by Kevin Stein
San Francisco – As the foreclosure crisis worsens, the Federal Reserve Board (the Fed) is proposing rules to restrict abusive mortgage lending practices. While this is a good step, 32 California groups, led by the California Reinvestment Coalition, assert that not enough is being done to help working families and their neighborhoods. In a letter to the Fed, the groups encourage stronger rules to protect families from being sold loans they cannot afford.
“The Fed continues to take baby steps that do not significantly help Main Street borrowers and do not meaningfully address the wide-scale, abusive industry practices that have created this current crisis,” said Kevin Stein, associate director of the California Reinvestment Coalition. “At the same time, the Fed has shown itself willing and able to take bold and dramatic steps to protect Bear Stearns and other Wall Street and banking companies.”
The Fed is using its powers under the Home Ownership and Equity Protection Act (HOEPA) – a federal anti-predatory lending law that governs all lenders – to further regulate a widely unregulated marketplace. A year and a half ago, several community groups and consumers in California testified at Federal Reserve Board HOEPA hearings held in San Francisco. At those hearings, and in subsequent comments to the Board, the groups highlighted a number of concerns with the mortgage market leading to widespread devastation for working families and their communities.
At that time, seven of the 10 metropolitan areas with the highest foreclosure rates in the country were in California. A year and a half later, seven of the 10 metro areas with the highest foreclosure rates are still in California, and foreclosures are increasing at a rapid pace, destroying entire neighborhoods.
Among a list of requests, the groups are asking the Fed to:
• Prohibit prepayment penalties. The Fed proposes to restrict the use of prepayment penalties, but the groups believe that prepayment penalties should be outright prohibited on higher priced mortgage loans. Prepayment penalties trap borrowers into unaffordable loans, are not bargained for or understood by many borrowers and provide little to no benefit to borrowers.
• Eliminate yield spread premiums. Such premiums have resulted in the rampant practice of lenders paying more to brokers for selling consumers loans that are more expensive than what the consumer is qualified to receive.
• Protect consumers against steering. The Fed has noted that borrowers are often steered into loans they cannot afford. Several studies show that borrowers of color are more likely to be steered into subprime loans and that the high costs borne by subprime loan borrowers often do not reflect the credit profiles of borrowers.
• Promote pre-purchase counseling. Perhaps the best way to protect consumers against abusive practices is to require and promote pre-purchase home loan counseling for borrowers. The Fed fails to do this.
• Require that loan documents be in the language of the negotiation. California groups have for years called on regulators to require that when home loans are negotiated in a language other than English, key loan documents be translated into that language so borrowers have some possibility of understanding the terms of their loans.
• Expand Community Reinvestment Act (CRA) assessment areas. The Federal Reserve Board has noted that where banks have CRA responsibilities subject to regulatory oversight, their lending appeared to be more equally and fairly distributed. Yet at the same time, the bank regulators have allowed certain companies such as H&R Block Bank, Countrywide Bank and Charles Schwab Bank to meet their CRA responsibilities by serving only a small fraction of the communities where they lend money. The Fed should expand CRA requirements to promote fair lending.
“The Federal Reserve Board’s proposed amendments do not go nearly far enough to protect homeowners from fraud and other abusive practices that helped create our current economic disaster,” says Maeve Elise Brown, director of Housing and Economic Rights Advocates. “We urge the board to offer more comprehensive protections.”
“The Fed’s proposed rules would exclude a number of loans that have been used in predatory practices from regulation,” said Noah Zinner, staff attorney and Equal Justice Works/ Morgan Miller Blair fellow with Bay Area Legal Aid.
The situation is dire in California communities. Working families are losing their homes, tenants are being displaced, neighbors are losing property value and being propelled towards foreclosure, local governments are unable to collect taxes sufficient to provide for needed municipal services and the larger economy is suffering. In their letter to the Fed, the groups urge, at a minimum, regulations that will prevent homeowners from losing their primary source of wealth and from further destabilizing California communities.
For a full copy of the letter and a list of the groups that signed on visit www.calreinvest.org. For more information, contact Kevin Stein, California Reinvestment Coalition, (415) 864-3980, firstname.lastname@example.org. See also the Coalition’s report, “Paying More for the American Dream: The Subprime Shakeout and Its Impact on Lower-Income and Minority Communities,” that many of the subprime lenders that have since gone out of business targeted Black and Brown urban neighborhoods. Because the lenders are defunct, borrowers can’t work out loan modifications to keep their homes A third report, “The Growing Chasm Between Words and Deeds,” surveying 38 mortgage counseling agencies that served 8,174 borrowers, found that in most cases lenders were not really modifying loans but simply foreclosing.
Rep. Maxine Waters’ bills address foreclosure crisis
Washington, D.C. – On April 2, Los Angeles Congresswoman Maxine Waters introduced two major pieces of legislation in response to the nation’s growing foreclosure crisis: HR 5679, “The Foreclosure Prevention and Sound Mortgage Servicing Act,” and HR 5678,”The Neighborhood Rescue and Stabilization Act.”
“I have been taking a careful and comprehensive look at this crisis, both in my position as the senior California member of the Financial Services Committee and as chair of that Committee’s Housing and Community Opportunity Subcommittee,” she said.
“First, I am convinced that we can no longer rely only on the voluntary actions of the mortgage industry to keep as many distressed borrowers in their homes and in affordable mortgages as needed to address the greatest foreclosure wave since the Great Depression. From the beginning of this debacle, I have been focused on the actions of mortgage servicers — who are the direct point of contact for nearly all borrowers. It is now crystal clear that they just aren’t moving quickly enough or offering borrowers approaching foreclosure sustainable alternatives to losing their homes.”
“The fundamental problem is that the mortgage servicers have no legal obligation to make a reasonable effort to keep a borrower in delinquency in his or her home, even where that borrower may have been the victim of a predatory, unaffordable loan. Their only duty is to the investment trust that holds the bundle of mortgages they service. And even though the servicers regularly come before Congress and tell us that their financial incentive is to avoid foreclosure, and stabilize people in their homes, foreclosure rates just keep increasing.”
“Enough is enough. While I look forward to the committee’s consideration of Chairman (Barney) Frank’s ambitious proposal to expand FHA loan guarantees to incentivize industry to write down principal on 1-2 million at-risk mortgages, the time has come to add a stick to the carrots being offered to mortgage servicers to do what it takes to stem this crisis now. Simply put, absent a statutory duty of some kind, I am concerned that consumers have little leverage with mortgage servicers in the current crisis and will continue to lack it in the future. H.R. 5679, the Foreclosure Prevention and Sound Mortgage Servicing Act, creates this enforceable legal duty.”
“Second,even as we work to keep as many borrowers in their homes as possible, it is clear that we must provide help to communities across the country that already face block after block of foreclosed and abandoned properties. A consensus has rapidly formed that a sound approach to providing additional economic stimulus to the ailing economy would include making federal resources available for state and local government, in partnership with nonprofits, to purchase these properties and either resell them or operate them as affordable rental properties.”
“While I look forward to Congressional consideration of the full range of proposals to assist communities with the growing foreclosed and abandoned property problem, I believe H.R. 5678, The Neighborhood Rescue and Stabilization Act (NRSA), is the soundest approach to investing federal resources.”
For more information, contact Rep. Waters’ Chief of Staff Mikael Moore at (202) 225-2201 or Mikael.Moore@mail.house.gov.