Good morning. Thank you for the chance to appear before you today. My name is Judith Kennedy. I am President of the National Association of Affordable Housing Lenders, or NAAHL, the national association devoted to supporting private capital investment in low- and moderate-income communities. NAAHL represents 200 organizations, including 85 insured depository institutions and more than 800 individuals. Formed more than eleven years ago, NAAHLís members are the pioneering practitioners of community investment. They include banks, corporations, loan consortia, financial intermediaries, pension funds, foundations, local and national nonprofits, public agencies and allied professionals.
Ever since NAAHLís 1999 Chicago conference, where we heard about predatorsí activities in that city, we have been convinced that if we are not part of the solution to predatory lending, we are a part of the problem. It is clear that while we remain committed to increasing the flow of capital into underserved communities, we must be equally concerned about access to capital on appropriate terms.
In March we sponsored a symposium that brought together experts on this issue: regulators, researchers, advocates, for-profit and non-profit lenders and secondary market participants. We were pleased to include as speakers Martin Eakes of Self Help, who testified before you yesterday, and Margot Saunders of the National Consumer Law Center. NAAHLís goal was to accelerate progress in stopping the victimization that strips equity from peoplesí homes and, all too often, triggers foreclosures. This victimization is not only wrong in itself, but as the Mayor of Chicago succinctly put it: "Itís all down the drain if we canít stabilize the communities that were stable until these foreclosures started to happen."
The symposium was very productive, and today we are releasing the summary of these proceedings which is attached to my statement. Our findings are as follows.
First, a profile of predatory lending emerged. Loan flipping, home improvement scams, asset-based and unaffordable mortgage loans, repetitive financings with no borrower benefit, packing single premium credit life insurance and other products into the loan amount, all of these can strip equity and trigger foreclosures.
Second, more needs to be done at the federal level. More is, of course, being done, and as New York State Banking Commissioner Elizabeth McCaul and Chairman Sarbanes have both emphasized, it is critical to balance the need for credit with the need to end abuses. NAAHL, like many others, has commented on the Federal Reserveís proposals in this area. But as the Federal Reserve has pointed out, a significant amount of mortgage lending is not covered by a federal framework. For example, Governor Gramlich reported that only about 30% of all subprime loans are made by depository institutions that have periodic exams. Even if the Fed were to do periodic compliance exams of the subsidiaries of financial holding companies, that would only increase the percentage to about 40%.
It is not surprising, then, that of the 21 completed Federal Trade Commission investigations into fair lending and consumer compliance violations, 19 involved independent mortgage companies and 2 involved subsidiaries of financial holding companies. None were Federally examined.
If the Fedís recent proposal to expand reporting under the Home Mortgage Disclosure Act to more lenders is adopted, it will encompass only those whose mortgage lending exceeds $50 million per year. Many of the proposed changes to HMDA will only create a more uneven playing field by putting additional burden and costs on responsible lenders while the worst lenders go unexamined.
To stop the predators, we need to close the barn doors on examination and reporting. A level playing field in oversight and enforcement is key. Insured Depository Institutions (IDI) engaging in the best practices in the subprime lending market do extensive due diligence of their brokers to ensure fair lending practices. They maintain data on their loans and are rigorously examined by the bank regulatory agencies.
But the majority of lenders are not subject to the same regulatory oversight, do not have the same level of compliance management, and often do not even file HMDA reports. If they do file, there is very little oversight of their disclosure. In a town with no sheriff, the bandits are in charge. Unscrupulous brokers who are rejected by legitimate lenders, simply go to others who have no knowledge of the loan terms, or reputational or compliance concerns about funding predatory loans.
Some states like New York are conducting vigorous exams of their licensed mortgage companies, but unfortunately many states lack sufficient resources. Some states and municipalities believe that stricter laws and ordinances will solve the problem of predatory practices. Many NAAHL members believe that the plethora of local laws and ordinances may only drive out the responsible lenders who will choose not to offer what may become "high cost loans" under a crazy quilt of new rate and fee restrictions.
Third, our symposium also confirmed that subprime lending is an important source of home finance. For many consumers, subprime loans may be the only way available to finance the American dream Ė a home of their own. And many, many programs exist, in both the private and public sectors, to help subprime borrowers achieve prime borrower status --- a worthy financial goal. Cutting off access to credit on appropriate terms would not be constructive. As OTS Director Ellen Seidman has warned, legislation must be very clear so as not to chill " the operation of the legitimate subprime market. The flow of responsibly delivered credit to underserved markets is critical to their survival and any legislative or enforcement solutionsÖmust proceed with this caution in mind."
Fourth, we also heard that vigorous enforcement, at all levels of government, works. We heard from people actively involved in combating predatory lending at the city and state levels. Increased government investigations, criminal prosecutions to the fullest extent of the law, and revocations of mortgage brokersí licenses all help to eradicate predatory lending. State bank supervisors coordinating across state lines on a single company and its practices will also accelerate progress.
Fifth, consumer education is key. Our experts recommend that financial literacy education must begin early, down to and including the high school level. The NAAHL symposium also confirmed that both the public and private sectors, on all levels, are undertaking consumer education and outreach campaigns, to stop predatory lending before it even happens, with good results. For example, New York residents can easily use state government information to shop for competitive mortgage rates. Chicago borrowers can call 1-866-SAVE HOME to receive counseling and legal assistance, funded by banks and city government. Lenders across the country fund financial literacy programs to help borrowers with debt management, the implications of signing contracts, and tips on how to avoid stalkers who offer financing on predatory terms.
Increased Federal resources for targeted counseling in neighborhoods that are vulnerable to predators could greatly extend these efforts. Education may not solve the entire problem. As Martin Eakes points out, "the Department of Education says that 24 percent of adult Americans are illiterate." But counseling can go a long way. As Governor Gramlich proposed, "the best defense is if people really know what they are doing."
Overall, our symposium confirmed once again that predatory lending is a complex issue requiring a multi-faceted solution. It takes a combination of responses from both the public and private sectors, including a broader Federal framework establishing a level playing field for legitimate lenders, more vigorous enforcement of existing laws, and more resources devoted to consumer education to deal with it.
But, as our closing speaker, the Honorable Mel Martinez, Secretary of the Department of Housing and Urban Development put it, "juntos podemos": together we can.
As the President of an organization whose members have spent years trying to increase the flow of private capital into underserved communities, I say, "together we must." Equity stripping, foreclosure triggering loans lead to family tragedies, foreclosures and destabilized neighborhoods. They must be stopped. We at NAAHL commit to help you in any way we can.
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