On March 30, the House Financial Services Subcommittees on Housing and Community Opportunity and Financial Institutions and Consumer Credit held a joint hearing entitled, “Subprime Lending: Defining the Market and its Customers.”
Financial Institutions and Consumer Credit Subcommittee Chair Spencer Bachus (R-AL) explained that many potential homeowners “are unable to qualify for the lowest mortgage rate available in the ‘prime’ market also known as the ‘conventional’ or ‘conforming’ market because they have less than perfect credit or cannot meet some of the tougher underwriting requirements of the prime market. These borrowers, who generally are considered as posing higher risks, rely on the subprime market which offers more customized mortgage products to meet customers’ varying credit needs and situations.”
Housing and Community Opportunity Ranking Member Maxine Waters (D-CA) expressed her concern that predatory lending practices in the subprime market pose “tremendous harm” to minorities, low-income families, and the elderly. “Far too many loans contain abusive rates or conditions,” she stated.
Testifying on behalf of the Mortgage Bankers Association, Teresa Bryce highlighted the benefits of subprime lending. Citing a Department of Housing and Urban Development (HUD) report, she stated, “By providing loans to borrowers who do not meet the credit standards for borrowers in the prime market, subprime lending provides an important service, enabling such borrowers to buy new homes, improve homes, or access the equity in their homes for other purposes.” Ms. Bryce also noted that subprime lending has increased homeownership rates for low-income and minority borrowers. “Millions upon millions of low- and moderate-income families now own a home and have opportunities at building wealth and accessing credit through the availability and growth of the subprime credit market,” she stated. Ms. Bryce explained that state and local anti-predatory laws are “confusing and difficult to decipher,” and impose “onerous restrictions that obstruct lending operations in the subprime market.” She argued that the federal government should impose a national standard that would “encourage competition and….ensure that the entire mortgage lending industry complies with one set of rules while allowing consumers to have a greater grasp of the lending process to keep from falling prey to unscrupulous practices.” Finally, Ms. Bryce stressed the importance of financial literacy, stating, “An educated consumer in a competitive marketplace is the best solution to predatory lending.”
Eric Stein of the Center for Responsible Lending stated, “While by no means are all subprime loans predatory, most predatory home loans are subprime.” He explained that predatory lenders in subprime markets strip equity away from homeowners through excessive fees financed in the loan; overcharge borrowers through interest rate steering, pricing loans on the basis of perceived financial sophistication instead of risk; and engage in asset-based lending that lead to high foreclosure rates. Arguing that predatory lending practices in subprime markets has had a disproportionate impact on minorities, Mr. Stein said that in 1998 HUD found that subprime loans “are five times more likely in black neighborhoods than in white neighborhoods. Homeowners in high-income black neighborhoods are twice as likely as homeowners in low-income white neighborhoods to have subprime loans.” His explanation for these findings was that some subprime lenders and brokers “provide borrowers with unnecessarily costly loans when they think they can get away with it by steering customers to certain lenders and/or to selected products. In fact, studies show that a significant percentage of subprime borrowers could qualify for mainstream, ‘prime’ loans.” Mr. Stein also noted that there has been a high incidence of home foreclosure among subprime loans in low-income and minority neighborhoods. Arguing that the cost of foreclosure is not borne only by the family who lost their home, he stated, “Foreclosed homes are often a primary source of neighborhood instability in terms of depressed property values and increased crime. Whole communities are affected. Trust in our financial system is eroded, and belief in social mobility is strained.”
Many of the witnesses, including George Butts of the ACORN Housing Corporation of Pennsylvania, offered North Carolina’s anti-predatory lending law as a model for other states. He explained that the law was designed to “deter exorbitant fees and other hidden ways of stripping equity, while encouraging costs to be openly displayed through interest rates.” Mr. Butts cited a June 2003 study by the Center for Community Capitalism at the University of North Carolina that found the number of subprime loans to people with credit scores above 660 declined by 28 percent, while loans by primarily prime lenders increased by 40 percent. “This suggests that people often African-Americans and Latinos who were being steered to subprime loans despite good credit are now getting prime loans, thereby saving thousands of dollars and reducing the risk of foreclosure,” he stated. Before concluding, Mr. Butts warned subcommittee members that federal legislation preempting state predatory lending laws would be “harmful to consumers.”
