Mr. Chairman and members of the Committee, I am Wade Henderson, Executive Director of the Leadership Conference on Civil Rights. I am pleased to appear before you today on behalf of the Leadership Conference to discuss the very pressing issue of predatory lending in America.
The Leadership Conference on Civil Rights (LCCR) is the nation's oldest and most diverse coalition of civil rights organizations. Founded in 1950 by Arnold Aronson, A. Philip Randolph, and Roy Wilkins, LCCR works in support of policies that further the goal of equality under law. To that end, we promote the passage of, and monitor the implementation of, the nation's landmark civil rights laws. Today the LCCR consists of over 180 organizations representing persons of color, women, children, organized labor, persons with disabilities, the elderly, gays and lesbians, and major religious groups. It is a privilege to represent the civil rights community in addressing the Committee today.
Predatory Lending is a Civil Rights Issue
Some may wonder why the issue of predatory lending raises civil rights issues, but I think the answer is quite clear.
Shelter, of course, is a basic human need - and homeownership is a basic key to financial viability. While more Americans own their homes today than any time in our history, minorities and others who historically have been under-served by the lending industry still suffer from a significant homeownership gap.
The minority homeownership rate climbed to a record-high 48.8 percent in the second quarter of 2001, Housing and Urban Development Secretary Mel Martinez said yesterday. About 13.2 million minority families owned homes in this period, up from 47.6 percent in the same quarter last year, HUD said. However, the rate for minorities still lagged behind the overall homeownership rate in the second quarter this year, which, at 67.7 percent, tied a. high first set in the third quarter of 2000. Nationally, 72.3 million American families owned their homes.
Unequal homeownership rates cause disparities in wealth since renters have significantly less wealth than homeowners at the same income level. To address wealth disparities in the United States and make opportunities more widespread, it is clear that homeownership rates of minority and low-income families must rise. Increasing homeownership opportunities for these populations is, therefore, central to the civil rights agenda of this country.
Increasingly, however, hard-earned wealth accumulated through owning a home is at significant risk for many Americans. The past several years have witnessed a dramatic rise in harmful home equity lending practices that strip equity from families' homes and wealth from their communities. These predatory lending practices include a broad range of strategies that can target and disproportionately affect vulnerable populations, particularly minority and low-income borrowers, female single-headed households and the elderly. These practices too often lead minority families to foreclosure and minority neighborhoods to ruin.
Today, predatory lending is one of the greatest threats to families working to achieve financial security. These tactics call for an immediate response to weed out those who engage in or facilitate predatory practices, while allowing legitimate and responsible lenders to continue to provide necessary credit.
As the Committee is aware, however, subprime lending is not synonymous with predatory lending. Moreover, I would ask you to remain mindful of the need for legitimate "subprime" lending. We should be careful that it is not adversely impacted by efforts directed at predators.
The subprime lending market has rapidly grown from a $20 billion business in 1993 to a $150 billion business in 1998, and all indications are that it will continue to expand. The enormous growth of subprime lending has created a valuable new source of loans for creditstrapped borrowers. Although these loans have helped many in an underserved market, the outcome for an increasing number of consumers has been negative.
On a scale where "A" represents prime, or the best credit rating, the subprime category ranges downward from A-minus to B, C and D. Borrowers pay more for subprime mortgages in the form of higher interest rates and fees. Lenders claim this higher consumer price tag is justified because the risk of default is greater than for prime mortgages. Yet even with an increased risk-, the industry continues to ring up hefty profits and the number of lenders offering subprime products is growing.
Some have suggested that subprime lending is unnecessary. They contend that if an individual does not have good credit then the individual should not borrow more money. But as we all know, life is never that simple. Even hard working, good people can have impaired credit, and even individuals with impaired credit have financial needs. They should not be doomed to a financial caste system, one that both stigmatizes and permanently defines their financial status as less than "A."
Until a decade ago, consumers with blemishes on their credit record faced little hope of finding a new mortgage or refinancing an existing one at reasonable rates. Without legitimate subprime loans, those experiencing temporary financial difficulties could lose their homes and even sink further into red ink or even bankruptcy.
Moreover, too many communities continue to be left behind despite the record economic boom. Many communities were "red-lined," when the nation's leading financial institutions either ignored or abandoned inner city and rural neighborhoods. And, regrettably, as I discussed earlier, predators are filling that void - the payday loan sharks; the check-cashing outlets; and the infamous finance companies.
Clearly there is a need for better access to credit at reasonable rates, and legitimate subprime lending serves this market. I feel strongly that legitimate subprime lending must continue. I am concerned that if subprime lending is eliminated, we will go back to the days when the only source of money available to many inner-city residents was from finance companies, whose rates are often higher than even predatory mortgage lenders. It was not long ago that these loan sharks walked through neighborhoods on Fridays and Saturdays collecting their payments on a weekly basis and raising havoc for many families. We do not want to see this again. However, predatory lending is never acceptable, and it must be eradicated at all costs.
Believing that there may have been an opportunity for a voluntary response to the predatory lending crisis, several national leaders within the prime and subprime lending industry, as well as the secondary market, came together last year with civil rights, housing, and community advocates in an attempt to synthesize a common set of "best practices" and selfpolicing guidelines. Although the group achieved consensus on a number of the guidelines, several tough issues remained unresolved. These points of controversy surrounded such issues as prepayment penalties, credit life insurance, and loan terms and fees, which go to the very essence of the practice by contributing to the equity stripping that can cause homeowners to lose the wealth they spend a lifetime building. In the end, we failed to achieve a consensus within our working group largely because industry representatives believed they could be insulated politically from mandatory compliance of federal legislation.
Given the industry's general reluctance to grapple with these tough issues on a voluntary basis, it seems clear that only a mandatory approach will result in a significant reduction in predatory lending practices.
Direct Action Has Led to Changes, But More is Needed
At the outset, I think it is important to recognize that many persons and organizations have been actively combating predatory lending practices, and with some success. I give credit to Maude Hurd and her colleagues at ACORN who have been able to persuade certain lenders to eliminate products like single premium credit life insurance. I think Martin Eakes of Self Help, who testified before the committee yesterday, should also be recognized for his efforts in crafting a comprehensive legislative package in North Carolina, the first such measure among the states.
These groups, including the National Community Reinvestment Coalition and others you have heard from in these hearings have forced real change. But they need help.
Recent investigations by federal and state regulatory enforcement agencies, as well as a series of lawsuits, indicate that lending abuses are both widespread and increasing in number. LCCR is therefore pleased to see that regulators are increasingly targeting their efforts against predatory practices. For example, we note that the Federal Trade Commission (FTC) has taken several actions aimed at predatory actions. These include a lawsuit filed against First Alliance Mortgage that alleges a series of deceptive marketing practices by the company, including a marketing script designed to hide the trust cost of loans to the, borrower.
More recently, the FTC filed a comprehensive complaint against the Associates First Capital alleging violations of a variety of laws including the FTC Act, the Truth in Lending Act, and the Equal Credit Opportunity Act. Among other things, the suit claims that Associates made false payment savings claims, packed loans with credit insurance, and engaged in unfair collection activities.
In addition to the activity at the federal level, various states Attorneys General have also been active in this area and I know the issue is of great concern to them.
Many have observed that certain practices cited as predatory are already prohibited by existing law. I agree, and therefore urge regulatory agencies to step up their efforts to identify and take action against predatory practices. At a minimum, this should include increased efforts to ensure lenders are fully in compliance with HOEPA requirements, particularly the prohibition on lending without regard to repayment ability. In addition, we strongly support continued efforts to combat unfair and deceptive acts and practices by predatory lenders.
State Legislation Has Addressed Some Practices
I think much can be learned from the actions of state legislators and regulatory agencies. At last count, roughly 30 measures to address predatory lending have been proposed and more than a dozen have been enacted. The first of these was the North Carolina statute enacted in July of 1999, that Martin Eakes has described to the Committee. Following this statute, a number of other statutes, regulations and ordinances have been adopted, several of which are summarized below.
Connecticut H.B. 6131 was signed into law in May of 2001 and is effective on October 1, 2000. The new statute addresses a variety of predatory lending concerns by prohibiting the following provisions in high cost loans agreements: (i) balloon payments in mortgages with a term of less than seven years, (ii) negative amortization, (iii) a payment schedule that consolidates more than two periodic payments and pays them in advance from the proceeds; (iv) an increase in the interest rate after default or default charges that are more than five percent of the amount in default; (v) unfavorable interest rebate methods; (vi) certain prepayment penalties; (vii) mandatory arbitration clauses or waivers of participation in a class action, and (viii) a call provision allowing the lender, in its sole discretion, to accelerate the indebtedness.
In addition to these prohibitions, the statute addresses certain lending practices by prohibiting: (i) payment to a home improvement contractor from the proceeds of the loan except under certain conditions; (ii) sale or assignment of the loan without notice to the purchaser or assignee that the loan is subject to the act; (iii) prepaid finance charges (which may include charges on earlier loans by the same lender) that exceed the greater of five percent of the principal amount of the loan or $2,000; (iv) certain modification or renewal fees; (v) lending without regard to repayment ability; (vi) advertising payment reductions without also disclosing that a loan may increase the number of monthly debt payments and the aggregate amount paid by the borrower over the term of the loan; (vii) recommending or encouraging default on an existing loan prior; (viii) refinancings that do not provide a benefit to the borrower; (ix) making a loan with an interest rate that is unconscionable, and (x) charging the borrower fees for services that are not actually performed or which are not bona fide and reasonable.
... City of Chicago
Chicago's predatory lending ordinance was effective November 13, 2000. It requires an institution wishing to hold city funds to submit a pledge affirming that neither it nor any of its affiliates is or will become a predatory lender, and provides that institutions determined by Chicago chief financial officer or city comptroller to be predatory lenders are prohibited from being designated as a depository for city funds and from being awarded city contracts. Cook County also has enacted an ordinance closely modeled to the one in Chicago.
Under the Chicago ordinance, a loan is predatory if its meets an APR or points and fees threshold and contains any of the following: (i) fraudulent or deceptive marketing and sales efforts to sell threshold loans (loan that meets the APR or points and fees threshold to be predatory but does not contain one of the enumerated triggering criteria); (ii) certain prepayment penalties; (iii) certain balloon payments; (iv) loan flipping, i.e. the refinancing and charging of additional points, charges or other costs within a 24-month period after the refinanced loan was made, unless such refinancing results in a tangible net benefit to the borrower; (v) negative amortization; (vi) financing points and fees in excess of 6% of the loan amount; (vii) Financing single premium credit life, credit disability, credit unemployment, or any other life or health insurance, without providing certain disclosures; (viii) lending without due regard for repayment ability; (ix) payment by a lender to a home improvement contractor from the loan proceeds, unless the payment instrument is payable to the borrower or jointly to the borrower and the contractor, or a third-party escrow; (x) payments to home improvement contractors that have been adjudged to have engaged in deceptive practices.
... District of Columbia
The District of Columbia has amended its foreclosure law, effective August 31, 2001 or 60 days after the effective date of rules promulgated by the mayor, to address predatory practices. In summary, the amendment prohibits: (i) making "home loans" unless lenders
66 reasonably believe" the obligors have the ability to repay the loan; (ii) financing single premium credit insurance; (iii) refinancings that do not have a reasonable, tangible net benefit to the borrower; (iv) recommending or encouraging default on any existing debt that is being refinanced; (v) making, brokering or arranging a "home loan" that is based on the inaccurate or improper use of a borrower's credit score and thereby results in a loan with higher fees or interest rates than are usual and customary; (vi) charging unconscionable points, fees and finance charges on a "home loan; (vii) post-default interest; (viii) charging fees for services not actually performed or which are otherwise "unconscionable;" (ix) failing to provide certain disclosures; (x) requiring waivers of the protections of the Predatory Lending Law; (x) financing certain points and fees on certain refinancings; and (xi) certain balloon payments.
The State of Illinois has enacted a predatory lending law that was effective on May 17, 2001. The Illinois law prohibits: (i) certain balloon payments; (ii) negative amortization; (iii) disbursements directly to home improvement contractors; (iv) financing "points and fees," in excess of 6% of the total loan amount; (v) charging points and fees on certain refinancings unless the refinancing results in a financial benefit to the borrower; (vi) loan amounts that exceed the value of the property securing the loan plus reasonable closing costs; (vii) certain prepayment penalties; (viii) accepting a fee or charge for a residential mortgage loan application unless there is a reasonable likelihood that a loan commitment will be issued for such loan for the amount, term, rate charges, or other conditions set forth in the loan application and applicable disclosures and documentation, and that the loan has a reasonable likelihood of being repaid by the applicantbased on his/her ability to repay; (ix) lending based on unverified income; (x) financing of single premium credit life, credit disability, credit unemployment, or any other credit life or health insurance; and (xi) fraudulent or deceptive acts or practices in the making of a loan, including deceptive marketing and sales efforts.
In addition, the statute requires lenders to: (i) provide notices regarding homeownership counseling and to forbear from foreclosure when certain counseling steps have been taken; and (ii) report default and foreclosure data to regulators.
Massachusetts adopted regulations that were effective on March 22, 2001. Those regulations prohibit the following in high cost loans: (i) certain balloon payments; (ii) negative amortization; (iii) certain advance payments; (iv) post-default interest rates; (v) unfavorable interest rebate calculations; (vi) certain prepayment penalties; (vii) financing points and fees in an amount that exceeds five percent (5%) of the principal amount of a loan, or of additional proceeds received by the borrower in connection with the refinancing; (viii) charging points and fees on some refinancings; (ix) "packing" of certain insurance products or unrelated goods or services; (x) recommending or encouraging default or further default on loans that are being refinanced; (xi) advertising payment savings without also noting that the "high cost home loan" will increase both a borrower's aggregate number of monthly debt payments and the aggregate amount paid by a borrower over the term of the "high cost home loan;" (xii) unconscionable rates and terms; (xiii) charging for services that are not actually performed, or which bear no reasonable relationship to the value of the services actually performed; (xiv) requiring a mandatory arbitration clause or waiver of participation in class actions that is oppressive, unfair, unconscionable, or substantially in derogation of the rights of consumers; (xv) failing to report both favorable and unfavorable payment history of the borrower to a nationally recognized consumer credit bureau at least annually if the creditor regularly reports information to a credit bureau; (xvi) single premium credit insurance, including credit life, debt cancellation; (xvii) call provisions; and (xviii) modification or deferral fees.
Massachusetts also requires credit counseling for any borrower 60 years of age or more. The counseling must include instruction on high cost home loans. Other borrowers must receive a notice that credit counseling is available.
... New York
In June of 2000, the New York State Banking Department adopted Part 41 of the General Regulations of the Banking Board. This regulation, which was effective in the fall of 2000, was designed to protect consumers and the equity they have invested in their homes by prohibiting abusive practices and requiring additional disclosures to consumers. Part 41 sets lower thresholds than the federal HOEPA statute, covering loans where the APR is greater than eight or nine percentage points over US Treasury securities, depending on lien priority, or where the total points and fees exceed either five percent of the loan amount.
The regulations prohibit lending without regard to repayment ability and establish a safe harbor for loans where the borrower's total debt to income ratio does not exceed 50%. The regulations address "flipping" by only allowing a lender to charge points and fees if two years have passed since the last refinancing or on new money that is advanced. The regulations also limit financing of points and fees to a total of 5 percent and require reporting of borrower's credit history. The regulations prohibit (i) "packing" of credit insurance or other products without the informed consent of the borrower; (ii) call provisions that allow lenders to unilaterally terminate loans absent default, sale or bankruptcy; (iii) negative amortization; (iv) balloon payments within the first seven years; and (v) oppressive mandatory arbitration clauses.
Finally, Part 41 requires additional disclosures to borrowers, including the statement "The loan which will be offered to you is not necessarily the least expensive loan available to you and you are advised to shop around to determine comparative interest rates, points and other fees and charges."
Pennsylvania has recently enacted predatory lending legislation that prohibits a variety of practices. These include: (i) fraudulent or deceptive acts or practices, including fraudulent or deceptive marketing and sales effort; (ii) refinancings that do not provide designated benefits to borrowers (iii) certain balloon payments; (iv) call provisions; (v) post-default interest rates; (vi) negative amortization; (vii) excessive points and fees; (viii) certain advance payments; (ix) modification or deferral fees; (x) certain prepayment penalties; (xi) certain arbitration clauses; (xii) modification or deferral fees; (xiii) certain prepayment penalties; (xiv) lending without home loan counseling; and (xv) lending without due regard to repayment ability.
Texas has enacted predatory lending prohibitions that are effective on September 1, 2001. Among other things, the Texas law prohibits: (i) certain refinancings that do not result in a lower interest rate and a lower amount of points and fees than the original loan or is a restructure to avoid foreclosure; (ii) certain credit insurance products unless informed consent is obtained from the borrower; (iii) certain balloon payments; (iv) negative amortization; (v) lending without regard to repayment ability; and (vi) certain prepayment penalties.
For certain home loans, the lender must also provide disclosures concerning the availability of credit counseling.
Virginia has enacted provisions that are effective July 1, 2001. These provisions prohibit (i) certain refinancings that do not result in any benefit to the borrower; and (ii) recommending or encouraging a person to default on an existing loan or other debt that is being refinanced.
Federal Legislation is Necessary
While LCCR commends state and local initiatives in this area, we believe they are clearly not enough. First, state legislation may not be sufficiently comprehensive to reach the full range of objectionable practices. For example, while some state and local initiatives impose restrictions on single-premium credit life insurance, others do not. This, of course, leaves gaps in protection even for citizens in some states that have enacted legislation. Second, while measures have been enacted in some states, the majority of states have not enacted predatory lending legislation. For this reason, LCCR supports the enactment of federal legislation, of the sort that has been proposed by the Chairman, to fill these gaps.
The Predatory Lending Consumer Protection Act of 2001 contains key protections against the types of abusive practices that have been so devastating to minority and low-income homeowners. They include the following: i) Restrictions on financing of points and fees for HOEPA loans. The bill restricts a creditor from directly or indirectly financing any portion of the points, fees or other charges greater than 3% of the total sum of the loan, or $600; ii) Limitation on the payment of prepayment penalties for HOEPA loans. The bill prohibits the lender from imposing prepayment penalties after the initial 24 month period of the loan. During the first 24 months of a loan, prepayment penalties are limited to the difference in the amount of
closing costs and fees financed and 3% of the total loan amount; and iii) Limitation on single premium credit insurance for HOEPA loans. The bill would prohibit the up-front payment or financing of credit life, credit disability or credit unemployment insurance on a single premium basis. However, borrowers are free to purchase such insurance with the regular mortgage payment on a periodic basis, provided that it is a separate transaction that can be canceled at any time.
The Leadership Conference strongly supports the Predatory Lending Consumer Protection Act of 2001 and urges its swift enactment.
Let me finish where I began. "Why is subprime lending -- why is predatory lending -- a civil rights issue?" The answer can be found in America's ongoing search for equal opportunity. After many years of difficult and sometimes bloody struggle, our nation and the first generation of America's civil rights movement ended legal segregation. However, our work is far from finished. Today's struggle involves making equal opportunity a reality for all. Predatory lending is a cancer on the financial health of our communities. It must be stopped.
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