Transcript NAACP Predatory Lending Financial Freedom Campaign

NAACP Economic Department
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Our Current Financial Picture
Mortgage Lending (Basics and History)
What is Predatory Lending?
History of Predatory Mortgage Lending
Impact of Predatory Lending in our Communities
The Current Foreclosure Crisis
Use of High-Cost, Alternative Financial Services (Payday
Lending, Car Title Lending, Check Cashing Services, Rentto-Own, Prepaid Cards etc.)
What does the Future of Consumer Financial Services look
like?
What can We do to Change and Improve Our Financial
Futures?
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43% of American households spend more than
they earn each year.
52% of employees live paycheck to paycheck.
Nearly 42% of all American households do not
have enough in liquid financial assets to
support themselves for at least three months.
46% of American households have less than
$5,000 in liquid assets, including IRAs.
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The GI Bill also included provisions for
low-cost mortgages to veterans so they
could purchase houses. This created a
housing boom.
 This boom and the increased earning
capacity, coupled with pent-up demand
for consumer goods, resulted in the
prosperity of the 1950 and 1960s.
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CRA: Requires banking institutions to meet
the credit needs of their local communities,
including low and moderate income
neighborhoods
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Redlining: Illegal practice where banking
institutions refused to do business with target
communities—low income, communities of
color, female headed households, and rural
residents
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Depository Institutions Deregulatory and
Monetary Control Act (DIDMCA) of 1980
eliminated state mortgage usury ceilings
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Alternative Mortgage Transactions Parity Act
of 1982 provided new exotic mortgages such
as adjustable rate mortgages, balloon payment
mortgages, interest only payment mortgages,
option ARMs
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These laws opened the door for the development
of a subprime market, but subprime lending
would not become a viable large-scale lending
alternative until the Tax Reform Act of 1986 (TRA).
The TRA increased the demand for mortgage debt
because it prohibited the deduction of interest on
consumer loans, yet allowed interest deductions
on mortgages for a primary residence as well as
one additional home.
This made even high-cost mortgage debt cheaper
than consumer debt for many homeowners
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Subprime lending rapidly grew only after 1995,
when MBS with subprime-loan collateral become
more attractive to investors.
During the late 1990s, house prices increased and
interest rates dropped to some of the lowest rates
in 40 years, thus providing low-cost access to the
equity in homes.
Of the total number of subprime loans originated,
just over one-half were for cash-out refinancing,
whereas more than one-third were for a home
purchase.
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Unfair, deceptive, or fraudulent practices
of some lenders during the loan
origination process.
 “The practice of a lender deceptively
convincing borrowers to agree to unfair
and abusive loan terms, or systematically
violating those terms in ways that make it
difficult for the borrower to defend
against.”
 “Imposing unfair and abusive loan terms
on borrowers”
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Financial Incentive Structure
Brokers are paid to originate loans, not to
ensure they perform
Lenders sell loans after origination so are not
concerned about performance
Servicers don’t originate loans so have no
input into who gets a loan
Private companies who buy loans do not
always monitor underwriting policies
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Strips savings, equity earnings from
families who have little wealth to start
with.
 Can push families into damaged credit,
bankruptcy, eviction, vehicle
repossession, and foreclosure.
 Has broader negative impact on
communities, local and state
municipalities, and U.S. economy.
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Low / moderate income households
African-American, Latinos, and Other People of Color
Elderly and/or Disabled Homeowners
Women
Non-English speakers, New immigrants
Persons in a financial or housing crisis, may be equity-rich but
cash-poor
Persons who lack information they need to choose the best
product
Persons who do not perceive themselves as having financial
options
Persons who are unfamiliar with the lending process and who fail
to comparison shop
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Fraud—Lenders lied about loan terms
Confusion—borrowers believed they are being
given one loan, when really they are given
another
Ignorance—most borrowers did not know or
understand the loans they were being offered
Fear—homeowners in financial trouble
believed they had no other options
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Use of fraud, lies or other deceptive tactics to get
borrowers into a loan they cannot afford.
Aggressive sales tactics (calling all the time to
pressure the borrower).
Lender or broker recommended paying off a lowrate mortgage with a high-rate mortgage.
Lender suggested rolling credit card debt into
mortgage debt.
The amount borrowed was more than the value of
the property (at the time of the loan).
Lender or broker encouraged borrower to get a
loan for more than needed to buy the house.
Loans made to borrowers who cannot afford to pay
them back.
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During Late 1990s, equity stripping practices
(getting homeowners to refinance and take
out cash) by unregulated financial
institutions targeted borrowers who were
house rich but cash poor.
Other Practices included:
 Targeting
 Steering
 Loan Flipping
 Prepayment Penalties
 Yield Spread Premiums
 Single Premium Credit Insurance
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Home improvement scams
◦ Some predatory lenders were affiliated with
home improvement companies
◦ Borrowers signed documents without
understanding they are taking out a loan on
their property
◦ Work was often shoddy or homeowner was
overcharged
◦ Contractors not registered with the state
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Defective Products (Hybrid Adjustable Rate
Mortgages-2/28s and 3/27s)
Failure to Escrow for Taxes and Insurance
Stated Income Loans
Failure to determine whether the borrower had
the ability to repay the loan
Lack of due diligence of brokers
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It was not until the mid-to late 1990s that the
strong growth of the subprime mortgage
market gained national attention.
Immergluck and Wiles (1999) reported that
more than half of subprime refinances
originated in predominately African-American
census tracts, whereas only one tenth of prime
refinances originated in predominately
African-American census tracts.
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Subprime Loans contained predatory features
and terms and contained greater risk.
Adjustable Rate Mortgages had 72% greater
risk of foreclosure than Fixed Rate Mortgages.
Balloon Loans had 36% greater risk.
Prepayment penalties associated with 52%
greater risk.
Low/no doc loans with 29% greater risk.
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Roughly 90% of subprime mortgages made
from 2004 to 2006 came with “exploding”
adjustable interest rates.
Roughly 45% of subprime mortgages
approved without fully documented income.
Roughly 75% of subprime mortgages have no
escrow for taxes and insurance.
Roughly 70% of subprime mortgages have
prepayment penalties.
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700
600
$ Billions
500
400
300
200
100
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
Origination Year
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25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1998
1999
2000
2001
2002
2003
2004
2005
2006
Origination Year
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# homeowners (000s)
400
New homeowners
200
0
Projected foreclosures
-200
-400
Net Homeownership
Loss
-600
-800
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99
00
01
02
03
04
05
06
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Rank 1996
 1 Associates First Capital, TX
 2 The Money Store, CA
 3 ContiMortgage Corp, PA
 4 Beneficial Mortgage Corp, NJ
 5 Household Financial Services, IL
 6 United Companies, LA
 7 Long Beach Mortgage, CA
 8 EquiCredit, FL
 9 Aames Capital Corp., CA
 10 AMRESCO Residential Credit, NJ
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Rank 2000
 1 CitiFinancial Credit Co, MO
 2 Household Financial Services, IL
 3 Washington Mutual, WA
 4 Bank of America Home Equity Group, NC
 5 GMAC-RFC, MN
 6 Option One Mortgage, CA
 7 Countrywide Financial, CA
 8 Conseco Finance Corp. (Green Tree), MN
 9 First Franklin, CA
 10 New Century, CA
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Rank 2001
 1 Household Finance, IL
 2 CitiFinancial, NY
 3 Washington Mutual, WA
 4 Option One Mortgage, CA
 5 GMAC-RFN, MN
 6 Countrywide Financial, CA
 7 First Franklin Financial Corp, CA
 8 New Century, CA
 9 Ameriquest Mortgage, CA
 10 Bank of America, NC
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Rank 2002
 1 Household Finance IL
 2 CitiFinancial, NY
 3 Washington Mutual, WA
 4 New Century, CA
 5 Option One Mortgage, CA
 6 Ameriquest Mortgage, DE
 7 GMAC-RFN, MN
 8 Countrywide Financial, CA
 9 First Franklin Financial Corp, CA
 10 Wells Fargo Home Mortgage, IA
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Rank 2003
 1 Ameriquest Mortgage, CA
 2 New Century, CA
 3 CitiFinancial, NY
 4 Household Finance, IL
 5 Option One Mortgage, CA
 6 First Franklin Financial Corp, CA
 7 Washington Mutual, WA
 8 Countrywide Financial, CA
 9 Wells Fargo Home Mortgage, IA
 10 GMAC-RFC, MN
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One in eight (12.5%) subprime loans made in
2000 had foreclosed by May 2005.
Predicted Foreclosure rate for Subprime
mortgages originated from 1998 – 2006 was
approximately 1 in 5 mortgages (20%) will end
in completed foreclosure (i.e., loss of home)
Other predictions included over 1/3 of
Subprime borrowers losing their homes
That’s over 2.2 million homeowners losing their
homes
$164 billion in lost equity
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2007-2009 Completed Foreclosures per 10,000 Loans
(on Loans Made in 2005-2008 to Owner-Occupants)
1000
800
790
769
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452
400
200
0
African-Am erican
Latino
Non-Hispanic White
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White households
$113,149 (↓16% 05-09)
African American
Households
$5,677 (↓ 53% )
Hispanic
Households
$6,325 (↓ 66%)
Source: Pew Research Center, Twenty-to-One: Wealth Gaps Rise to Record
Highs Between Whites, Blacks and Hispanics (July 26, 2011) “Plummeting
house values the principal cause”
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Negative equity, often referred to as “underwater” or “upside
down,” means that borrowers owe more on their mortgages than
their homes are worth. Negative equity can occur because of a
decline in value, an increase in mortgage debt or a combination
of both.
11.1 million, or 23.1 percent, of all residential properties with a
mortgage were in negative equity at the end of the fourth quarter
of 2010, up from 10.8 million, or 22.5 percent, in the third quarter.
The small increase reflects the price declines that occurred
during the fourth quarter and led to lower values. An additional
2.4 million borrowers had less than five percent equity, referred
to as near-negative equity, in the fourth quarter.
Together, negative equity and near-negative equity
mortgages accounted for 27.9% of all residential properties
with a mortgage nationwide.
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Nevada had the highest negative equity
percentage with 63% of all mortgaged
properties, followed by Arizona (50%), Florida
(46%), Michigan (36%) and California (31%).
38% of borrowers with home equity loans were
in a negative equity position.
The average negative equity borrower was
upside down by $65,000.
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Insufficient Servicer Staffing (servicers now working
to increase staffing levels, provide more outreach etc.)
Misaligned Financial Incentives for Servicers
(efforts now being made to compensate servicers for
modification activities)
Fear of Investor Lawsuits
Pooling and Servicing Agreement Limitations
(legal modifications to agreements being made)
Piggyback Second Mortgages (legal obstacles being
resolved)
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Judicial—lender must first obtain judgment in an
affirmative lawsuit (e.g. New York, Ohio, Florida)
Nonjudicial—lender can foreclose without filing
suit (e.g. California, Texas, Virginia, Georgia)
◦ Hybrid nonjudicial—lenders can foreclose after
limited quasi-judicial process (e.g. North
Carolina proceeding run by Clerk of Court)
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State Foreclosure Mediation/Intervention
Programs
State Foreclosure Process Extension and/or
Modification Programs
City of Philadelphia (court administrative
order) – Requires representative for servicer to
meet with borrower in court before a
foreclosure sale to seek a loan modification
and avoid foreclosure
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Filing under Chapter 7 or 13 stops all
foreclosure proceedings while the automatic
stay is in effect
Quickest way to stop an imminent foreclosure
sale
Chapter 13 allows a borrower to become
current and repay their arrearage through the
repayment plan
Bankruptcy provides nothing more than a
temporary delay if the borrower cannot afford
the monthly payments even with all unsecured
debt wiped away.
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The States' attorneys general are
pursuing claims against banks for their
"robo-signing" of court affidavits in
foreclosures and for servicing abuses
against homeowners seeking to modify
their loans.
 That effort could bring a settlement of
$20 billion and reforms of bank
practices.
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The banks are reportedly demanding
that any settlement in this case come
with a broad release for wrongdoing
committed in originating, packaging, and
selling the disastrous mortgages at the
heart of the financial collapse.
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The Federal Housing Finance Agency has sued
18 banks for misleading Fannie Mae and
Freddie Mac about risky loans in mortgage
securities that the banks sold to those entities,
resulting in more than $30 billion in losses.
Evidence uncovered by the Financial Crisis
Inquiry Commission indicates that the banks
knew but failed to disclose the fact that many
of those loans did not even meet the stated
standards of the lenders that originated or
securitized them.
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Investors have launched a barrage of litigation
against banks for their actions in selling them
risky mortgage securities that quickly soured.
By one count, there are at least 90 such suits
seeking nearly $200 billion.
Among the plaintiffs: insurance giant AIG, still
largely taxpayer owned, is suing Bank of
America and is reportedly readying cases
against Goldman Sachs and others.
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Federal Reserve made no amendments to its 1994
HOPEA rules until July 2008, while more than two
dozen states enacted anti-predatory lending
laws.
Member of the Federal Reserve warned of the
dangers of subprime lending getting out of hand
in 2000, but no action resulted
Office of Thrift Supervision brought only two
referrals under the Equal Credit Opportunity Act
to Dept. Of Justice on matters involving race or
discrimination from 2000 to 2008, Office of
Comptroller of the Currency made zero
Federal Trade Commission record settlements
along with states against two top subprime
originators but no regulatory action in 25 years
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Mortgages: Stop mortgage companies from charging illegal fees, keeping sloppy
records of what people owe, forcing homeowners into overpriced insurance, or
rushing to foreclose before considering home-saving options. Authority: Truth in
Lending Act (TILA), Real Estate Settlement Procedures Act.
Overdraft and Bank Fees: Stop banks from tricking people into incurring
overdraft fees, help consumers get the cheapest overdraft coverage, and provide
clear information on bank fees. Authority: Electronic Funds Transfer Act (EFTA),
Truth in Savings Act (TISA), TILA.
Internet and Bank Payday Loans: Stop 400% internet and bank “account
advance” payday loans from grabbing consumers’ wages, Social Security or
unemployment benefits before families pay food or rent. Authority: EFTA.
Prepaid Cards: Protect prepaid debit cards, a growing but unregulated bank
account substitute, from identity theft, bank errors and hidden fees. Authority:
EFTA, TISA.
Credit Cards: Get inside the books of credit card companies to make sure they
are not charging illegal fees or rate increases and help consumers shop for the
best card without back-end tricks and traps. Authority: TILA.
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Credit Reports: Force the credit bureaus to clean-up errorplagued credit reports and to respond to consumers trying to fix
mistakes. Authority: Fair Credit Reporting Act.
Student Loans: Help students avoid expensive student loans
when cheaper aid or loans are available. Authority: TILA.
Auto Loans: Prohibit kick-backs to auto dealers who put
consumers, especially minorities, in more expensive loans and
stop bait-and-switch tactics. Authority: Equal Credit Opportunity
Act, TILA.
Debt Collectors and Debt Buyers: Go after debt collectors who
make illegal threats, harass people for debts they do not owe, and
pursue zombie debt long after it expires. Authority: Fair Debt
Collection Practices Act.
Money Transfers: Ensure that consumers who are transferring
money across the country or across the world know exactly what
the transfer will cost and how much their family will receive.
Authority: EFTA.
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Years to Save for 10% Down Payment Loan
(plus 5% closing costs - based on 2010 median-priced home, $172,900)
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18
16
12
10
8
6
4
2
0
$6
0, 0
0
0
$5
5, 0
0
0
$5
0, 0
0
0
$4
5, 0
0
0
$4
0, 0
0
0
$3
5, 0
0
0
2, 0
0
$3
0, 0
0
0
0
$3
Years
14
Income (wages)
Assumes 5.2% savings rate, all for home purchase (i.e., none for retirement, college tuition or repairs)
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Support appointment of Director for Consumer
Financial Protection Bureau (so that CFPB can use
its full powers to protect consumers)
Educate our units and our members in the area of
financial literacy
Advocate on the federal level and in the states
against predatory lending products such as
payday lending, car title lending, and tax refund
anticipation loans.
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