This story from MarketWatch describes another ugly aspect of subprime lending that is likely to get more press as foreclosures rise: minority groups with credit records that would have qualified them for prime loans were steered to subprime products at a far greater rate than their white counterparts.
And the industry’s defense? Rogue brokers, of course. As one industry spokesman asserted, “Individuals harm consumers not companies.” Has he never heard of Ameriquest, which had to pay a $325 million settlement for deceptive lending? Or Household International, which paid $484 million to settle charges of predatory lending? What about Citigroup, which paid $215 to resolve charges that it engaged in systematic and widespread deceptive and abusive lending practices? And we also have mortgage brokerage firm New Century, which the State of Ohio has charged with with a variety of violations of consumer sales and mortgage brokerage regulations, including making false and misleading statements, accepting loan processing payments even though the company knew it did not have the money to fund them, and failing to act in good faith.
And even in those cases when individuals are preying on minorities, the firms they work for are ultimately responsible for their actions. You can’t give them your business card and then deny accountability.
More than a quarter million black and Hispanic families are expected to lose their homes in the next few years due to foreclosure. For many, the financial trouble will be traceable to a mortgage they should never have been given.
The heads of these households signed up for mortgages that appeared affordable, some with enticingly low starter rates. But what they were really agreeing to were loans with ultimately onerous terms, high costs and prepayment penalties that make refinancing the loan difficult.
The problem is worse for minority borrowers, consumer advocates say, because they were disproportionately pushed into these subprime mortgages even when, in some cases, they qualified for conventional financing. Subprime loans are generally made to those with blemished credit histories.
And the troubles have been exacerbated by a confluence of perilous conditions in the housing market — dropping home prices in many areas, sloppy lending practices and insufficient regulatory oversight.
“For years, civil rights and consumer protection groups have been arguing that the modern subprime mortgage lending system is fundamentally flawed, that countless numbers of irresponsible and abusive loans were being made, and that the consequences for both borrowers and our economy at large would be drastic,” Wade Henderson, chief executive of advocacy coalition Leadership Conference on Civil Rights, recently told a Senate panel.
Henderson and others are particularly concerned about the higher-priced loans made to minorities.
Compared with their white counterparts, African American and Hispanic borrowers were more than 30% more likely to receive a higher rate on many types of loans, even after accounting for differences in risk, according to a 2006 report from the Center for Responsible Lending, a research and policy nonprofit. The Federal Reserve has also observed discrepancies in higher-priced lending across racial and ethnic groups.
“It has long been clear to our groups that America has a separate and unequal lending system, and that African American, Latino and other minority consumers disproportionately secure credit from an unscrupulous and unregulated lending market,” Henderson said.
In 2005 alone, black and Hispanic borrowers took on about 870,000 high-priced loans — with one out of five expected to go into foreclosure, according to CRL. Those loans only include conventional first mortgages for one-to-four family, owner-occupied dwellings. In the prior year, minority groups took on more than 430,000 of these loans.
More teeth needed
A lack of consistent oversight of all industry participants, as well as lax enforcement of laws already on the books, has enabled housing problems for minorities to flourish, critics say.
“Mortgage brokers are the point of entry for most families seeking to buy a home or refinance a mortgage. Too many brokers engage in steering and discriminatory practices,” said David Berenbaum, executive vice president with the National Community Reinvestment Coalition.
In an investigation of large and small mortgage brokerages, white testers were offered better pricing than black or Hispanic testers in the most egregious cases, according to the NCRC. The test, which was performed on small and large mortgage brokers from 2004 to 2006, found a 46% rate of disparate treatment based on race and national origin.
Consumer groups would like to see firmer standards for all industry participants, including mortgage brokers, who have come under intense scrutiny. Brokers originated 72% of subprime loans in the second half of 2006, according to a recent survey from the Mortgage Bankers Association.
“Given the strong financial incentives to make unaffordable loans packed with fees, mere guidelines and suggestions will not be enough to stop risky loan practices and dangerous loan products,” said Michael Calhoun, president of CRL. “It is troubling that brokers, who have aggressively marketed dangerous loans in communities of color and low-wealth neighborhoods, and who have routinely charged excessive and unnecessary fees, have no financial interest in the ultimate success of the loans.”
The National Association of Mortgage Brokers has called for the creation of a national registry of all loan originators, with oversight from a federal agency such as the FTC or HUD, that would track complaints and prevent “bad actors” from simply moving from one loan company to another.
“Without a focus on individual accountability, we can never truly have consumer protection. Individuals harm consumers not companies,” said Harry Dinham, the immediate past president of the NAMB. “The purpose of this registry is to establish a consequence for bad actions. Mortgage originators must have something to lose if they act unethically.”
“Expanding consumer knowledge and awareness, not restricting consumer choice, should be the goal of any proposed guidance, regulation, or legislation aimed at curbing abusive lending practices,” Dinham testified recently before a Federal Reserve Board hearing.
Agreement in principles
In April, Sen. Chris Dodd, D-Conn., held a summit of large mortgage industry participants.Since that meeting, leaders in the subprime mortgage market have agreed to a set of principles when working with families facing foreclosure on their homes. One of the principles calls for servicers to seek to modify loans before they reset if borrowers will be unable to afford the new payments.
There’s concern that the “principles” do not have teeth because industry participants are not forced to follow them as law.
“Where discretion is permitted minorities will tend to be disadvantaged,” said Allen Fishbein, director of housing and credit policy at the Consumer Federation of America. “Whenever we see areas of discretion in home financing, the record shows that minorities tend to be treated less [well] than whites.”
Companies should be monitored to make sure that they carry out the spirit of the new guidance, and offer equal help to homeowners across the board, Fishbein added.
Consumer advocates would also like to see the Department of Housing and Urban Development bring more action under the Fair Housing Act, which specifically bans imposing different terms or conditions on a loan, including different interest rates, based on race, national origin or religion, among other factors.
The Fed could also make more use of its power to ban “unfair” and “deceptive” mortgage practices, critics say. Late last month, federal agencies created new rules for banks to make sure that borrowers take on loans that they can actually afford.
Dodd, chairman of the Senate Committee on Banking, Housing and Urban Affairs, said in a statement that he would like the Fed to further tighten standards and create laws applicable to all lenders to protect minorities.
“We still have a considerable distance to travel,” Dodd said. “The Federal Reserve must take the guidance, strengthen its protections by requiring escrow accounts and limiting prepayment penalties, and turn it into a regulation. Subprime borrowers, who are disproportionately black and Hispanic, deserve strong protections to attain and sustain homeownership, regardless of whether they get a loan from a federal or state lender.”
Government taking notice
The government is taking several steps to help consumers, though it may be too late for some minority families to hold onto their homes.
HUD is looking to build a team this summer of fair-lending specialists that will be part of its systemic investigation unit, which handles high-profiles cases of widespread abuse.
“Although our bread and butter is individual complaints…[we] are being more proactive, doing big picture cases,” said Kim Kendrick, HUD’s assistant secretary for fair housing and equal opportunity.
Recently proposed legislation called the Borrower’s Protection Act of 2007 has fairly wide support among consumer advocates. The act does not address minorities specifically, though it does aim to cure ills in the subprime market, and includes new levels of responsibility for brokers and lenders.
It would subject brokers to all federal and state requirements for fiduciaries.
Sen. Bob Casey, D-Penn., a co-sponsor of the bill, told MarketWatch that the legislation’s faith and fair dealing standard for all originators could help minority borrowers.
“That doesn’t mean you rule out other legislative remedies that are particularly targeted to those groups,” said Casey, a member of the Senate banking, housing and urban affairs committee. “We should continue to examine whether or not there’s a particular strategy that is more targeted at helping Latino and African American borrowers. The key thing is just pushing hard.”