Black Lawmakers, Others Want Federal Reserve to Address Predatory Lending

By Robert "Rob" Redding Jr.

Publisher

May 17, 2007, 9:15 p.m. - Several members of the U.S. Congress yesterday requested the Federal Reserve Board "curb irresponsible sub-prime lending practices that have led to the growing crisis of foreclosures in the United States."

The members sent a letter to Ben Bernanke, chairman of the Board of Governors of the Federal Reserve System, urging the Federal Reserve Board to use its authority, under the Home Ownership Equity Protection Act of 1994 (HOEPA), to issue rules that prohibit unfair and deceptive practices in the issuance of home mortgage loans.

"We all have an interest in helping American families purchase and keep their own homes," said Cummings, a Maryland Democrat.  "I am encouraged that Chairman Bernanke today acknowledged the current crisis of mortgage delinquencies and foreclosures affecting our nation and that the Federal Reserve Board is undertaking a review of the subprime mortgage market, which is a major cause of this growing problem.  However, action must take place now. Millions of families have already lost their homes and this epidemic will only get worse without swift regulatory intervention."

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"Although Chairman Bernanke says abusive mortgage lending practices will not hurt the broader economy," Cummings continued, "I find it impossible to believe that the social and economic future of this nation's communities will not be jeopardized by this trend.  According to the nonprofit Center for Responsible Lending, 20 percent of subprime loans purchased in 2006 will end up in foreclosure. This tragedy not only affects the homeowner, but the surrounding neighborhood also suffers from a drastic decline in home prices due to blight."

Cummings signed the letter along with Donna M. Christensen (D-VI), Yvette D. Clarke (D-NY), Charlie Gonzalez (D-TX), Sheila Jackson-Lee (D-TX), Barbara Lee (D-CA), James P. Moran (D-VA), Linda T. Sanchez (D-CA), and David Scott (D-GA).

A full copy of the letter is attached and pasted below:

Dear Chairman Bernanke:

As Representatives of Congressional Districts that have been disproportionately affected by foreclosures, we are writing to express our concern regarding problems that have developed over the past year in the subprime mortgage market, particularly those created by predatory and abusive lending practices.  Additionally, we are writing to request that the Federal Reserve Board use its authority under the Home Ownership Equity Protection Act of 1994 (HOEPA) to issue rules that prohibit unfair and deceptive practices with home mortgage loans.

As you know, due to historically low mortgage rates, rising home prices, and increased liquidity in the secondary mortgage market, the United States experienced a tremendous housing boom from 2001 to 2006.  While positive economic factors increased home ownership rates, they also led to the growth of the subprime mortgage industry and created opportunities for predatory lending in which unscrupulous lenders have hidden the true cost of subprime loans from vulnerable borrowers.

Over the past few months, it has become increasingly clear that irresponsible subprime lending practices have contributed to a wave of foreclosures that are harming homeowners and rattling the housing market.  According to the Center for Responsible Lending (CRL), an estimated 1 in 5 subprime loans issued in 2005 and 2006 will default.

Although predatory loans and foreclosures are a nationwide concern, subprime mortgage loans are most prevalent in lower-income neighborhoods with high concentrations of minorities.  Research shows that African American and Hispanic borrowers are 30 percent more likely to be steered into the higher-rate, subprime loan market than other borrowers with the same qualifications. In 2005, for instance, 53 percent of loans to African Americans and 37.8 percent of loans to Hispanics were placed in the subprime market. 

While there have been House and Senate hearings to investigate the growing crisis of subprime mortgage loans, we believe that regulators play a vital role in the process.  We are concerned that current regulatory oversight has not kept pace with deteriorating credit standards or the growth of unfair and deceptive lending practices. 

We believe furthermore, that the Federal Reserve Board should use its broad authority under HOEPA to issue regulations that address the problem of predatory lending.  HOEPA expressly states that:

The Board, by regulation or order, shall prohibit acts or practices in connection with (A) mortgage loans that the Board finds to be unfair, deceptive or designed to evade the provisions of the section; and (B) refinancing or mortgage loans that the Board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower.  15 U.S.C. § 1639 (L) (2)

HOEPA clearly mandates action by the Federal Reserve Board.  The Board's use of its authority under the statute is crucial to stemming the tide of predatory lending because any promulgated regulation would apply to both bank and non-bank lenders. 

To address this crisis and to provide important protections, we urge the Board to use its authority under HOEPA to take the following minimum steps:

Require lenders to establish a borrower's ability to repay over the

life of the loan prior to making a mortgage loan;

Restrict the use of low- and no-documentation loans;
Increase disclosure of alternative mortgage products;
Reduce or eliminate the initial fees and prepayment penalties;
Designate the failure to escrow taxes and insurance as an unfair 

      and deceptive practice;

Identify brokers and lenders with high rates of foreclosure; and,
Mandate pre-loan counseling.

 

This does not represent an exhaustive list.  However, quick and decisive action on these items by the Federal Reserve Board under its mandated HOEPA authority would extend important consumer protections to homeowners and buyers.  Moreover, these comprehensive remedies would require that all lenders operate under the same rules. 

Chairman Bernanke, we are encouraged by the fact that the Board will be holding a June 14 hearing under HOEPA to gather information on how best to use its rulemaking authority to curb abusive lending practices in the home mortgage market.  We look forward to reviewing the results of the hearing.

Thank you for your consideration of this important issue.

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