Transcript NCRC Presentation on CRA and Fair Lending Patterns & Policy

NCRC Presentation on CRA
and Fair Lending Patterns &
Policy
Josh Silver, Vice President of
Research and Policy January 2010
Dr. Jeckel & Mr. Hyde
• Community lending – safe and sound,
covered by CRA
• Toxic lending – Predatory & abusive,
not regulated
• Where do We Go From Here – CRA
Modernization, Comprehensive AntiPredatory Law, Regulatory Reform
Foreclosure Prevention
Current Trends
• National delinquency rate 9.6% in 3rd qtr ‘09, a record
qtr rate (MBA, Nov 09); foreclosures 4.3%;
delinquency plus foreclosure 14.4%, also record.
• Unemployment rate 10%
• Foreclosure filings reported on 2.8 million properties
in 2009, a 21% increase from 2008(Realtytrac)
• Nevada, Florida, Arizona have highest foreclosure
rates; 10% of Nevada’s properties received
foreclosure filings in 2009.
• Fed govt guarantees or funds 86% of all new home
loans, up from 30% 4 years ago (Wash Post Sept 7)
How CRA Works
• Passed in 1977, CRA makes redlining, or
discrimination against neighborhoods illegal
• CRA establishes an affirmative and continual
obligation to serve credit needs of low- and
moderate-income (LMI) communities
• CRA empowers via public participation – CRA
exams and bank mergers.
• CRA is a win-win proposition: more safe and
sound loans, building community wealth,
more profitable business opportunities for
banks
CRA’s Effectiveness
• More than $6 trillion in CRA agreements – to make
loans, investments, and services to LMI and minority
communities
• NCRC database of CRA agreements used by Fed
Reserve economists and Harvard Univ. – home
lending to LMI and minority borrowers higher in
communities covered by CRA agreements and CRA
exams
• The Treasury Dept. - banks increased home loans to
LMI areas and borrowers by 39 percent from 1993 to
1998, more than twice the increase (of 17 percent) to
middle- and upper-income borrowers and areas.
CRA’s Effectiveness contd.
• CD Lending - $480 billion since 1996
• Small Business Lending - $641 billion in
low/mod neighborhoods since 1996
• CRA-covered banks less likely to issue
high-cost loans & piggybacks. Only 6%
of high-cost loans issued by banks to
LMI people and n’hoods in CRA AA’s
Year
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
$ (in Trillions)
CRA Commitments
(in Trillions of Dollars)
$7
$6
$5
$4
$3
$2
$1
$0
Source: FFIEC (http://www.ffiec.gov/craadweb/national.aspx)
Source: FFIEC (http://www.ffiec.gov/craadweb/national.aspx)
Why CRA Safe & Sound
• Prepare borrowers carefully for
homeownership through counseling &
building up savings, which also earns
points on CRA exams
• Not just homeownership but rental
housing, small business, economic &
community development
• Holistic community development
Foreclosure Prevention
• CRA Question and Answer document affirms
CRA points for loan programs with the
objective of providing affordable, sustainable,
long-term relief….through loan
refinancing…or modifications to homeowners
who are facing foreclosure on their primary
residence.
Quote on CRA
• The revisions (in 1995) helped to stimulate
increased lending and investment activity in
low- and moderate-income areas. In fact,
some studies suggest that these changes to
the regulations coincided with an increase in
annual lending commitments from $ 1.6
billion in 1990 to $103 billion in 1999.
Quote on CRA contd.
• From a consumer perspective, the fact that Congress
amended the CRA statute in 1989 to make
evaluations public provided the transparency
necessary to help create a dialogue between banks
and community advocates. This dialogue contributed
to an increased number of public/private partnerships
that were uniquely successful in addressing the
economic and community development needs of
lower-income communities
What is Abusive Lending: Not
Community Lending
• Prime lending – market rate lending to
creditworthy borrowers
• Subprime lending – high-cost lending to
borrowers with imperfect credit
• Predatory lending – higher interest rates and
fees beyond what is necessary to compensate
for added risk of lending to borrowers with credit
imperfections. Unfair and deceptive practices –
could be prime Option ARM loans with teaser
rates that increase dramatically & borrower was
not told. Also violate fair lending laws.
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How Did it Happen?
• Lack of Regulation: Mortgage Companies & Wall
Street
• Market Failure: Information Assymetry or Imbalance
of Knowledge: Stiglitz markets don’t work well with
imbalance, which is most of the time
• Not Internalizing Negative Externalities of Action –
Lack of Financial Liability
• Oligolopolistic Pricing Behavior
• Non-prime (sub & ALT A) lending rose from 12% of
all loans ($125 billion in ’00) to 34% of all lending ($1
trillion in ’06) – GAO (Dec 16, 09)
Risk Layering
• MBA – 39% of loans were interest only or option ARM
in 2006; 2% in 2000
• 75% of subprime MBS pools were 2/28 or 3/27
• Only 61% subprime ARM loans are full doc; 74% of
ARM subprime have prepay penalties; 41% DTI.
• 41% DTI is guideline in FHA lending: in subprime
lending, portion with DTI > 41% rose from 47% in
2000 to 59% in 2007 (GAO July 09)
• Subprime ARMs portion low- or no-doc from 20% in
’00 to 40% in ’06. ALT-A – 64% in ’03 to 80% in ’06
(Fed HOEPA rule)
• Share of Alt-A loans with > 90% LTV – 2% in ’98 to
32% in ’06 (Sengupta, St. Louis Fed, Jan. ’10)
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Grandma with an ARM
Monthly payments of loans adjusting in 2009 and 2010 are expected to increase with $1,053 on average .
Steering
• Data analysis reveals likely possibility of steering
• Steering is making a high cost loan to a
borrower who qualifies for a lower cost loan
• Oligopoly and lessened competition in minority
neighborhoods
• Equity drain and/or delinquencies and
foreclosures
• Some of the next slides from NCRC Income is
No Shield study available via
http://www.ncrc.org
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Control for Creditworthiness: Still More
High Cost Loans in Minority Neighborhoods:
NCRC’s Broken Credit System report
Fed Reserve Research
• Quartile of tracts in Cuyhoga with highest foreclosure
rates (19%) were 73% African-American & 63% of
loans were high-cost, Lisa Nelson, Cleve Fed, Sept
08
• SF Fed, Reid - African-Americans 1.8 times more
likely than whites to be in foreclosure, Latino and
Asians were 1.4 and 1.3 more likely to be in
foreclosure than whites
• Boston Fed – Willen – increase in minority
homeownership due to subprime lending wiped out
by terminations (sales and foreclosures, foreclosures
rapidly increasing share of terminations)
Disparities for African-Americans
and Whites Increase with Income
Metro Areas Where African-Americans are Twice or
More Likely to Receive High-Cost Loans Than
Whites
Percent MSAs
71.43%
80%
70%
60%
50%
40%
30%
20%
10%
0%
47.28%
Middle- and UpperIncome
Low- and ModerateIncome
Five Worst MSAs for MUI
African-Americans
High-cost Disparuty Ratio
The Five Metro Areas Where MUI African-Americans are Most
Likely to Get More High-Cost Loans Than MUI Whites
4.5
4.0
3.5
4.20
4.15
3.59
3.39
3.35
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Greenville, Durham,
NC
NC
RaleighCary, NC
M adison, M ilwaukeeWI
WaukeshaWest Allis,
WI
Distribution of Loans to LMI Borrowers in Greenville, NC MSA,
2006
LMI African-Americans
LMI Whites
13%
46%
38.90%
54%
61.10%
87%
Subprime
Prime
LMI African-American borrowers were
3.5 times more likely to receive a high-cost
loan than LMI white borrowers.
Distribution of Loans to MUI Borrowers in Greenville MSA, 2006
MUI African-Americans
MUI Whites
11%
47%
38.90%
53%
61.10%
89%
Subprime
Prime
MUI African-American borrowers were
4.2 times more likely to receive a high-cost
loan than MUI white borrowers.
Trends in Arizona, 2007
Applicant Race
American Indian/
Alaska Native
Hispanic or Latino
(Ethnicity)
White Non-Hispanic
(Minority Status)
State of AZ
Subprime Loans
Total Loans
Market Share %
Disparity Ratio
442
12,091
14,851
1,697
37,078
118,061
26.05%
32.61%
12.58%
2.07
2.59
1.00
Redlining
• Still Alive and Well
• Redlined Communities More Likely to
Experience Predatory Lending
Relationship between Branches & Lending
Bank Branch Locations by Minority Level of
Neighborhood
Delinquencies
• 28% of subprime ARMs seriously delinquent in
May ’08, 5 times the mid-’05 rate (Fed HOEPA
rule, July ’08).
• 38% of short-term hybrid ARMs & 30% of
payment-option ARMs delinquent by March ’09
(GAO July 09), 33% of option-ARMs by June
• 2003 Alt A delinquencies were 2% by 2nd
calendar year; 2006 Alt A 16.4% by end of 2nd
calendar year (Sengupta, St. Louis Fed, 1/10)
• 5.2 million active non-prime (subprime & ALT A)
loans, 25% in default or in foreclosure process
(GAO July 09)
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Foreclosure Rates
• 1.7 million of the 14.4 million non-prime
loans originated between ’00 and ’07 or
12% in foreclosure (GAO, Dec 16 09)
• 2.8 million properties had foreclosure filings
in 2009
• Credit Suisse – 8 to 10 million foreclosures
in the next four years
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National Community Reinvestment Coalition ▪ http://www.ncrc.org ▪ 202-628-8866
FHA Difficulties
• Rapid expansion – 2 to 30% of the market
• Inadequate policing capacity – HUD staffing
levels have not kept up.
• Over 9,200 FHA loans during the past year
entered into default after no or only one
borrower payment, triple the rate of previous
years
• FHA delinquency & foreclosure rate 8% in
2009; 5.4% in 2008
Consequences of Foreclosure
• Joint Economic Committee estimates 2 million
subprime foreclosures from 2007- 2009 (Oct 07)
• 2nd half of 07 through 09, $71 billion in housing
wealth lost & $32 billion lost in neighboring
properties
• 25% of nonprime borrowers had negative equity
as of June ’09, 16 large MSAs, 60% of nonprime
borrowers; negative equity was $54 billion or
$36,000 for median borrower (GAO, Dec 09)
• $3.3 trillion lost in total home values in 2008
alone; $13 trillion since crisis began
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National Community Reinvestment Coalition ▪ http://www.ncrc.org ▪ 202-628-8866
Home Affordable Modification
Program
• 854,000 active mods done by end of Dec
• But only 66,000 permanent mods
• Trial mods as share of eligible delinquent loans
ranges from 46% for Saxon, JP Morgan Chase 36%,
Bank of America 19% (Dec 09 Dept of Treas)
• OCC/OTS for every 6 borrowers in serious
delinquency or foreclosure in 3rd qtr, 1 received loan
mod or trial plan (HAMP & non-HAMP)
• Foreclosure filings on 2 to 3 million annual clip
Wanted: Federal AntiPredatory Legislation
Consumer Protections
• Protections applied to all loans – prime, subprime &
FHA
• No steering
• Broker fiduciary relationship with borrower,
compensate over life of loan performance, instead
of immediately
• Ability to Pay: PITI, maximum possible rate
• Verification of Income required
• Escrows for subprime & non-traditional prime loans
Desired Elements for Legislation
• Prohibition on prepayment penalties for
subprime and ARM & other non-trad loans;
• No financing points and fees in subprime and
non-traditional prime loans
• Prohibit Appraisal Fraud and servicing abuse
• Assignee liability…that is hold Wall Street
accountable
Legislation Pending
• Senator Chris Dodd – S. 2452, Home
Ownership Preservation and Protection Act of
2007 introduced in 110th Congress
• Rep. Barney Frank – H.R. 1728, Mortgage
Reform & Anti-Predatory Lending Act of 2009
• Both offer comprehensive protections but
prefer S. 2452 which holds Wall Street
accountable and does not preempt state law
• H.R. 1728 was attached to H.R. 4173 in Dec
‘09
H.R. 1479 CRA Mod Act of 2009
• Introduced by Reps. Eddie Bernice
Johnson and Luis Gutierrez
• Improves CRA as applied to banks
• Enhances data disclosure
• Applies CRA to non-bank institutions
Improve CRA as Applied to
Banks
• Lending, investing, and service to minorities
considered by CRA exams – increase
responsible lending to minorities
• Bolster penalties for predatory &
discriminatory lending and financing of
predatory lending
• Assessment area reform
• More hearings during merger applications
Enhance Data Disclosure
• HMDA improved to include credit score,
debt-to-income, LTV, & other
underwriting criteria
• Loan performance database on default,
foreclosure, and loan modifications
• Race and gender for small business
lending
Apply CRA to Non-Banks
•
•
•
•
•
•
Independent Mortgage Companies
Mainstream Credit Unions
Insurance Companies
Securities Firms
Investment Banks
All affiliates of banks
Financial Regulatory Reform: the
CFPA
• Replace multiple agencies with CFPA (Consumer Financial
Protection Agency); end regulatory shopping by banks
• CRA still enforced by existing agencies in House version (HR
4173 – Wall Street Reform and Consumer Protection Act), but
not Senate discussion draft (but Senate is up in the air)
• Exemption from CFPA oversight for banks with assets under
$10 billion in House but not Senate
• Other exemptions for automobile dealers, merchants, insurers in
House, but not Senate
• Oversight board – existing regulators initially in House bill but
will transition to commission; Senate has a voting board of 5
members, not from existing agencies
Foreclosure Prevention
• Obama plan most comprehensive to date
• Writing down interest rate to 31% debt-toincome good, but does plan need to pay
more attention to principal write-downs (about
13% of mods reduce principal – OCC/OTS).
Loan mods reducing monthly payment 20%
or more less likely to re-default
• Will voluntary participation be enough –
NCRC HELP Now proposal
The National Community Reinvestment Coalition
The National Community Reinvestment Coalition (NCRC) is an association of
more than 600 community-based organizations that promote access to basic
banking services including credit and savings, to create and sustain affordable
housing, job development and vibrant communities for America's working families.
Our members include community reinvestment organizations, community
development corporations, local and state government agencies, faith-based
institutions, community organizing and civil rights groups, minority and women-
owned business associations, local and social service providers from across the
nation
For more information:
National Community Reinvestment Coalition
727 15th Street, Suite 900
Washington, DC 20005
P: (202) 628.8866
F: (202) 628.9800
www.ncrc.org