- House Subcommittee Holds Hearing on Combating Predatory Lending Under the Fair Housing Act
- May 5, 2010
- Law Firm: Alston & Bird LLP - Atlanta Office
Yesterday, the House Judiciary Committee’s Subcommittee on the Constitution, Civil Rights, and Civil Liberties held a hearing entitled “Protecting the American Dream Part II: Combating Predatory Lending Under the Fair Housing Act.” The hearing focused on how the Department of Justice has been combating predatory lending and to assess potential courses of corrective action. The subcommittee heard testimony from the following witnesses:
- Thomas E. Perez, Assistant Attorney General, Civil Rights Division, U.S. Department of Justice
- A. C. Wharton, Jr., Mayor of Memphis, Tennessee
- Roger Clegg, President and General Counsel, Center for Equal Opportunity
- Gillian N. Miller, Boston, Massachusetts
- Gary E. Klein, Consumer Attorney, Roddy, Klein & Ryan
According to Subcommittee Chairman Jerrold Nadler (D-NY), “everything old is new again.” In his view, the discriminatory practice of “redlining,” or declining to offer favorable terms for a loan because of the borrower’s race or ethnicity, has returned, but in a different form - “reverse redlining,” a practice in which lenders or mortgage brokers steer potential borrowers to more profitable subprime loans because of their race, ethnicity or location, even though their credit scores may justify terms more favorable to the potential borrower.
Mr. Perez asserted that minorities, primarily African Americans and Latinos, have suffered disproportionately from predatory lending. For example, he noted that, of the neighborhoods in New York with mortgage default rates twice the regional average, 85% were consisted of a majority of African American or Latino homeowners. In his home county in Maryland, Mr. Perez claimed that upper-income African Americans were as much as six times more likely to have a subprime loan than upper-income non-minorities.
Mr. Perez emphasized that federal regulation of predatory lending is essential, because national financial institutions are not subject to state regulation. He assured the Subcommittee that fair lending is a “top priority” of the Civil Rights Division of the Department of Justice and outlined the Division’s enforcement process. In the event bank regulatory agencies observe what they believe to be a pattern or practice of discrimination, they are required to notify the Division, which then determines which referrals to pursue. The Division has added 102 attorney positions in 2010 and has created the Fair Lending Unit to be comprised of several attorneys, economists and a statistician. In addition, the Division will soon receive data from the Home Affordable Modification Program (HAMP), which, once received, will enable the Division to identify discriminatory practices in modifying loans. He also discussed the results of recent investigations, including the Division’s $6.1 million settlement with two subsidiaries of AIG and a $600,000 settlement with First United Security Bank, an Alabama bank, regarding discrimination against African-American borrowers. The Division currently has 39 open matters, including 17 investigations.
In response to a question from Chairman Nadler, Mr. Perez stated that the Division’s “undercover testing program” has been very effective. Testers, or undercover agents of the Division, have been contacting real estate agents and mortgage brokers to observe and proactively identify any discriminatory practices.
When asked for suggestions for improvement, Mr. Perez suggested that Congress grant the Division the power to subpoena documents before a complaint is filed and recommended that Congress extend the Division’s jurisdiction to cover discriminatory statements made over the internet.
Mayor Wharton focused on the pending litigation the City of Memphis brought against Wells Fargo alleging that it engaged in reverse redlining in and around Memphis. He alluded to the risk that the case may be dismissed for lack of standing and suggested that a federal agency initiating litigation may not have standing limitations and would have the necessary resources to properly fund the litigation. Addressing the more general issue of reverse redlining, Mayor Wharton commented that borrowers frequently are not aware of or do not understand the complicated terms of their financing arrangements until they reach the closing table. He recommended imposing fiduciary obligations of mortgage brokers and lenders to borrowers.
Mr. Clegg deviated from all the other witnesses by presenting a conservative view. He opined that “politically correct discrimination” was at least as prevalent as “politically incorrect discrimination.” He explained that the Clinton and Bush administrations pressured lenders to make more loans to less creditworthy individuals. For these loans to be economically feasible, lenders offered higher interest rates or otherwise less favorable terms, which contributed to the expansion of the subprime market. Mr. Clegg’s opinion became a major point of contention for the remainder of the hearing. Congressman Hank Johnson (D-GA) pressed Mr. Clegg for support of his claim that lenders were pressured to lend to less creditworthy individuals, which he termed a “false statement.” However, only approximately two weeks ago, the Financial Crisis Inquiry Commission (FCIC) held a three-day hearing during which Daniel Mudd, former President and Chief Executive Officer of Fannie Mae, and Robert Levin, former Executive Vice President and Chief Business Officer of Fannie Mae, testified at length as to how Congress and the Clinton and Bush administrations pressured Fannie Mae by requiring it to allocate an increasing percentage of its portfolio (ultimately reaching 57%) to “underserved” geographic regions with lower-income borrowers. Mr. Mudd testified that there was insufficient demand for these loans, and as a result, Fannie Mae conducted “outreach programs” to solicit lower-income borrowers from these areas.
Gillian Miller conveyed her personal experience with what she considers to be predatory lending:
- She met with her mortgage broker at informal establishments, such as fast food restaurants, rather than in an office.
- She was told she qualified for 100% financing, but was not told or did not understand that 20% of the debt would be financed with a second mortgage on substantially less favorable terms.
- She was not aware that her mortgages would be sold until after the transaction was closed.
Summarizing her testimony, Ms. Miller said, “It’s not my job to know what a broker does, all I can do as a consumer is ask the right questions and hope that the answers given are truthful....”
Gary Klein, the last witness, testified about his experience as an attorney pursuing predatory lending class action lawsuits. He claimed that lenders engaged in redlining or reverse redlining by frequently placing brick-and-mortar offices in non-minority areas and relying on mortgage brokers to service predominantly minority areas. Because mortgage brokers usually charge additional fees and are frequently authorized to mark up mortgage loans, the borrowing costs to minorities in these areas are often greater than in non-minority areas. According to Mr. Klein, lenders, namely Wells Fargo, allegedly targeted African Americans by sponsoring “wealth building” seminars at African American churches, in which it steered African Americans to subprime loans.
Mr. Klein criticized risk-based lending (the practice of charging higher interest rates to less creditworthy borrowers) because “charging higher interest rates to people with fewer resources leads to a self-fulfilling prophecy.” In other words, loans with higher interest rates are by definition more expensive, and lower-income borrowers are less likely to consistently make the payments. He suggested that the best remedy to address subprime mortgages is through affordable loan modifications. Mr. Clegg cautioned, however, that one unintended consequence of eliminating or limiting subprime lending is that loans will be “unavailable on any terms to [borrowers] with marginal creditworthiness, even from otherwise willing lenders.”