The shift of power in Congress this November was a strong statement by the electorate that they want a government that cares about communities, working-class people and their biggest assets – their homes. Some of the stories we saw leading up to the election were about “mortgage moms” and rising foreclosures. Although the economy was doing well statistically and on paper, many consumers were daunted by declining housing values and stagnant wages, while being over-leveraged in credit card debt and fearing an interest rate reset on their non-traditional mortgages.
Ohio was a microcosm of failed national policies. That state’s foreclosure rate soared in 2005, as regulators and Congress have allowed unscrupulous lenders to undermine homeownership for low-, moderate-and middle-income families with the proliferation of nontraditional mortgages and an unrestrained subprime market. The state is estimated to have the highest foreclosure rate in the nation as it continues to lose jobs overseas and see wages stagnate. Although Ohio responded with a comprehensive anti-predatory lending law this year, it was too late for some families who had already lost their homes, leaving behind many blighted communities.
But the shift in political power has brought hope back to communities. With Congressman Barney Frank (D-MA) as the expected new chair of the House Financial Services Committee, along with his returning Democratic colleagues, Mel Watt and Brad Miller, both of North Carolina, there will be an opportunity to bring forward a bipartisan National Anti-Predatory Lending Bill that will sustain homeownership and put families and communities first. Likewise, the Senate Banking Committee, under the new leadership of Christopher Dodd (D-CT), promises to be receptive to consumer protection legislation.
Protecting our Communities
America has witnessed the scourge of predatory loans stripping the equity and wealth from our communities. Headlines describing the rise in foreclosures, mortgage fraud and rising adjustable rates have become commonplace, but they only begin to tell the whole story. Available national lending data through the Home Mortgage Disclosure Act (HMDA) reveal that 24.7 percent of all conventional single-family first lien loans made in the United States in 2005 were high-cost. Yet while this is a mounting problem for America as a whole, it is an even greater concern for traditionally underserved communities. Racial discrepancies in lending continue to persist, as minorities are more likely to get high-cost loans. Of all loans made to white borrowers in 2005, only 19 percent were high-cost. But a whopping 51.2 percent of all loans made to African-American borrowers and 37.9 percent of all loans made to Hispanic borrowers were high-cost. This raises pressing public policy concerns, as predatory lending is a subset of subprime, or high-cost, lending. Predatory lending is also more likely to occur when subprime lending begins to crowd out prime lending for traditionally underserved communities.
The current federal anti-predatory law, the Homeownership Equity Protection Act (HOEPA), is limited in its ability to provide any meaningful protections for consumers. And absent a national anti-predatory lending bill, states have been left on their own to fight off predatory lenders and high foreclosures in their communities that result from the unrestrained mortgage market and the failure of the regulators and Congress to respond. Today we have only 20 percent of the population covered by seven good state anti-predatory lending laws, with the remaining 80 percent of the population exposed to predatory lenders.
Since the last review of HOEPA by the Federal Reserve Board, the home lending market has evolved to the detriment of borrowers. Subprime lending has become an entrenched force, unregulated mortgage brokers now originate 70 percent of all loans and the recent explosion of toxic (or “exotic”) mortgages are contributing to rising foreclosure rates around the country.
In addition, many southern states such as Mississippi, Louisiana and Alabama (Hurricane-affected states), where the 2005 HMDA data revealed that more than 28 percent of the home lending was subprime, have very few, if any, anti-predatory lending laws. Mississippi had the most high-cost loans, where 37.6 percent of the loans made in the state were subprime.
In recent years the regulatory regime has also tilted towards the industry. The preemptions of strong consumer state law by the Office of the Comptroller of the Currency and Office of Thrift Supervision have been particularly frustrating. Recent court decisions challenging preemption have ruled in favor of the regulators; courts are increasingly unfavorable to consumers.
The confluence of bad regulatory environment, unfavorable court decisions and the hard-fought but still slow development of effective state anti-predatory lending laws inform us that a strategy of fighting to enact an anti-predatory lending bill that covers all of the states may well offer benefits worth trying for.
Community Reinvestment Makeover
With the latest changes in Congress comes the opportunity to shift attention back onto community reinvestment. Passed in 1977, the Community Reinvestment Act (CRA) mandates that banks and thrifts meet the credit needs of all the communities in which they are chartered and from which they take deposits, including those of low and moderate income people. Federal officials examine banks and issue them CRA ratings based upon the number of loans, investments and services they offer to residents these communities. However, in recent years regulatory changes have watered down the CRA. But with a few updates, the CRA could be strengthened to further ensure that traditionally underserved communities have better access to credit and capital.
With such access, families are able to buy homes and start small businesses – and begin to build their wealth and assets. Homeownership is the traditional way for Americans to build wealth and intergenerational wealth. Home equity can be used as a nest egg for retirement, leveraged to finance the start of a small business, send a child to college or help them finance a down payment for their own home.
The incoming Congress should consider reintroducing the CRA Modernization Bill, first brought forward by Congressmen Luis Gutierrez (D-IL) and Thomas Barrett (D-WI) in the 107th Congress. The bill would modernize the CRA to apply to mortgage companies, insurance companies and securities firms, and should also be extended to include large credit unions. Harvard University and Federal Reserve economists have demonstrated that the CRA increases bank lending and investing in working class and minority communities. Likewise, if mortgage companies and insurance firms had CRA requirements, they would provide more loans and policies to traditionally underserved communities.
We also hope to see several enhancements of data disclosures for home and small business lending so that the public can thoroughly assess how banks and other financial institutions are lending to women, minorities and working-class Americans. For example, by knowing the race and gender of small business owners getting loans, we can determine if lenders are making a disproportionate number of loans to one race or gender and ignoring another. Or if credit scores were made available, we could look at borrowers with similar incomes and credit scores (but of different race or ethnicity) and determine if lenders treated them differently. Available data on the price, or APR, of all home loans would also help to assess if certain borrower groups were getting a disproportionate amount of higher-cost loans.
With more data disclosure, it becomes easier to identify predatory lenders, enforce existing fair lending laws and regulations and demand for equal access to credit and capital for all borrowers. And with a national anti-predatory lending bill and a strengthened CRA, minority and lower-income communities would benefit from an increase of safe and sound lending.