Report on predatory lending recommends swift action by Congress, regulators

WASHINGTON-Taking advantage of the poor and uneducated to the point of making them homeless as a standard business practice would seem to be something ethical lenders and investors would avoid. And targeting low-income neighborhoods, especially African-American communities, in order to strip homeowners of the equity in their homes might be morally repugnant to a credit unionist- but neither of these things is illegal. Welcome to the predatory mortgage market, where unscrupulous lenders issue foreclosure notices, rack up profits for themselves and their Wall Street backers while regulatory agencies take little or no action against them. According to the recently released Treasury Department/ Housing and Urban Development joint study on predatory lending, such action is long overdue both in applying existing law to stem such inequities and in seeking more expansive legislation and regulatory oversight to prevent it. The Task Force Forums held by HUD showed that "minorities, women and the elderly bear the brunt of abusive mortgage lending practices, particularly in predominantly minority or low-income neighborhoods that do not have access to mainstream sources of credit." Secretary Cuomo said: "Predatory lenders are greedily devouring families' life savings and destroying good neighborhoods all across the country. We heard horror stories at our forums around the country about the suffering these lenders have caused, and Members of Congress have heard the same stories. We ask Congress to join us and move swiftly to give American homebuyers the protection they need from predatory lenders." To ensure that the potential "civil rights implications" of these practices is investigated, the report recommended that congress approve funding to enforce fair lending principles In examining the subprime lending "pipeline" however, the report concedes that this area of the market is "much more complicated than the simple interaction between a borrower and a lender." It can involve more than a half-dozen types of participants on the borrower side alone. At the other end of the pipeline are the ultimate providers of funds. It is at this source that subprime and predatory practices collide, making it more difficult to spot the sharks. Providers/backers include depository institutions, capital markets that lend to financial institutions and capital market investors who buy subprime mortgages by purchasing asset-backed securities. So, there is the thread that winds through the pipeline from the cash-poor, house-rich, black widow bamboozled by the home improvement con artist, who works in tandem with a scheming mortgage broker who sells the mortgage to the finance company who packages a bunch of them together who sells them to a Wall Street firm that issues subprime securities that are bought by... John Q. Public. With some 51% of Americans investing in stocks, bonds and mutual funds, either directly or through their employer's 401 (k), the true source of predatory mortgage funding is people who likely do not know what is in their own portfolio As the report states, "the ultimate source of funds includes depositors, pension funds, mutual funds and other investors (both institutions and individuals)." While noting that not all subprime lending is predatory, the report states that predatory practices are more often found in minority areas, specifically, three-times more likely. Nationwide, subprime refinances are 11% of the market, but in low-income areas, they constitute 26%. In mostly black neighborhoods, subprime refinances were 51% in 1998, compared to 9% in white neighborhoods. Most notably, these disparities still exist if " if homeowners in black and white neighborhoods are compared while controlling for the income of the neighborhood," states the report. After studying the effects of foreclosures in three cities, Chicago, Baltimore and Atlanta, it was found that "growth in mortgage foreclosures paralleled growth in subprime lending." The report's recommendations identified four areas for improvement, including: * Consumer Literacy and Disclosures- Creditors should be required to recommend that high-cost loan applicants avail themselves of home mortgage counseling, disclose credit scores to all borrowers upon request and give borrowers more timely and more accurate information as to loan costs and terms. * Harmful Sales Practices in the Mortgage Market-Practices such as loan "flipping""and lending to borrowers without regard to their ability to repay the loan should be banned. New requirements should be imposed on mortgage brokers to document the appropriateness of a loan for high-cost loan applicants, and lenders who report to credit bureaus should be required to provide "full-file" payment history for their mortgage customers. * Abusive Terms and Conditions on High-Cost Loans- Congress should increase the number of borrowers in the subprime market covered by legislative protections; further restrict balloon payments on high-cost loans; restrict prepayment penalties and the financing of points and fees; prohibit mandatory arbitration agreements on high-cost loans; and ban lump-sum credit life insurance and similar products. * Market Structure- Community Reinvestment Act (CRA) credit should be awarded to banks and thrifts that promote borrowers from the subprime to prime mortgage market, and to deny CRA credit to banks and thrifts for the origination or purchase of loans that violate applicable lending laws. The report garnered immediate support for the proponents of fair lending in Congress. Senators Paul Sarbanes, (D- Md.) and Charles Schumer (D-N.Y.). "This report... lays out a roadmap for action by the Congress and the regulators that will help put an end to these abusive practices," said Sarbanes. "We should leave no stone unturned to find and crack down on predatory lenders and Congress must pass the strongest legislation possible to end this pernicious practice," said Schumer. Turning up the heat, ACORN, (Association of Community Organizations for Reform Now) will celebrate its 30th anniversary June 24-26 in Philadelphia and pledged (at press time) to gather over 2000 members from across the country to take action against predatory lending. "With the issuance of this report, there can no longer be any question that predatory lending is a serious problem that calls for serious measures,"said ACORN Executive Director Steven Kest, a member of the HUD/Treasury Task Force on Predatory Lending. "The loan sharks are stripping hard working Americans of their homes. They have been aided by banking regulators who look the other way, and by the moneychangers on wall street who have supplied them with the bait of cash. With this report, the time has come for Congress and the Federal Reserve to go shark fishing. If they don't, then come November, the American people will surely cut bait." ACORN promised to target a predatory lender in the city for a demonstration and vowed to take to the streets of North Philadelphia to make neighborhoods off-limits to predatory lenders or "Shark Free." "We have fought for years to increase reinvestment in our communities only to be victimized by predatory lenders. ACORN will fight to take back our communities from these loan sharks street by street if we have to," promised Maude Hurd, ACORN National President. -caburger@cutimes.com