[Congressional Record Volume 148, Number 52 (Wednesday, May 1, 2002)]
[Senate]
[Pages S3629-S3631]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SARBANES (for himself, Mr. Dodd, Mr. Schumer, Ms. 
        Stabenow, Mr. Corzine, Mr. Kerry, Mr. Kennedy, Mr. Durbin, Ms. 
        Mikulski, Mrs. Clinton, Mrs. Boxer, Mr. Wellstone, Mr. 
        Torricelli, Mr. Dayton, and Mr. Levin):
  S. 2438. A bill to amend the Truth in Lending Act to protect 
consumers against predatory practices in connection with high cost 
mortgage transactions, to strengthen the civil remedies available to 
consumers under existing law, and for other purposes; to the Committee 
on Banking, Housing, and Urban Affairs.
  Mr. SARBANES. Madam President, earlier today, I had a press 
conference with a number of my colleagues, Senators Schumer, Stabenow, 
Corzine, and Clinton, as well as Mayor DeStefano of New Haven, CT, 
Mayor McCollum from Richmond, VA, Wade Henderson, Executive Director of 
the Leadership Conference on Civil Rights, and Tess Canja, a member of 
the Board of AARP, to announce the introduction of the ``Predatory 
Lending Consumer Protection Act of 2002.''
  When I took over as Chairman of the Committee on Banking, Housing, 
and Urban Affairs last year, I made it clear that one of my highest 
priorities would be to use the Committee as a way to shine a bright 
light on the deceptive and destructive practices of predatory lenders.
  We then held a series of three hearings, starting in July of 2001 and 
continuing through January of this year, at which the Committee heard 
from housing experts, community groups, legal advocates, industry 
representatives and victims of predatory lending in an effort to 
determine how best to address this problem. The bill I am introducing 
this afternoon, along with 14 of my colleagues, represents the result 
of the recent work of the Committee, as well as efforts from the 
previous Congress.
  In particular, this legislation builds on the excellent work of my 
colleagues in the Senate and Representative LaFalce, with whom I 
introduced legislation on this topic in the last Congress.
  Homeownership is the American Dream. We say this so often that there 
is a danger of the idea becoming almost trivial, or devoid of real 
meaning. But it pays to step back for a second and understand how true 
and fundamental this is.
  Homeownership is the opportunity for Americans to put down roots and 
start creating equity for themselves and their families. Homeownership 
has been the path to building wealth for generations of Americans, 
wealth that can be tapped to send children to college, pay for a secure 
retirement, or simply work as a reserve against unexpected emergencies. 
It has been the key to ensuring stable communities, good schools, and 
safe streets. Common sense tells us, and the evidence confirms, that 
homeowners are more engaged citizens and more active in their 
communities.
  Little wonder, then, that so many Americans, young and old, aspire to 
achieve this dream.
  The predatory lending industry plays on these hopes and dreams to 
cynically cheat people out of their wealth. These lenders target lower 
income, elderly, and, often, uneducated homeowners for their abusive 
practices. And, as a study released today by the Center for Community 
Change so clearly indicates, they target minorities, driving a wedge 
between these families and the hope of a productive life in the 
economic and financial mainstream of America.
  We owe it to these hardworking families to provide protections 
against these unscrupulous pirates.
  Let me share with you one of the stories we heard at our hearings in 
July. Mary Ann Podelco, a widowed waitress from West Virginia, used 
$19,000 from her husband's life insurance to pay off the balance on her 
mortgage, thus owning her home free and clear. Before her husband's 
death, she had never had a checking account or a credit card. She then 
took out a $11,921 loan for repairs. At the time, her monthly income 
from Social Security was $458, and her loan payments were more than 
half this amount. Ms. Podelco, who has a sixth grade education, 
testified that after her first refinancing, ``I began getting calls 
from people trying to refinance my mortgage all hours of the day and 
night.'' Within two years, having been advised to refinance seven 
times, each time seeing high points and fees being financed into her 
new loan, she owed $64,000, and lost her home to foreclosure.
  Ms. Podelco's story is all too typical. Unfortunately, most of the 
sharp practices used by unscrupulous lenders and brokers, while 
unethical and clearly abusive, are perfectly legal. This bill is 
designed to address that problem by tightening the interest rate and 
fee triggers that define a high cost loans; the bill improves 
protections for borrowers receiving such loans by prohibiting the 
financing of exorbitant fees, ``packing'' in of unnecessary and costly 
products, such as credit life insurance, and limiting prepayment 
penalties. Finally, it protects these consumers' rights to seek redress 
by prohibiting mandatory arbitration, as the Federal Trade Commission 
proposed unanimously in 2000.
  We cannot extol the virtues of homeownership, as we so often do, 
without

[[Page S3630]]

seeking at the same time to preserve this benefit for so many elderly, 
minority, and unsophisticated Americans who are the targets of 
unscrupulous lenders and brokers. This legislation will help achieve 
this important goal.
  Before closing, let me say that, in addition to the aforementioned 
AARP, Leadership Conference on Civil Rights, and Center for Community 
Change, CCC, this bill has been endorsed by the National Consumer Law 
Center, ACORN, the National League of Cities, National Consumer 
Reinvestment Coalition, Consumers Union, Consumer Federation of 
America, NAACP, the Self-Help Credit Union, and the U.S. Conference of 
Mayors.
  Finally, I ask unanimous consent to print in the Record the Executive 
Summary of the new CCC study entitled ``Risk or Race? Racial 
Disparities and the Subprime Refinance Market.'' While predatory 
lending is not by any means exclusively a problem of racial 
discrimination, this study demonstrates how much more minorities are 
forced to rely on subprime lending as a source of mortgage credit. 
Because predatory lending is concentrated in the subprime market, this 
study provides new evidence on why the protections provided by the 
Predatory Lending Consumer Protection Act are so important.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

 Risk or Race? Racial Disparities and the Subprime Refinance Market--A 
               Report of the Center for Community Change

   (Prepared by Calvin Bradford, Calvin Bradford & Associates, Ltd.)


                           executive summary

       African-Americans and Hispanics are disproportionately 
     represented in the subprime home refinance mortgage market. 
     Surprisingly, this study finds that the disparity between 
     whites and African-Americans and other minorities actually 
     grows at upper-income levels and is greater for higher-income 
     African-American homeowners than for lower-income white 
     homeowners.
       High levels of subprime mortgage lending represent markets 
     where borrowers are paying unusually high costs for credit, 
     while often depleting their home equity. Of particular 
     concern are the consistent and pervasive racial disparities 
     and concentration of subprime lending in communities of color 
     and to borrowers of color at all income levels. The 
     persistent racial patterns found in this analysis raise 
     questions as to whether factors other than risk alone account 
     for them.
       These patterns exist in all regions and cities of all 
     sizes, thereby raising concerns about the absence of prime 
     conventional mortgage loans in these geographic areas. The 
     subprime market is fertile ground for predatory lending, a 
     disturbing part of the explosive growth in this market. 
     Abusive credit practices in the subprime segment of the 
     mortgage market are stripping borrowers of home equity they 
     may spend a lifetime building. Thousands of families end up 
     facing foreclosure, which destabilizes communities and often 
     shatters families.
       The subprime market provides loans to borrowers who do not 
     meet the credit standards for borrowers in the prime market. 
     Most subprime borrowers use the collateral in their homes for 
     debt consolidation or other consumer credit purposes. The 
     growth in subprime lending has benefitted credit-impaired 
     borrowers, those who may have blemishes in their credit 
     records, insufficient credit history, or non-traditional 
     credit sources. When undertaken responsibly, subprime lending 
     offers the opportunity to further expand lending markets to 
     underserved populations.
       However, research by the U.S. Department of Housing and 
     Urban Development (HUD) and others has documented the waive 
     of foreclosures occurring in the subprime market. High 
     foreclosure rates for subprime loans indicate that many 
     subprime borrowers are entering into mortgage loans they 
     cannot afford. Thus, high levels of subprime lending indicate 
     markets where borrowers have unusually high risks of losing 
     their homes. The sheer geographic concentration of these 
     loans, therefore, may have a significant negative impact not 
     just on individual borrowers, but on entire neighborhoods. 
     Foreclosed homes frequently remain vacant for extended 
     periods, during which they are neglected. These vacant homes 
     can depress property values and lead to neighborhood 
     deterioration and disinvestment.
       This study represents some important differences from 
     previous work. It is national in scope, analyzing lending 
     patterns in all 331 metropolitan statistical areas (MSAs), 
     and ranking metropolitan areas by a variety of measures of 
     subprime lending. It also includes a regional analysis, 
     looking at the variations in lending patterns in different 
     geographic regions within the country. The study focuses on 
     single-family conventional refinance loans, where subprime 
     lending is most concentrated, using 2000 data provided by the 
     Federal Home Mortgage Disclosure Act. In addition to looking 
     at lending patterns based on the race and income of the 
     borrower, the study also analyzes the way these patterns play 
     out at the neighborhood level and identifies the types of 
     neighborhoods in which subprime loans are most concentrated. 
     Finally, in conjunction with this study, the Center for 
     Community Change is making available an important new 
     national database on subprime lending, which is posted on our 
     website at www.communitychange.org.
 Our analysis is based on two key measures. One is the 
     percentage of home refinance loans made to any given racial 
     or ethnic group that are subprime. The second is a comparison 
     between this figure and the percentage of subprime refinance 
     loans made to white borrowers in the same geographic market. 
     This comparison is expressed as a ratio, the ``racial 
     disparity ratio.'' A ratio of 1.0 indicates no disparity, a 
     ratio above 1.0 indicates that minorities are receiving a 
     higher proportion of subprime loans than whites. The higher 
     the ratio, the greater the disparity between white and non-
     white borrowers.


                              Key Findings

       This study documents the pervasive racial disparities in 
     subprime lending. Placed in the context of previous research, 
     this study supports the position that risk alone does not 
     explain these racial disparities. Our three major findings 
     are as follows:
       1. There are significant racial disparities in subprime 
     lending, and these disparities actually increase as income 
     increases.
       Lower-income African-Americans receive 2.4 times as many 
     subprime loans as lower-income whites, while upper-income 
     African-Americans receive 3.0 times as many subprime loans as 
     do whites with comparable incomes.
       Lower-income Hispanics receive 1.4 times as many subprime 
     loans as do lower-income whites, while upper-income Hispanics 
     receive 2.2 times as many of these loans.
       At a level of 5.93, St. Louis has the nation's highest 
     disparity ratio between upper-income African-Americans and 
     upper-income whites. It was one of five metropolitan areas 
     where this disparity ratio was greater than 4.0. In another 
     18 cities, this ratio was between 3.0 and 4.0.
       2. High concentrations of subprime lending and racial 
     disparities in subprime lending exist in all regions of the 
     nation.
       Each region contains metropolitan areas where the level of 
     subprime lending is above the national average of 25.31%.
       In 17 MSAs, the level of subprime lending is more than 1.5 
     times the national norm. Fourteen of these are in the 
     Southeast or Southwest, 7 are in Texas. El Paso has the 
     highest overall level of subprime loans in the nation: 
     47.28%.
       For African-Americans, Hispanics and Native Americans, 
     disparities exist in all regions of the country, reaching as 
     high as 3.25 or more in the Midwest and Great Plains.
       3. High concentrations of subprime lending and racial 
     disparities occur in metropolitan areas of all sizes.
       Twelve of the 17 metropolitan areas that have 
     concentrations of subprime lending more than 1.5 times the 
     national norm have populations below 500,000. For example, 
     Enid, Oklahoma, the nation's smallest metropolitan area, 
     ranks #12 in percentage of subprime lending. On the other 
     hand, 4 of these 17 metropolitan areas are above 1 million in 
     population.
       When we examined disparity ratios for cities in different 
     size categories, we found the highest disparity ratios for 
     African-Americans, Hispanics and Native Americans in cities 
     under 250,000 in population. For example, the highest 
     disparity ratio for African-Americans is found in Kankakee, 
     Illinois, with a population of 103,833 and a disparity ratio 
     of 6.10. For Asians, the highest disparity ratios are 
     generally found in cities between 500,000 and the 1 million 
     in population.


                       Additional Racial Impacts

       In examining the racial dynamics of subprime lending, our 
     research identified three distinct dimensions to the 
     patterns: (a) high overall percentages of subprime loans made 
     to African-Americans and Hispanics; (b) high disparity ratios 
     when these percentages are compared to white borrowers; and, 
     (c) high disparity ratios for neighborhoods with significant 
     African-American and Hispanic residents as compared to white 
     neighborhoods. Examples of these patterns include:

                           African-Americans

       In every single metropolitan area, the percentage of 
     subprime loans made to African-American borrowers was higher 
     than the national norm of 25.31%. (Note: certain metropolitan 
     areas were excluded from this calculation because they had 
     fewer than 100 loans to African-Americans, which was the 
     number we set as the threshold for this calculation.)
       Buffalo, New York had the highest percentage of subprime 
     loans to African-Americans, 74.53%.
       There were no metropolitan areas where the disparity ratio 
     for African-Americans fell below 1.64.
       The highest disparity ratio for African-Americans was 
     Kankakee, Illinois, at 6.10. This was followed by Albany, 
     Georgia, (5.69) and Dothan, Alabama (5.23)
       Chicago had the highest disparity ratio for African-
     American census tracts: 4.12. It was followed by Milwaukee 
     (4.04) and Philadelphia (3.40). Eight metropolitan areas had 
     disparity ratios above 3.0 for African-Americans census 
     tracts; another 65 cities had disparity ratios above 2.0.

[[Page S3631]]

                               Hispanics

       The highest percentages of subprime loans to Hispanic 
     borrowers were found in El Paso, Texas, (52.36%) and San 
     Antonio, Texas (51.46%).
       San Jose, California, had a disparity ratio for Hispanics 
     of 2.45, the highest in the nation. Fourteen metropolitan 
     areas had disparity ratio above 2.0.
       In Corpus Christi, Texas, 75.48% of refinance loans in 
     Hispanic census tracts were subprime, the highest percentage 
     of subprime loans in Hispanic tracts in the nation.
       Albuquerque, New Mexico, had the highest disparity ratio 
     for Hispanic census tracts, 2.59.


                               Conclusion

       The persistent racial disparities in levels of subprime 
     lending found in this analysis do not, in and of themselves, 
     constitute conclusive proof that there is widespread 
     discrimination in the subprime lending markets. These 
     disparities do, however, raise serious questions about the 
     extent to which risk alone could account for such patterns. 
     Discrimination has been a persistent problem in the home 
     finance markets in the United States. The history of mortgage 
     lending discrimination adds weight to the need to explore 
     more fully the role that discrimination plays in the subprime 
     markets through either differential treatment of individual 
     minority borrowers or through the effects of industry 
     practices.
       The issue of whether there is racial exploitation in the 
     subprime markets essentially rests on two issues. First, are 
     the disparities in subprime lending related to race? Second, 
     can these disparities be fully explained by legitimate risk 
     factors? Recent research suggests that risk alone does not 
     explain the huge racial disparities that this study found 
     across all income levels. Among the factors that influence 
     the racial disparities in subprime lending:
       The absence of active mainstream prime lenders in minority 
     markets has increased the chances that borrowers in these 
     communities are paying a high cost for credit. For example, 
     the finding that racial disparities actually increase as 
     income increases suggests that a portion of subprime lending 
     is occurring with borrowers whose credit histories would 
     qualify them for lower-cost, conventional, prime loans.
       Both Fannie Mae and Freddie Mac, the publicly chartered 
     secondary mortgage market enterprises, have questioned 
     whether risk explains the use of subprimes loans. Freddie Mac 
     has estimated that from ``10 to 30 percent of borrowers who 
     obtained mortgages from the subprime market could have 
     qualified for a conventional loan through Loan Prospector'' 
     (Freddie Mac's automated underwriting system). (See Freddie 
     Mac, ``We open Doors for America's Families,'' Freddie Mac's 
     Annual Housing Report for 1997).
       Subprime refinance lending tends to be ``sold'' to 
     customers rather than ``sought'' by them. Subprime lenders 
     aggressively market their loans to potential borrowers. These 
     marketing techniques disproportionately target minority 
     market segments, often to homeowners with considerable equity 
     in their homes. Since mainstream prime lenders are absent 
     from many of these same communities, homeowners are more 
     susceptible to being persuaded that the more expensive 
     subprime loans are all that is available to them.
       There is other evidence that risk factors do not explain 
     racial differences in the use of subprime lending. A recent 
     study by the research Institute for Housing America 
     concluded, ``after controlling for borrower income, debt, and 
     credit history, racial groups behave differently.'' (See 
     Pennington-Cross, Yezer, and Nichols, Credit Risk and 
     Mortgage Lending: Who Uses Subprime and Why? Research 
     Institute for Housing America (2000).) Specifically, the 
     study noted that minorities are more likely to use subprime 
     lending than whites.
       Subprime lending may provide certain borrowers with access 
     to credit they could not otherwise obtain in the prime 
     markets. However, the wide disparities in subprime lending to 
     African-Americans and Hispanics at all income levels, suggest 
     that factors other than risk may be at work. Further, the 
     pervasiveness of subprime lending in communities of color, in 
     all regions and in metropolitan areas of all sizes, raises 
     important public policy concerns about possible adverse 
     implications stemming from these heavy geographic 
     concentrations. It also suggests that minority homeowners may 
     be particularly vulnerable to predatory lenders, which by 
     most accounts target communities with high levels of subprime 
     lending.
                                 ______