------------------------------------
\5\ Thomas M. Shapiro, The Hidden Cost of Being African American
48-49 (2006); see also Nat'l Cmty Reinvestment Coal. & Woodstock
Instit., A Lifetime of Assets (2006).
---------------------------------------------------------------------------
City residents have been falling behind their suburban
counterparts, and non-white neighborhoods have been falling behind
white communities. In 1960, per capita income in cities was 105% that
of suburbanites, but in 2000, urban residents were earning just 84% of
those in the suburbs.\6\ The median census tract income for the typical
black household in 1990 was $27,808 compared to $45,486 for whites, a
gap of $17,679. A similar pattern holds for Hispanics.\7\
---------------------------------------------------------------------------
\6\ Interwoven Destinies: Cities and the Nation 25 (Henry G.
Cisneros Ed. 1993); John R. Logan, Lewis Mumford Ctr. for Comparative
Urban and Regional Research, Univ. at Albany, The Suburban Advantage:
New Census Data Show Unyielding City-Suburb Economic Gap, and
Surprising Shifts in Some Places (2002).
\7\ John R. Logan, Lewis Mumford Ctr. for Comparative Urban
Regional Research, Univ. at Albany, Separate and Unequal: The
Neighborhood Gap for Blacks and Hispanics in Metropolitan America tbl.
1 (2002).
---------------------------------------------------------------------------
Between 1970 and 2000, the number of high poverty census tracts
(those where 40 percent or more of the population is poor) grew from
1177 to 2510, and the number of people living in those tracts grew from
4.1 million to 7.9 million.\8\ The isolation of rich and poor families
is also reflected by the declining number of middle income
communities.\9\ Between 1970 and 2000, the number of middle income
neighborhoods (census tracts where the median family income is between
80% and 120% of the median family income for the metropolitan area)
dropped from 58% to 41% of all metropolitan area neighborhoods.\10\ And
whereas more than half of lower-income families lived in middle income
neighborhoods in 1970, only 37% of such families did so in 2000.\11\
The share of low-income families in low-income areas grew from 36% to
48%.\12\
---------------------------------------------------------------------------
\8\ Compare Paul A. Jargowsky, Poverty and Place: Ghettos, Barrios,
and the American City 34 (1998) (Reporting 1970 Figures), with Paul A.
Jargowsky, Brookings Inst., Stunning Progress, Hidden Problems: The
Dramatic Decline of Concentrated Poverty in the 1990s 20 (2003).
\9\ Jason C. Booza, Jackie Cutsinger & George Galster, Brookings
Inst., Where Did They Go? The Decline of Middle-Income Neighborhoods in
Metropolitan America 1 (2006).
\10\ Id.
\11\ Id.
\12\ Id. at 7.
---------------------------------------------------------------------------
Even longer standing patterns of racial segregation persist.
Nationwide, the black/white index of dissimilarity declined from .73 to
.64 between 1980 and 2000.\13\ Scores above .60 are widely viewed as
reflecting high levels of segregation. But in the large metropolitan
areas where the black population is most concentrated, segregation
levels persist at high levels reaching at or near .80 in New York,
Chicago, Detroit, Milwaukee, and many other urban communities. Lower
levels exist primarily in western and southwestern communities with
small black populations. For Hispanics and Asians, segregation levels
are much lower, approximately .4 and .5, but they have remained at that
level or actually increased slightly between 1980 and 2000.\14\
---------------------------------------------------------------------------
\13\ John Iceland, Daniel H. Weinberg & Erika Steinmetz, U.S.
Census Bureau, Racial and Ethnic Residential Segregation in the United
States: 1980-2000 tbl. 1 (2002). This index varies from 0 to 1, where a
score of 0 would indicate that each neighborhood had the same racial
composition of the metropolitan area as a whole and a score of 1 would
represent total segregation meaning every neighborhood was either all
African American or all white. Id. at 5. For a more complete discussion
of the index of dissimilarity, see Jeffrey M. Timberlake & John
Iceland, Change in Racial and Ethnic Residential Inequality in American
Cities, 1970-2000, 6 City & Community 335-65 (2007).
\14\ Iceland, Weinberg & Steinmetz, supra note 14, at tbls. 3 & 5;
see also John E. Farley & Gregory D. Squires, Fences and Neighbors:
Segregation in 21st Century America, 4 Contexts 33, 34-35 (2005).
---------------------------------------------------------------------------
Inequality and Subprime Lending
A wealth of research has documented the concentration of subprime
loans in low-income and minority communities.\15\ HMDA reports reveal,
for example, that for 2006, when subprime lending was at its peak, for
first lean conventional home purchase loans 46 percent of borrowers in
low-income areas compared to 16 percent in upper income areas received
a high-priced loan. Among borrowers in predominantly non-white
communities 49 percent received such loans compared to 18 percent in
predominantly white areas. In that year 53 percent of African
Americans, 46 percent of Hispanics, and 22 percent of whites received
high-priced loans. Subsequent research revealed that even after
controlling on credit rating, income, and other financial
characteristics, racial disparities persist.\16\
---------------------------------------------------------------------------
\15\ Gregory D. Squires, Derek S. Hyra, and Robert N. Renner,
Segregation and the Subprime Lending Crisis, Paper Presented at the
Federal Reserve Board's Community Affairs Research Conference, (April
16, 2009).
\16\ P. Calem, K. Gillen, and S. Wachter, The Neighborhood
Distribution of Subprime Mortgage Lending, Journal of Real Estate
Finance and Economics 29: 393-410 (2004).
---------------------------------------------------------------------------
Such patterns are no accident. The City of Baltimore recently sued
Wells Fargo Bank for racially discriminatory predatory lending patterns
in that community leading to high foreclosure rates and the heavy costs
associated with those foreclosures. Plaintiffs found, for example, that
the foreclosure rate for Wells Fargo loans was twice the city-wide
average in African American communities while the rate in white
neighborhoods was half the city-wide average (Mayor and City Council of
Baltimore v. Wells Fargo Bank, U.S. District Court for the District of
Maryland, Baltimore Division Case Number 1:2008v00062, January 8,
2008). Subsequent investigation revealed that Wells Fargo loan officers
were provided financial incentives to steer borrowers from lower-cost
prime loans to higher-cost subprime loans, referring to them as
``ghetto loans'' and to the borrowers as ``mud people.''\17\
---------------------------------------------------------------------------
\17\ Michael Powell, Bank Accused of Pushing Mortgage Deals on
Blacks, The New York Times, (June 7, 2009): A-15.
---------------------------------------------------------------------------
And racial segregation has an effect above and beyond that of race
alone. Table 1 shows that the share of loans that are high-priced is
considerably higher in highly segregated than in less segregated
communities. The average share of such loans in the nation's ten most
segregated communities is 31 percent compared to 20 percent in the ten
least segregated.
Table 1--Top 10 Most and Least Segregated Metro Areas and Percent of
High-Cost Loans
------------------------------------------------------------------------
10 Most Segregated Metropolitan Black Segregation High-Cost Loans
Regions Index (%)
------------------------------------------------------------------------
Detroit-Warren-Livonia, MI........ 84 34
Milwaukee-Waukesha-West Allis, WI. 81 29
Chicago-Naperville-Joliet, IL-IN- 78 31
WI...............................
Cleveland-Elyria-Mentor, OH....... 77 28
Flint, MI......................... 76 37
Muskegon-Norton Shores, MI........ 76 38
Buffalo-Niagara Falls, NY......... 76 25
Niles-Benton Harbor, MI........... 73 30
St. Louis, MO-IL.................. 73 31
Cincinnati-Middletown, OH-KY-IN... 73 25
------------------------------------------------------------------------
Average....................... 77 31
------------------------------------------------------------------------
------------------------------------------------------------------------
10 Least Segregated Metropolitan Black Segregation High-Cost Loans
Regions Index (%)
------------------------------------------------------------------------
Coeur d'Alene, ID................. 16 24
Hinesville-Fort Stewart, GA....... 18 39
Santa Fe, NM...................... 21 17
Prescott, AZ...................... 21 21
Bellingham, WA.................... 22 16
Boulder, CO....................... 23 10
Jacksonville, NC.................. 24 22
Blacksburg-Christiansburg-Radford, 24 20
VA...............................
Santa Cruz-Watsonville, CA........ 24 14
Missoula, MT...................... 24 15
------------------------------------------------------------------------
Average....................... 22 20
------------------------------------------------------------------------
Source: Gregory D. Squires, Derek S. Hyra, and Robert N. Renner,
Segregation and the Subprime Lending Crisis, paper presented at the
Federal Reserve Board's Community Affairs Research Conference, (April
16, 2009).
Far more significant, however, is that racial and ethnic
segregation remain statistically significant predictors of the level of
high-priced loans even after controlling for credit rating, poverty
level, percent minority, and education (see Tables 2 and 3). These data
show, for example, that a ten percent increase in black/white
segregation (measured by the index of dissimilarity) is associated with
an increase of 1.4 percent in high-cost lending. Every ten percent
increase in Hispanic/white segregation is associated with an increase
of 0.6 percent in high-cost lending.
Table 2--Black Segregation
------------------------------------------------------------------------
Variables Coefficients Standard Errors
------------------------------------------------------------------------
Percent in Poverty................ -0.00 0.67
Percent Minority.................. 0.13 * 0.02
Median Home Value................. -0.11 * 0.03
Black Segregation................. 0.14 * 0.02
Percent Low Credit Score.......... 0.23 * 0.06
Percent with BA or Higher......... -0.48 * 0.04
------------------------------------------------------------------------
N = 354, R-Squared = 0.6943, * p < .01.
Table 3--Model II: Hispanic Segregation
------------------------------------------------------------------------
Variables Coefficients Standard Errors
------------------------------------------------------------------------
Percent in Poverty................ -0.05 0.07
Percent Minority.................. 0.12 * 0.02
Median Home Value................. -0.14 * 0.03
Hispanic Segregation.............. 0.06 * 0.02
Percent Low Credit Score.......... 0.25 * 0.07
Percent with BA or Higher......... -0.48 * 0.04
------------------------------------------------------------------------
N = 354, R-Squared = 0.6312, * p < .01
Policy Responses
Many proposals have been offered to change the way banks do
business and the way they are regulated. Clearly, such reforms are
necessary. But if the problems generated by subprime and predatory
lending along with the foreclosures and other economic costs that
followed require new policies to change lending practices of financial
institutions and regulatory actions of enforcement agencies, the
broader context of inequality and segregation must also be addressed.
Several politically feasible tools are available to respond to the
overall surge in inequality. For example, the federal minimum wage
should be indexed to take into consideration the cost of living so that
the recent increase that was approved in May 2007 does not continue to
lose buying power as it has since the moment it went into effect in
July 2007.\18\ Living wage ordinances, which mandate even higher wages,
generally $8 to $10 per hour, frequently with fringe benefits, have
been enacted in more than 100 jurisdictions with these rules applying
to government contractors and recipients of economic development
subsidies.\19\ More jurisdictions should follow this lead. The Earned
Income Tax Credit could be expanded to lift more working families out
of poverty.\20\ Enacting the Employee Free Choice Act, which allows
workers to form a union when more than 50% of workers sign a card
indicating their desire to do so in lieu of secret elections, would
strengthen the role of unions in the U.S. and their positive impact on
wage inequality.\21\ A more provocative proposal, the Income Equity
Act, has been offered by former Minnesota Representative Martin Sabo
that would deny corporations tax deductions on any executive
compensation exceeding twenty-five times the pay of the firm's lowest
paid workers.\22\
---------------------------------------------------------------------------
\18\ See generally John Atlas & Peter Dreier, Waging Victory, Am.
Prospect., Nov. 10, 2006, http://www.prospect.org/cs/
articles?article=waging_victory; Neal Peirce, Congress' Minimum Wage
Vote: Prelude to a Better Politics?, Stateline.org, Jan. 25, 2007,
http://www.stateline.org/live/details/story?contentID=174954.
\19\ Peter Dreier, Community Organizing For What? Progressive
Politics and Movement Building in America., In Transforming the City:
Community Organizing and the Challenge of Political Change 237 (Marion
Orr ed., 2007).
\20\ See Lawrence Mishel, Jared Bernstein & Sylvia Allegretto, The
State of Working America, 2004/2005 13 (2005).
\21\ See Thomas Kochan & Beth Shulman, Econ. Policy Inst., A New
Social Contract: Restoring Dignity and Balance to the Economy 14, 15-16
(2007).
\22\ Peirce, supra note 46.
---------------------------------------------------------------------------
Expansion of several housing and land use policies would also
reduce inequality. Inclusionary zoning laws that require developers to
set aside a specific share of housing units to meet affordable housing
objectives have been implemented in dozens of cities.\23\ Tax-based
revenue sharing, whereby a portion of the increasing property tax
revenues in prosperous neighborhoods is used to invest in housing and
other community development initiatives in distressed areas, has been
implemented in Minnesota.\24\ Mobility programs have enabled thousands
of families to leave ghettos and barrios for more prosperous outlying
urban and suburban communities where they found safer neighborhoods,
better schools, and better job prospects.\25\
---------------------------------------------------------------------------
\23\ Rusk, supra note 45 (arguing that state legislatures must set
new ``rules of the game'' requiring housing policies to ensure that all
new developments have their fair share of low- and moderate-income
housing).
\24\ Myron Orfield, American Metropolitics: The New Suburban
Reality (2002).
\25\ John Goering & Judith D. Feins, Choosing a Better Life?:
Evaluating the Moving to Opportunity Social Experiment (2003);
Alexander Polikoff, Waiting for Gautreaux: A Story of Segregation,
Housing, and the Black Ghetto (2006); Leonard S. Rubinowitz & James E.
Rosenbaum, Crossing the Class and Color Lines: From Public Housing to
White Suburbia (2000).
---------------------------------------------------------------------------
Housing policies of the past have been linked with the
concentration of minorities, particularly African Americans, in
extremely segregated and impoverished communities.\26\ Today, much of
the distressed public housing that once segregated minorities in inner
city neighborhoods is being razed.\27\ Residents of these demolished
buildings are receiving housing vouchers, a rent subsidy, to obtain
private market rental units. Evidence suggests that voucher holders are
ending up in other highly segregated communities.\28\ To prevent the
continuing concentration of poverty and racial disadvantage, the U.S.
Department of Housing and Urban Development's Housing Choice Voucher
program must be reformed to provide greater opportunities for
recipients to find units in less segregated and impoverished
neighborhoods.
---------------------------------------------------------------------------
\26\ James H. Carr and Nandinee K. Kutty, Segregation: The Rising
Costs for America, New York: Routledge, (2008). Douglas S. Massey and
Nancy Denton, American Apartheid: Segregation and the Making of the
Underclass, Cambridge, MA: Harvard University Press (1993). Douglas S.
Massey and Shawn M. Kanaiaupuni, Public Housing and the Concentration
of Poverty, Social Science Quarterly 74(1): 109-122, (1993).
\27\ Edward Goetz, Clearing the Way: Deconcentrating the Poor in
Urban America, Washington, D.C.: The Urban Institute Press (2003).
Derek S. Hyra, The New Urban Renewal: The Economic Transformation of
Harlem and Bronzeville, Chicago: University of Chicago Press (2008).
\28\ Paul Fischer, Where Are Public Housing Families Going? An
Update, Chicago: Woods Fund of Chicago (2003). John M. Hartung and
Jeffrey R. Henig, Housing Vouchers and Certificates as a Vehicle for
Deconcentrating the Poor, Urban Affairs Review 32(3): 403-419 (1997).
---------------------------------------------------------------------------
The Low Income Housing Tax Credit (LIHTC) program and inclusionary
zoning laws are two other mechanisms for increasing the number of
affordable rental units in non-poverty neighborhoods for voucher
recipients. Traditionally, housing developments in low-income
communities are given preferences for LIHTCs. This circumstance may
indirectly increase or sustain prior levels of segregation by placing
low-income residents and units in an already low-income community. To
open up housing opportunities for low-income families, affordable
housing developments in middle- and upper-income communities should be
given priority for LIHTCs. Inclusionary zoning laws can also increase
the stock of affordable housing in low-poverty areas. These local laws
require new developments to set aside a certain percentage of units for
affordable housing. The federal government could provide financial
incentives for municipalities to adopt zoning laws that promote the
construction and redevelopment of affordable units.
Housing market discrimination clearly contributes to segregation.
To more effectively enforce fair housing laws already in place, the
proposed Housing Fairness Act of 2009 (H.R. 476) should be enacted.
This bill would increase funding for the Fair Housing Initiatives
Program to $52 million and would fund a $20 million nationwide paired
testing program providing for 5,000 tests, approximately 50 in each of
the nation's 100 largest metropolitan areas. In paired-testing
investigations, equally qualified white and non-white auditors posing
as homebuyers or renters approach housing providers, such as real
estate and rental agents, mortgage lenders, and insurance agents, and
inquire about the availability of the same or similar housing units or
housing related services like home insurance or mortgage loans. Any
differences in treatment they receive likely reflect discrimination
since these auditors or testers are assigned identical qualifications
and interests. Such investigations have routinely revealed
discrimination in approximately one out of every five initial visits to
real estate or rental agents. Discrimination in insurance and mortgage
lending has also been documented using similar investigative
techniques. \29\ If the real estate, mortgage and insurance industries
knew these investigations were occurring more frequently, incidents of
discrimination and levels of segregation might be reduced.
---------------------------------------------------------------------------
\29\ Shanna Smith and Cathy Cloud, Documenting Discrimination by
Homeowners Insurance Companies Through Testing. In Gregory D. Squires
(Ed), Insurance Redlining: Disinvestment, Reinvestment, and the
Evolving Role of Financial Institutions, Washington, D.C.: The Urban
Institute Press (1997). Margery T. Turner and Felicity Skidmore,
Mortgage Lending Discrimination: A Review of Existing Evidence,
Washington, D.C.: The Urban Institute (1999). Margery Turner, Fred
Freiberg, Erin Godfrey, Carla Herbig, Diane Levy, and Robin Smith, All
Other Things Being Equal: A Paired Testing Study of Mortgage Lending
Institutions, Washington, D.C.: The Urban Institute (2002).
---------------------------------------------------------------------------
In addition to these general economic reforms and housing
proposals, there are specific changes in the regulation of financial
services that should be included in any reorganization of that
regulatory function. For example, prepayment penalties and introductory
teaser rates should be limited in all mortgage lending including the
prime and subprime markets. Prepayment penalties make it more difficult
for those that get behind in their payments to refinance or sell their
homes. Even though these penalties provide banks with risk protection
against early payment, it increases the likelihood that borrowers will
default. Teaser rates (for example, 2/28 and 3/27 adjustable rate
mortgages) frequently lead to late payments, defaults, and
foreclosure.\30\ Only when carefully underwritten and when there is a
clear economic benefit for the borrower should these types of loans be
permitted. These simple product restrictions might reduce the extent of
subprime loans, defaults, and foreclosures throughout the country. The
National Mortgage Reform and Anti Predatory Lending Act (H.R. 1728)
would reduce substantially the provision of inappropriate products in
the mortgage market.
---------------------------------------------------------------------------
\30\ Robert G. Quercia, Michael A. Stegman, and Walter R. Davis,
The Impact of Predatory Loan Terms on Subprime Foreclosures: The
Special Case of Prepayment Penalties and Balloon Payments, Housing
Policy Debate 18(2): 311-346 (2007).
---------------------------------------------------------------------------
State and local governments that receive federal funding for
housing and community development are required to ``affirmatively
further fair housing'' in the utilization of those funds. Recipients of
TARP, bailout, or any other federal financial support should be
required to pursue this objective as well.
To ensure that these regulations and restrictions are followed,
federal oversight is needed over the independent mortgage companies,
the unregulated entities who originated the bulk of subprime mortgages
and the affiliated institutions that are involved in the trading of
mortgage-backed securities.\31\ Currently, the CRA applies only to
depository institutions but passage of the CRA Modernization Act of
2009 (H.R. 1749) would bring unregulated mortgage lenders under its
purview. Having greater oversight over independent mortgage companies,
might help decrease the number of high-cost loans.
---------------------------------------------------------------------------
\31\ Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner, The
2006 HMDA Data, Federal Reserve Bulletin 93: 73-109 (2007).
---------------------------------------------------------------------------
It has been argued that the CRA and related fair lending laws
contributed to the foreclosure and related problems. But as the Federal
Reserve Board and others have documented, this is simply not the case.
CRA lenders made approximately 6% of all high-cost loans to low-income
markets. Altogether just 5% of loans made by CRA lenders were high-cost
compared to 34% for non-CRA lenders. In fact, the Fed and others have
found that the CRA is responsible for significant increases in the
level of good loans in traditionally underserved markets.\32\
---------------------------------------------------------------------------
\32\ Governor Randall S. Kroszner, The Community Reinvestment Act
and the Recent Mortgage Crisis, Speech Delivered to Confronting
Concentrated Poverty Policy Forum, Board of Governors of The Federal
Reserve System, Washington, D.C. (December 3, 2008). New York Times,
Mortgages and Minorities Editorial, (December 9, 2008). Gregory D.
Squires, Scapegoating Blacks for the Economic Crisis, Poverty & Race
17(6): 3,4 (2008).
---------------------------------------------------------------------------
A promising step in this direction is the President's proposal for
the creation of a Consumer Financial Protection Agency.\33\ If given
the tools to write and enforce strong regulations, this independent
agency should prove far more effective in protecting the rights of
consumers under the CRA and other consumer protection laws.
---------------------------------------------------------------------------
\33\ U.S. Department of the Treasure, Financial Regulatory Reform,
Washington, D.C.: U.S. Department of the Treasury (2009).
---------------------------------------------------------------------------
Conclusion
The housing and related economic crises that disproportionately
impact poor and minority communities, but which are clearly now
threatening many middle income families as well, are inextricably
linked to specific financial industry practices as well as broader
forces of inequality and uneven development. The policies and practices
that have generated these patterns are no great secret. Neither are at
least some of the remedies.
__________
Prepared Statement of Sarah Bloom Raskin, Commissioner of Financial
Regulation, State of Maryland
Chairman Maloney, Vice Chairman Schumer, Congressman Cummings and
members of the Committee, thank you for inviting me to testify at
today's hearing. As the chief financial regulator for the state of
Maryland, I am pleased to share information about our state's efforts
to respond to the subprime lending crisis as it has manifested itself
in Maryland. I also serve as the Chair of the Legislative Committee of
the Conference of State Bank Supervisors.
Protecting Maryland residents from predatory mortgage lending has
been a priority of mine since I took office as the Maryland
Commissioner of Financial Regulation two years ago.
As you all know, the home foreclosure crisis has profoundly
affected not only homeowners but also taxpayers, cities, and states. I
have heard from Maryland citizens who can hardly believe the enormous
sums of taxpayer dollars flowing into the large money-center financial
institutions to keep them afloat. In return for their trillion-dollar
investment, these same citizens demand accountability, and, just as
importantly, they demand that something be done to stem the swelling
tide of home foreclosures in their communities.
As the Commissioner of Financial Regulation, it is my obligation to
pursue, within the boundaries of my authority, those who engaged in
violations of all our laws, including our anti-predatory lending laws.
State regulators have a long history as the first-line of protection
for consumers. It was the states that first sounded the alarm against
predatory lending and brought landmark enforcements against some of the
biggest subprime lenders.
Indeed, state banking commissioners have aggressively pursued
enforcement actions against predatory lending practices since the
1990s. And just last week, Maryland and 13 other states entered into a
$9 million settlement with one of the ten largest wholesale mortgage
lenders in the country. On Tuesday, Maryland issued a cease and desist
order against a company that brokers usurious pay-day loans to Maryland
residents.
My testimony is divided into two parts. First, I will discuss a
couple of the enforcement actions that my office has pursued against
participants who have violated our financial laws and regulations
designed to protect consumers. Second, I will identify some of the key
impediments to effective legislation and enforcement of fraud and other
consumer protection laws and regulations by state banking
commissioners.
Maryland is not a newcomer to the arena of predatory lending or its
impact. Our state is ravaged by the fallout from irresponsible
lending--too many loans that never should have been made--poorly
underwritten, if at all, with features and loan terms that make it
clear that the chance for success was limited. And all too often, these
loans have had a disproportionate impact on minority communities. The
Urban Institute published a study last month of subprime lending in 100
metropolitan areas. The study controlled for income levels and
concluded that the neighborhoods hardest hit by the subprime crisis
have been those where minority residents predominate.\1\
---------------------------------------------------------------------------
\1\ Source: Urban Institute, The Impacts of Foreclosures on
Families and Communities. Thomas Kingsley, Robin Smith and David Price.
May 2009.
---------------------------------------------------------------------------
The fallout is evident in foreclosures throughout our state,
particularly Baltimore City and Prince George's County. Under a new law
reforming the foreclosure process in our state, secured parties must
send a Notice of Intent to Foreclose to homeowners at least 45 days
prior to docketing the foreclosure. My office receives copies of these
notices--and unfortunately they come in by the boxload. In the past
twelve months, over 100,000 Notices of Intent to Foreclose have been
sent to Maryland borrowers and to our office. Each day, we struggle to
input the information into our database and to send outreach to the
borrower regarding options for assistance and warnings about
foreclosure scams.
With state attorneys general and other state regulators, Maryland
has sought to cooperatively pursue unfair and deceptive practices in
the mortgage market. Through several settlements, state regulators have
returned nearly one billion dollars to consumers. In 2002, a settlement
with Household Financial resulted in $484 million paid in restitution;
that investigation targeted many of the practices that bring us to this
room today. A settlement with Ameriquest Mortgage Company four years
later resulted in $295 million paid in restitution; for those of us at
the state level, the Ameriquest investigation marks the moment when we
began to see the underwriting practices of mortgage lenders erode at a
disturbingly accelerated pace.
While these cases have received most of the recognition, success is
sometimes better measured by those actions that never receive media
attention. In 2007 alone, states took almost 6,000 enforcement actions
against mortgage lenders and brokers. But these cases do not include
the unrecorded investigations and referrals for criminally punishable
fraud and other crimes.
We have also moved through regulatory and legislative action. We
have implemented regulatory changes through my office----
Establishing a standard of good faith and fair dealing
for mortgage lenders, brokers, servicers, and originators;
Requiring that mortgage refinances provide the borrower
with a net tangible benefit; and
Setting forth new marketing standards and risk management
standards for nontraditional mortgage loans
Our state has also implemented statutory changes. These include
requiring lenders to verify the borrower's ability to repay a mortgage
loan at the fully indexed rate, prohibiting prepayment penalties in
connection with residential mortgage loans, increasing surety bond
requirements for mortgage lenders, enhancing mortgage originator
licensing requirements in a way that conforms to the federal SAFE
Mortgage Licensing Act, reforming the foreclosure process, and creating
a process to track mortgage lenders and originators throughout the life
of a mortgage loan by requiring that this information be recorded with
the instrument securing the loan.
These are important steps. Unfortunately, Wells Fargo, as a
national bank, is not subject to these laws and regulations.
At the same time, Maryland was one of 14 states that most recently
entered into a major settlement with Taylor, Bean & Whitaker Mortgage
Corporation earlier this week. Taylor Bean is one of the 10 largest
wholesale mortgage lenders in the country. They are also a major
mortgage servicer--the 7th largest licensed servicer in Maryland. This
agreement follows a coordinated examination conducted jointly by 14
states to evaluate compliance with laws and regulations pertaining to
the origination of nontraditional mortgage loans made in 2006. These
non-traditional products, also known as ``exotic'' loans represent the
riskiest and most dangerous products on the mortgage market--
``interest-only'' mortgages, ``payment option'' adjustable-rate
mortgages and stated income loans. In so many communities, these tools
represent ground zero for the mortgage crisis.
Concern over these practices led Taylor Bean to stop offering
nontraditional mortgages in early 2007 and to make other changes to its
internal control processes. As part of this settlement, Taylor Bean
agreed to implement a loan modification program in accordance with the
Making Home Affordable Program, to implement a comprehensive compliance
program and to retain a third party to review compliance with state
laws for these products to determine if refunds are appropriate.
Maryland conducted an initial review on its own that has already
resulted in over $50,000 in refunds to our borrowers. Finally, Taylor
Bean is paying $9 million as part of the settlement including $4.5
million to help fund the new Nationwide Mortgage Licensing System.
This coordinated, multi-state examination and its results
underscore the efforts and progress that the states have made in
addressing problems within the non-bank mortgage segment. These
efforts, combined with an increased use of technology to support the
examination process, are a critical step forward in protecting
consumers and further professionalizing the mortgage industry.
Despite these enforcement and legislative successes, state actions
have been hamstrung by the dual forces of preemption of state authority
and lack of federal oversight. The authority of state banking
commissioners to craft and to enforce consumer protection laws of
general applicability was challenged at precisely the time it was most
needed--when the amount of subprime lending exploded and riskier and
riskier mortgage products came into the marketplace.
The laws passed by state legislatures to protect citizens and the
enforcement actions taken by state regulators should have alerted
federal authorities to the extent of the problems in the mortgage
market and should have spurred a dialogue between state and federal
authorities about the best way to address the problem. Unfortunately,
this did not occur. Had the federal regulators not adopted preemptive
policies, I suggest we would have fewer home foreclosures and may have
avoided the need to prop up our largest financial institutions. It is
worth noting that many of the institutions whose names were attached to
the mortgage preemptive initiative in general, including two who served
as plaintiffs in an action against my predecessor in Maryland for
trying to invoke a state law regarding pre-payment penalties--National
City and First Franklin--were all brought down by the mortgage crisis.
What is clear is that the nation's largest and most influential
financial institutions have been major contributing factors in our
regulatory system's failure to respond to this crisis. At the state
level, we sometimes perceived an environment at the federal level
skewed toward facilitating the business models and viability of our
largest institutions, rather than promoting the strength of the
consumer or our diverse economy.
At the same time that preemption of state consumer protection
powers gained ground, federal agencies failed to fill the gap in
regulation with uniform market-wide standards that ensured lenders did
not engage in fraudulent, deceptive or unfair lending practices and to
respond to the crisis. Congressman Cummings has seen this close up in
the effort to gather information on mortgage modifications. My office
gathers modification data and, following concern regarding
modifications that were not substantive, we required servicers to
report the impact of modification on the borrowers' monthly payment
last summer. When the results showed that 50+% of modifications did not
lower the borrower's monthly payment, it was clear to us that this
topic should be aired. Unfortunately, the federal authorities resisted.
They dutifully reported that modifications were redefaulting at high
rates, but resisted drilling into the nature of those modifications.
Thankfully, Congressional action led by Congressman Cummings helped
change things, and earlier this year, the OCC began collecting similar
data regarding monthly payment.
Our federalist system of government is premised on the notion that
federal and state regulation can co-exist and are in fact
complementary. Moreover, even if sufficient federal regulations had
been promulgated, they are only effective to the extent that the
federal regulator is interested in enforcing them.
The void created by preemption in the face of a failure of federal
oversight added a number of impediments for state banking commissioners
in crafting legislation and in pursuing enforcement actions against
predatory lenders. While it is too late to remove some of these
impediments, there are some obstacles that can be eliminated to restore
to state bank commissioners the ability to successfully regulate
lending in the future.
One key point I would like to make is that Congress should
eliminate the preemption of consumer protections enacted by the states.
I urge Congress to promptly eliminate federal preemption of the
application of the state consumer protection laws to national banks.
The magic of federalism is that if one level of government falls asleep
at the wheel or has too much to drink at the party, another can drive
everybody home safely. But when you preempt our best laws, you take
away the keys to the car and our license to drive.
Together with our nation's 50 banking commissioners, and with the
Conference of State Bank Supervisors, I am supportive of provisions
contained within President Obama's recently proposed financial
regulatory reform plan that would grant state authorities the ability
to promulgate statutes and regulations that would apply to all
financial firms operating in our states, to examine for compliance of
these statutes and rules, and to take enforcement actions against those
entities that were found to be out of compliance with these statutes
and rules.
The Administration's proposal to create a consumer financial
product agency is interesting. This agency could require a federal
minimum of consumer protections for particular products. Such a
standard would declare a national norm but also would allow states to
address new predatory practices as they evolve. This dynamic would
create a floor for all lenders but still permit states to protect their
citizens through more robust legislation and regulation.
Such ability to expand upon a basic federal standard is essential
to the development of effective responses to new mortgage abuses as
they emerge. Today, we see another mortgage storm brewing in the area
of loss-mitigation consulting. Historically, we confronted fraudulent
foreclosure transactions where title was conveyed as part of a scheme
to strip homeowners of their equity. Today, with no equity left to
strip, the ripoffs have become fee-based with so-called consultants
charging high up-front fees to vulnerable consumers to help them get a
loan modification. Too often, these efforts result in both wasted money
and wasted time. Up front fees are restricted in Maryland and our
office has recovered more than $80,000 for consumers to date. We have
worked through the State Foreclosure Prevention Working Group to raise
the issue with the Administration and to warn those overseeing the
President's Housing Program of the potential for these practices to
cause further financial instability. Congress can ban upfront fees at
the federal level, or at least ensure that states have the flexibility
to enforce their own laws against such ``loss-mitigation consultants''
who seem to be more in the business of loss aggravation.
To sum up, some bank commissioners have been predicting the current
lending crisis for years, but few listened. Banks, lenders and mortgage
brokers lobbied aggressively to prevent any regulation at either the
state or federal level. There are lessons to be learned. First, the
movement to erode state authority to enforce state and federal consumer
protection laws must cease. Attempts to exclude state banking
regulators from enforcing consumer protection laws have significantly
contributed to the distress our residents have endured as a result of
these difficult economic times. Thank you for the opportunity to
testify before the Committee today.
__________
Prepared Statement of Robert J. Strupp, Director of Research and
Policy, Community Law Center
Good Morning Congresswoman Maloney, Senator Schumer, and members of
the Joint Economic Committee. My name is Robert J. Strupp and I am the
Director of Research and Policy at the Community Law Center based in
Baltimore. I am honored to testify today concerning the impact of
predatory lending and reverse redlining on low-income, minority, and
senior borrowers and communities.
For over 22 years, the Community Law Center has been a leading
voice in Baltimore for preventing and eradicating blight and returning
vacant and abandoned property to productive use. The Community Law
Center also seeks solutions to the predatory and deceptive real estate
transactions that have caused foreclosures and that have led to many of
the housing challenges facing communities throughout Maryland
Discriminatory practices in residential real estate are a well-
documented blemish on our Country's history. It was not until 1962 that
President Kennedy issued Executive Order # 11063 making Federal Housing
Administration (FHA) and VA loans available to all Americans, without
regard to race, color, creed, or national origin. Tragically, some
homebuilders responded by no longer offering FHA and VA loans. Indeed,
5 years later, thirteen homebuilders--including three in Baltimore--
were identified as violating the President's directive (See Michael L.
Mark, But Not Next Door, Baltimore Neighborhoods, Inc, 2002, p. 20).
In 2000, at the behest of Senators Barbara Mikulski and Senator
Paul Sarbanes, the United States Department of Housing and Urban
Development (HUD) established the Baltimore City Flipping and Predatory
Lending Task Force as a ``laboratory'' to develop creative solutions to
the problems arising in Baltimore and nationwide from abuses in the FHA
mortgage program, which was designed to help low-income families attain
homeownership. The Community Law Center served as the staff for this
Task Force. The Task Force was created to combat a number of
residential real estate tactics that were hurting Baltimore's most
vulnerable residents and neighborhoods. Relying on false and
unsupportable appraisals, lenders originated FHA insured loans in
amounts greatly exceeding the property's true value. Unsuspecting,
trusting families aspiring to the American dream of homeownership were
lured into purchasing shoddy, over-mortgaged properties that were too
costly to repair and too overvalued to sell. As a result of these
predatory practices, neighborhoods in the 1990s experienced rising
foreclosures, bankruptcies, vacancies, and neighborhood disintegration.
The gravity of the foreclosure situation at the time is perhaps best
demonstrated by the decision of the FICA to declare a moratorium on FHA
foreclosures.
The Baltimore Task Force included representatives of HUD, FHA,
Baltimore City Housing agencies, Fannie Mae, governmental officials,
law enforcement agencies, housing counselors, consumer advocates,
community leaders, and some of the regulated industries, including
lenders and the real estate licensees.
As law enforcement heightened, responses to the mortgage fraud
epidemic increased, and FHA loan requirements became more stringent,
the abusive use of highly risky and exotic loan products to promote
homeownership began to emerge.
The American obsession with homeownership at least since the
administration of President Hoover. President Hoover initiated the Own
Your Own Home Program, citing that ``nothing [is] worse than increased
tenancy and landlordism.'' Unfortunately, as homeownership grew, so did
foreclosures: from 2% of commercial bank mortgages in 1922 to 11% by
1927. Following the Great Depression, the federal government
established numerous initiatives to repair the mortgage markets and
encourage homeownership. It created FHA to insure home loans and
initiated the Federal National Mortgage Association (Fannie Mae) to
purchase mortgages made by local banks. The federal government's
regulation of the mortgage industry was born.
Homeownership requires sustainable, qualified borrowers. During the
decade of the 1950s the FHA default rate increased fivefold. VA loans
doubled during the same period. At the same time, the foreclosure rate
on conventional mortgages remained nearly constant because non-
government lenders maintained strict underwriting standards.
In 1968, responding to the turmoil in our cities, FHA was empowered
by Congress to insure loans that required down payments as low as $250.
The unintended consequence was blockbusting; unscrupulous investors
began to buy homes in changing neighborhoods, scaring homeowners to
sell quick, and then these homes would be resold to low-income and
minority families at inflated prices. By the early 1970s the
consequences of these practices hit home, resulting in large numbers of
mortgage defaults, a 500 count federal indictment involving 7,500 FHA
insured homes in New York City neighborhoods, and previously stable
neighborhoods collapsing as once optimistic homeowners, now in over
their heads, walked away, leaving their homes to arsonists and other
criminals.
The press for homeownership opportunities continued in the 1980s
when Congress passed legislation requiring Fannie Mae and Freddie Mac
to buy mortgages designed for low- and moderate-income households. The
intent was noble: find a way to grow sustainable homeownership among
American minorities. These efforts, however, failed to regard the
borrower's underlying economic ability to sustain the mortgage and
obligations of homeownership. Despite the fact that by the end of the
1990s homeownership reached 66% of all households, homeownership for
low- and moderate-income households and young families was declining.
The most creditworthy, were now homebuyers, leaving the biggest
opportunity for mortgage expansion to be the field of lower-income
families and refinancing. A Maryland mortgage lender predicted in a
trade article that ``low income borrowers are going to be our leading
customers going into the 21st century.''
Homeownership has been described as wealth building, a ``forced
savings plan,'' and is recognized as the largest purchase most
Americans will ever make. Not only is homeownership important
economically; it is important psychologically. A Baltimore study
revealed that low-income homeowners had significantly higher levels of
life satisfaction than similarly situated renters. (William M. Rohe &
Michael A. Stegman, The Effects of Homeownership on the Self-Esteem,
Perceived Control, and Life Satisfaction of Low-Income People, Journal
of the American Planning Association 60, 1994 pp173-184). No doubt,
personal satisfaction with one's life leads to more stable households
and communities.
Encouraging increased homeownership opportunities is not
irresponsible, but it is wrong to equate legitimate, flexible lending
standards with irresponsible underwriting. Low- and moderate-income
communities need and ought to be given opportunities to access
affordable credit. As we have learned, the loan products provided to
borrowers were not affordable. Rather, they were money makers for the
lending industry, so much so that premiums were paid based on the risk
of the loan. The riskier the loan, the more a mortgage broker was paid,
and the more Wall Street paid the originating bank. This feeding frenzy
continued until, much like an over-stuffed animal, the entire system
exploded.
What went wrong was the misuse of loan products not designed for
fixed-income low- and moderate-income families, but intended for
higher-compensated, self-employed borrowers with fluctuating incomes.
Nevertheless, lenders were encouraged to utilize certain ``tricks of
the trade,'' such as the use of the NINA (``no income, no asset'')
loans. These loans are commonly referred to as ``liar loans.'' As we
know, in 2007, Freddie Mac stopped purchasing these loans. Although it
is widely believed that borrowers deliberately took advantage of these
products to be untruthful on their loan applications, the reality is
that, time and again, it was the mortgage brokers and loan officers who
inflated the borrower's income to qualify borrowers for loans they
could not afford and to redirect them to the higher risk, more
lucrative, and more expensive loans. Loan applications were frequently
taken over the telephone and borrowers often did not see the documents
until the closing. When borrowers spoke up, they were often told ``not
to worry,'' the information did not need to be verified. Many borrowers
never even saw the misstatements until much later because they were
rushed through the closing process without an opportunity to review,
let alone comprehend, the documents. Today, as a result of these
practices and the proliferation of predatory and subprime lending,
numerous cities confront abandoned, foreclosed, and unmaintained
properties. For example, Baltimore and other municipalities have filed
law suits against lenders for the economic devastation caused by
lending practices and lack of property maintenance. As a result of
foreclosures and the ensuing vacant houses, cities like Baltimore are
losing tax revenue due to plummeting home values, but must continue to
provide essential services. In addition, the rise in vacant properties
increases the costs for rodent control, attracts squatters and drug
dealers, and contributes to the overall decline of the community.
So, were minorities ``targeted''? Was this reverse red-lining?
Research conducted by the Chicago Reporter showed that African-
Americans earning more than $100,000 a year were more than twice as
likely to receive a high-cost loan than a white homeowner earning less
than $35,000.
The New York Times reported in-depth on the impact of foreclosures
in the Baltimore community of Belair-Edison. The Community Law Center
researches the real estate transactions in this community and provides
findings to the local housing counselors to reach out to at-risk
homeowners, This partnership has enabled Belair-Edison residents the
opportunity to successfully obtain sustainable loan modifications and
avoid foreclosure.
The Times article highlighted a study conducted by The Reinvestment
Fund, showing that over a 4-year period (2003-2007), nearly half of the
houses foreclosed on were owned by women. The National Association of
Realtors reported that 40% of all home sales in 2006 were to single
female buyers. The National Community Reinvestment Coalition (NCRC)
determined that nearly half of these 2006 female purchases utilized
subprime mortgages.
The Consumer Federation of America reported that women were 32%
more likely to receive a subprime loan than men, even though male/
female credit scores are comparable. The Consumer Federation of America
also determined that, among high income borrowers, African-American
women were five times more likely to receive subprime loans than white
men. There has been considerable research conducted by NCRC, the
Federal Reserve, and others to support the conclusion that minorities
received a disproportionate number of subprime loans, even after
controlling for creditworthiness (i.e., see Paul S. Calem, Kevin Gillen
& Susan Wachter, The Neighborhood Distribution of Subprime Mortgage
Lending, 29 Journal of Real Estate Fin. & Econ. 393 (2004); Paul S.
Calem, Jonathan E. Hershaff & Susan M. Wachter, Neighborhood Patterns
of Subprime Lending: Evidence from Disparate Cities, 15 Housing Policy
Debate 603 (2004)).
The mortgage crisis is felt by the senior population as well.
Equity is often a senior's largest if not only asset for retirement.
The devaluation of home prices severely impacts this population, delays
retirement, impacts employment opportunities for the next generation,
and thwarts the ability of seniors to use reverse mortgage products to
supplement fixed-income elderly homeowners. According to AARP research,
28% of all delinquencies and foreclosures at the end of 2007 were on
loans held by older Americans. Older African Americans and Hispanics
had higher foreclosure rates than older whites. Another frightening
trend highlighted by Harvard's Joint Center for Housing Studies is that
today more older Americans are carrying a mortgage. Twenty years ago,
34% of Americans over 50 had a mortgage. Today, according to the study,
53% of older Americans have a mortgage. Combined with the fact that
millions of elderly homeowners devote more than 50% of their income to
pay for housing, this presents a troubling picture. Research indicates
that some of the most financially vulnerable members of our society,
such as the elderly and poor, are being hit particularly hard by the
housing crisis.
Returning to Baltimore, since 2000, over 30,000 homes went into
foreclosure, roughly 13% of all city households. As noted, these
foreclosures have caused the city lost tax revenue, lower home values,
increased crime and added expenditure for essential services and
property maintenance--including rodent control and the need to board up
and secure these homes from squatters and other misuse. In January
2008, Baltimore filed a complaint against Wells Fargo Bank seeking
damages for the economic injuries brought upon the city's minority
neighborhoods as a result of Wells Fargo's deceptive lending practices.
Where do we go now? The FHA response a decade ago in Baltimore is
worth a closer look. A national foreclosure moratorium may be the bold
but necessary next step in resolving the foreclosure crisis. Although
foreclosures are said to have dipped slightly in May, one in every 398
households with loans received a foreclosure filing. Filings, which
include notices of default and auctions, were reported on 321,480
properties last month.
Congress alluded to a national foreclosure moratorium in the
Helping Families Save Their Homes Act of 2009, Title IV 401(a): ``It
is the sense of the Congress that mortgage holders, institutions, and
mortgage servicers should not initiate a foreclosure proceeding or a
foreclosure sale on any homeowner until . . . foreclosure mitigation
provisions have been implemented and determined to be operational . . .
'' This provision is unfortunately not binding, but it points to
Congress's recognition that a national foreclosure moratorium would
give borrowers time to research and apply to loan modification programs
and give lenders time to build the capacity necessary to handle the
increased volume of loan modification requests.