NAACP Financial Freedom Campaign Fair Lending and Predatory

NAACP Financial Freedom Campaign Fair Lending and Predatory Lending NAACP Economic Department 1

Agenda 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, Rent-to-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? � 2

World Income Levels 3

Households on the edge of the financial cliff � 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. 4

Lack of Growth Real Family Income 5

Unemployment 6

Growth in Food Stamp Use 7

Growth in Food Stamp Participation 8

Our Debt Where It Comes From 9

Credit Card Debt 10

Growth in Foreclosures 11

1940 s and 1950 s Housing and the GI Bill �The GI Bill also included provisions for lowcost 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 1960 s. 12

Redlining & Community Reinvestment Act of 1977 �CRA: Requires banking institutions to meet the credit needs of their local communities, including low and moderate income neighborhoods �Redlining: Illegal practice where banking institutions refused to do business with target communities—low income, communities of color, female headed households, and rural residents 13

Source: The Atlanta Journal Constitution, The Color of Money: Home mortgage lending practices discriminate against blacks, May 1988 14

1980 s Deregulation �Depository Institutions Deregulatory and Monetary Control Act (DIDMCA) of 1980 eliminated state mortgage usury ceilings �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 15

1980 s Deregulation Continued � 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 16

Growth of Mortgage Backed Securities (MBS) and Low-Cost Access To Equity � Subprime lending rapidly grew only after 1995, when MBS with subprime-loan collateral become more attractive to investors. � During the late 1990 s, 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. 17

Beginnings of Predatory Lending Mid to Late 1990 s �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” 18

Why Predatory Lending? MONEY $$$$$$ 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 19

Impact of Predatory Lending �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. 20

Targets of Predatory Lending Practices � � � � � 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 21

Why did Borrowers become Victims of Predatory Lending? �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 22

Abusive Marketing Practices � 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 low-rate 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. 23

Predatory Lending Practices During Late 1990 s, 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 24

Home Improvement Scams �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 25

nd 2 Wave of Abuses �Defective Products (Hybrid Adjustable Rate Mortgages-2/28 s and 3/27 s) �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 26

Predatory Lending Exposed �It was not until the mid-to late 1990 s 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. 27

Use of Subprime Loans as Predatory Loans �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. 28

Other Subprime Loan Features �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. 29

Growth of Subprime Loans 30

Subprime Share of All Mortgages (by origination year) 31

Impact of Subprime Lending 1998 -2006 32

Top Ten B&C Originators, Selected Years Rank 1996 � 1 Associates First Capital, TX � 2 The Money Store, CA � 3 Conti. Mortgage Corp, PA � 4 Beneficial Mortgage Corp, NJ � 5 Household Financial Services, IL � 6 United Companies, LA � 7 Long Beach Mortgage, CA � 8 Equi. Credit, FL � 9 Aames Capital Corp. , CA � 10 AMRESCO Residential Credit, NJ 33

Top Ten B&C Originators, Selected Years Rank 2000 � 1 Citi. Financial 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 34

Top Ten B&C Originators, Selected Years Rank 2001 � 1 Household Finance, IL � 2 Citi. Financial, 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 35

Top Ten B&C Originators, Selected Years Rank 2002 � 1 Household Finance IL � 2 Citi. Financial, 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 36

Top Ten B&C Originators, Selected Years Rank 2003 � 1 Ameriquest Mortgage, CA � 2 New Century, CA � 3 Citi. Financial, 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 37

CRL Losing Ground Report December 2006 � 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 38

Foreclosures Disproportionately Impact Borrowers of Color 39

2009 Projected Foreclosures 40

Rise of Racial Wealth Gap 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” 41

Mortgage Fraud 42

Mortgage Foreclosure Schemes 43

“Negative Equity” � � � 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. 44

Negative Equity Facts �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. 45

Upcoming Mortgage Loan Resets 46

Upcoming Mortgage Loan Resets 47

Continuing Problems 48

Continuing Problems 49

Continuing Problems 50

Lack of Federal Government and Bank Loan Modifications 51

Loan Modification Problems � 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) 52

Types of Foreclosure � 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) 53

State/Local Foreclosure Activities �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 54

Use of Bankruptcy to Stop Foreclosures � 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. 55

Lawsuits-Part 1 �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. 56

Lawsuits-Part 2 �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. 57

Lawsuits-Part 3 � 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. 58

Lawsuits-Part 4 �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 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. 59

The Federal Regulatory Agencies Failed to Act � � 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 60

Consumer Financial Protection Bureau organization chart 61

What the CFPB Can Do � � � 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 backend tricks and traps. Authority: TILA. 62

CFPB continued � � � Credit Reports: Force the credit bureaus to clean-up error-plagued 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. 63

Years Needed to Save for 10% Down payment 64

What We Must Do � 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. 65