Looking forward, we need the federal government to be a lending-industry watchdog, not a lapdog. Step One is to stop predatory lending. The Mortgage Reform and Anti-Predatory Lending Act of 2007, passed by the U.S. House of Representatives in November, contains some useful provisions. It requires lenders to verify applicants’ income and document that borrowers have a reasonable ability to pay — not just at the initial interest rate, but any future rate hike. It puts private mortgage companies and brokers under the umbrella of federal lending regulations, requiring them to be registered and licensed. It would also allow a borrower to modify an illegal loan before being forced into foreclosure. And it permits states to pursue cases against fraud, misrepresentation, false advertising, and civil-rights abuses. Under the bill, wronged borrowers could seek redress from the original lender, even if they’re not in danger of losing their homes.
But under pressure from the banking lobby, the House gutted some of the better parts of the bill. The Mortgage Bankers Association and the American Banking Association lobbyists persuaded legislators to allow lenders to continue the insidious practice of paying an increased fee to brokers for steering borrowers into higher cost subprime mortgages. It also bars borrowers whose predatory loans have been sold on Wall Street from suing investors for relief until the homeowners are facing foreclosure. In effect, it forces borrowers into foreclosure as a condition for asserting their rights.
Under the bill, victims of predatory loans have almost no ability to pursue claims against investment banks and other investors. Wall Street and the big players in the mortgage market won’t be held accountable for buying abusive loans. Borrowers who were ripped off should be encouraged to sue Wall Street firms in state court for relief.
A sweeping bill introduced in December by Sen. Chris Dodd (D-Conn.), chairman of the Senate Banking Committee, closes many of the loopholes in the House bill by adding more consumer protections and industry penalties. His bill, the Homeownership Preservation and Protection Act of 2007, makes Wall Street and other investors liable for illegal practices of mortgage brokers and lenders. Unlike existing law, which puts the burden on the borrower to identify the broker or lender who made the original deal, Dodd’s bill allows the borrower to sue the current mortgage-holder. It would prohibit lenders from steering borrowers toward more expensive loans and from influencing an appraiser’s value of a house. It requires that lenders confirm that a borrower can afford to pay an adjustable-rate mortgage after the rate jumps, and that loans provide a net tangible benefit to the borrower. It also prohibits prepayment penalties on subprime loans.
Lobbyists for the lending industry will certainly try to weaken the Dodd bill, just as they eviscerated key components of the House bill. We can’t expect a good bill to emerge from Congress this year.
The Job for the Next Congress
To prevent the current crisis from getting worse—and to avoid future crises—the next Congress needs to take much bolder action to rein in abusive mortgage lending. The House and Senate should focus on strengthening nonprofit lending institutions to serve the credit needs of high-risk borrowers. Like the old S&L companies, these nonprofit lenders are highly regulated and devoted entirely to helping people purchase homes with transparent, stable loans.
Nonprofit lenders do better than their for-profit counterparts at helping working-class families become homeowners without putting them at risk. One such lender, Neighborhood Housing Services of America (NHS), a federally chartered nonprofit group with chapters in every American urban area, makes 90 percent of its loans to low- and moderate-income homebuyers—the so-called risky borrowers who only qualify for subprime loans in the private market.
About 54 percent of NHS’ borrowers are minority households. As of June 30, 2007, it has made some 3,000 loans totaling $205 million to these borrowers who otherwise would have been forced into the private subprime market. These NHS borrowers don’t have the same mortgage problems as subprime borrowers. In fact, NHS’s delinquency rate is only 3.34 percent—well below the national rate of 14.5 percent for private-sector subprime loans. The same is true for foreclosures. Only one half of one percent of NHS loans went into foreclosure during the second quarter of 2007, one-fifth the foreclosure rate (2.45 percent) among private lenders.
NHS succeeds for two reasons. It has an effective mortgage education program conducted by its own loan counselors. It requires every borrower to participate in its counseling program before and after a loan is made. Moreover, NHS makes no adjustable-rate loans.
The mortgage bankers and brokers who profited handsomely from the subprime market and predatory lending are working overtime to protect their profits by lobbying in state capitals and in Washington to keep government off their backs. The banking industry, of course, has repeatedly warned that any restrictions on their behavior will close needy people out of the home-buying market. Its lobbyists insisted that the Bush plan be completely voluntary.
This isn’t surprising, considering who was at the negotiating table when the administration forged the plan. The key players were the mortgage-service companies (who collect the homeowner’s monthly payments, or foreclose when they fall behind) and groups representing investors holding the mortgages, dominated by Wall Street banks. The Bush approach reflected both groups’ calculation that for some loans they would do better temporarily freezing interest rates than foreclosing. Groups who represent consumers—ACORN, NCRC, the Greenlining Institute, Neighborhood Housing Services, and the Center for Responsible Lending—were not invited to the negotiation.
None of the Republican candidates for president offered any proposals to seriously address the predatory lending crisis, while the Democratic contenders all took forceful positions to protect homeowners facing foreclosure and add sensible regulation to the financial-services industry. Before he dropped out of the race, John Edwards led the Democrats in highlighting the urgency of the foreclosure debacle. He called for a seven-year freeze on mortgage rates. Echoing Edwards, Hillary Clinton proposes a five-year freeze and a 90-day moratorium on foreclosures. Barack Obama supports a $10-billion foreclosure-prevention fund to help borrowers obtain lower-cost, fixed-rate mortgages. Both Clinton and Obama are co-sponsors of the Dodd bill.
The best hope for real reform rests with a Democratic Party victory in November, securing a majority in Congress as well as the presidency. And after an electoral win, victorious Democrats must make sure that consumer groups are full participants in shaping lending legislation.
Wouldn’t it be nice to hear the next president tell the American people that the era of unregulated so-called free-market banking greed and sleaze is over?