The Bush administration wants to add 5.5 million minority families to the ranks of homeowners by 2010 - but it may not appreciate the challenges that predatory lenders pose to that goal.
In a recent speech before the Conference of State Bank Supervisors, Wayne Abernathy, the Treasury Department's assistant secretary for financial institutions, said anti-predator laws diminish the number of home loans available to consumers.
While the emphasis is now on the burdens on lenders, what has been lost in the debate is the much greater burden on the tens of thousands of families whose wealth is being bled away by equity-stripping fees and foreclosure.
Recent studies by regulatory agencies and universities slice and dice the data to draw the conclusion that anti-predator laws reduce the number of subprime loans. These studies imply that any restriction of credit amounts to an assault on the vital free enterprise system. But the studies do not explore whether possible restrictions of credit are actually the result of fewer predatory loans victimizing borrowers.
A few of the studies have the integrity to say that their data lacks information on loan terms and conditions - meaning that they cannot determine whether fewer predatory loans are in fact reaching borrowers. But none of them has the honesty to say that Congress and the Federal Reserve Board need to lift the veil of secrecy and mandate the collection of interest rates, fees, and terms and conditions in the publicly available home loan data.
In his speech to state supervisors Mr. Abernathy rightfully applauds the Office of the Comptroller of the Currency for discouraging abusive practices, but the President's minority homeownership goals would be better served with a call for outlawing such practices.
Mr. Abernathy also draws a false distinction between practice and product, and urges legislators to refrain from outlawing products. The OCC has declared in advisory letters to nationally chartered banks that the practice of lending beyond repayment ability is the core of predatory lending. That is why anti-predator laws around the country have outlawed making loans based on the collateral in the home, not on the ability of the borrower to repay the loan. Anti-predator laws focus on practices.
Many anti-predator laws, including the federal Home Ownership and Equity Protection Act, outlaw short-term balloon payments on very high interest rate loans. Contrary to Mr. Abernathy's assertions, these laws are not outlawing products on a widespread basis. Instead, they are making practices illegal that are abusive and strip wealth.
Short-term balloon payments on high-cost loans lead to flipping. When a panicked borrower comes close to facing that balloon payment, the lender will convince the borrower to refinance, often at higher rates and larger fees.
Two studies illustrate the fixation on loan supply without probing terms and conditions of loans before and after an anti-predator law.
In September of 2002, Peter Nigro of the OCC and Keith Harvey of Boise State University concluded that North Carolina's anti-predator law does not choke off access to subprime loans in a statistically significant manner.
The same two authors then issued another study concluding that the Chicago and Philadelphia laws reduced access to subprime loans. The latter study, however, does not carefully consider the fact that this impact was felt over the short period of one year, and that many lenders boldly threatened the cities and then pulled out.
This was a self-fulfilling prophecy; declare a law ruinous and then flee. This trick is much harder to pull off on a state level since most lenders do not want to lose access to that much market share.
While recent studies examine the aftershocks of anti-predator law in painstaking detail, they do not scrutinize the nature of high-cost lending.
My group's "Best and Worst Lenders" study finds, after controlling for housing costs and income levels, that subprime lending surges in minority neighborhoods as the level of segregation increases. In other words, the more segregated a minority community is, the more high-cost loans it receives, regardless of its economic wherewithal.
This sounds more like aggressive targeting, rather than providing traditionally underserved borrowers with wide product choice. It is no coincidence that Freddie Mac analysts found that two-thirds of subprime borrowers were dissatisfied with their mortgages while three-quarters of prime borrowers were content with theirs.
According to academic studies discussed at the recent Federal Reserve Board conference on community development and financial education, the Community Reinvestment Act stimulated an increase in prime home mortgage lending to low- and moderate-income borrowers and communities. Meanwhile, a large body of other research has revealed that subprime lenders have saturated minority and low- and moderate-income communities with refinance loans.
Subprime lenders are predominantly refinance specialists, and are not responsible for the homeownership boom. The prime mortgage loans providing increased homeownership opportunities did not contain the short-term balloon payments, single-premium credit insurance, steep prepayment penalties, and other onerous practices. These were present in the predatory subset of subprime refinance loans.
Anti-predator laws are necessary to preserve the gains in homeownership achieved in the 1990s through prime CRA lending. Anti-predator laws are necessary to protect the new minority homeowners served by Bush administration initiatives.
The National Community Reinvestment Coalition invites the administration on a bipartisan endeavor. We ask it to work with members of Congress to enhance the publicly available home loan data to include loan costs and terms. We believe that after studying the new home loan data the administration would become a steadfast proponent of a strong and comprehensive federal anti-predator law.
