On May 24, the House Financial Services Subcommittees on Housing and Community Opportunity and Financial Institutions and Consumer Credit held a joint hearing on abusive mortgage lending practices in the subprime market. The panels examined two legislative proposals to end those practices: the Responsible Lending Act (H.R. 1295) sponsored by Housing and Community Opportunity Subcommittee Chair Robert Ney (R-OH) and the Prohibit Predatory Lending Act (H.R. 1182) sponsored by Rep. Brad Miller (D-CA).
In a press release announcing the hearing, Rep. Ney explained that hearings held during the 108th Congress “clearly demonstrated both the importance of ensuring the continued availability of subprime mortgage credit and the need for a strong new Federal subprime mortgage lending law to provide clear and uniform national rules that protect all borrowers. This year we look forward to building on the progress that was made in the last Congress as we move forward with a legislative effort to address this growing national problem.”
Financial Institutions and Consumer Credit Subcommittee Chair Spencer Bachus (R-AL) stated, “Uniform standards in the marketplace are essential if the primary and secondary markets are to continue to serve as a vital source of liquidity to make mortgages available to homebuyers with less than perfect credit. I am therefore committed to finding ways to put an end to predatory lending while also preserving and promoting access for all homebuyers to affordable credit.”
Testifying on behalf of the National Community Reinvestment Coalition (NCRC), Stella Adams explained that subprime loans “are loans with [interest] rates higher than prevailing rates made to borrowers with credit blemishes. The higher rates compensate lenders for the added risks of lending to borrowers with credit blemishes. While responsible subprime lending serves credit needs, public policy concerns arise when certain groups in the population receive a disproportionate amount of subprime loans.” Ms. Adams said that minorities, women, and low- and moderate-income individuals were the majority of recipients of high-cost loans: “Across the country, African-Americans received 18 percent of the conventional subprime loans but only 6 percent of the conventional prime loans during 2004. In contrast, whites received a greater percentage of prime than subprime loans. Whites received 55.3 percent and 66.4 [percent] of the subprime and prime loans, respectively. Disparities are also present by gender. Females received 36.8 percent of the subprime conventional loans but just 28 percent of the prime conventional loans in NCRC’s sample of 2004 loans. Males, in contrast, received a higher percentage of prime loans (67.5 percent) than subprime loans (59.8 percent).” She also noted that females “received 39.1 percent of subprime home improvement loans, and a lower percentage (32.4 percent) of prime home improvement loans. In contrast, males received a higher percentage of prime than subprime loans. Of all the home improvement loans issued to women, 24 percent were subprime. Just 19.2 percent of all the home improvement loans made to men were subprime.”
Lisa Bouldin-Carter, national executive director of the BorrowSmart Public Education Foundation, highlighted the importance of financial literacy for mortgage borrowers: “Obtaining financial literacy education helps level the playing field so families will understand the impact of the choices they make based on their credit and the loan product they select. Armed with knowledge, they can steer clear of inappropriate loan terms and watch for predatory practices and abusive terms. They can compare loan products to find not only the most affordable loan, but also the loan that best fits their personal circumstances.” She expressed her support for a provision in H.R. 1295 that would authorize $75 million for the establishment of an Office of Housing Counseling within the Department of Housing and Urban Development. In addition, she stated, “I am especially impressed with H.R. 1295’s recognition that homeownership counseling spans the entire homeownership process, including the decision to purchase a home, the selection and purchase of a home, issues arising during or affecting the period of ownership of a home (including refinancing, default, foreclosure, and other financial decisions), and the sale or other disposition of the home. What is also exciting is the certification of software programs that consumers can use with confidence to evaluate different mortgage loan proposals.”
Mortgage Bankers Association (MBA) Chair-Elect Regina Lowrie said that recipients of subprime loans “commonly have low- to moderate income, less cash for down payment and credit histories that range from less-than-perfect to none-at-all. These borrowers include first-time homebuyers, borrowers whose credit has been damaged by divorce or illness, single moms and dads, teachers and firefighters as well as business and professional people who have gone through difficult times but whose credit needs and dreams of homeownership have not abated. Before the advent of this new market, these borrowers were either simply denied the dream of homeownership or, in a very limited number of cases, served exclusively by FHA or other government-subsidized financing.” She stated her support for H.R. 1295 because it “strikes the right balance between providing strong consumer protections and ensuring clear, objective compliance standards to facilitate market competition. In particular, MBA supports the bill’s replacement of the patchwork of state and local laws with a better and more comprehensive uniform national law…The bill’s balanced and objective standards will fairly protect consumers from excessive loan flipping and equity stripping without preventing borrowers from accessing needed credit. And the new disclosures, borrower education, and counseling provisions will also provide greater consumer protections.”
Martin Eakes, CEO of the Self-Help Credit Union and the Center for Responsible Lending (CRL), underscored the harm caused by abusive mortgage practices, explaining that “for most families, the equity owned in their home represents their greatest source of savings. When they lose that equity through an abusive refinance loan, they often lose their best chance to send children to college, start small businesses, weather crises such as unanticipated medical expenses, and enjoy some measures of security in old age. Even worse, because predatory lending can lead to increased foreclosures across a neighborhood, abuses can systematically destroy entire communities.” He explained that many states have already been successful in their attempts to curb predatory lending: “North Carolina was a pioneer in this area, passing the first anti-predatory law of its kind in 1999. Since then, that law has received a great deal of scrutiny. CRL estimates show that the new law saved consumers at least $100 million per year by preventing predatory loan terms that would have been expected to occur in the law’s absence.” In examining federal legislative proposals, Mr. Eakes said that a “meaningful” bill should accomplish the following goals: 1) adopt a definition of “high-cost” loan that captures all major fees, so that abusive loans are included in the definition; 2) prohibit practices such as loan flipping repeated refinances that provide no benefit to borrowers; 3) provide effective protections for high-cost loans; 4) ensure that homeowners’ rights are effective by providing meaningful remedies and the ability to enforce rights when the loan is sold; and 4) allow flexibility for states to address localized and new abuses. Mr. Eakes expressed his support for the Miller bill, H.R. 1182, noting that the bill embodies all the goals he outlined. In addition, he argued that H.R. 1295 “would achieve none of the goals of a meaningful and effective federal bill,” adding, “If implemented, this proposal would fail to protect homebuyers and homeowners against irresponsible lending and, in fact, would allow predatory mortgage lending to proliferate.”
