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NAACP Financial Freedom Campaign Fair Lending and Predatory Lending

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Title: NAACP Predatory Lending Financial Freedom Campaign Author: clowery Last modified by: mfrehiwot Created Date: 8/29/2011 7:55:12 PM Document presentation format – PowerPoint PPT presentation

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Title: NAACP Financial Freedom Campaign Fair Lending and Predatory Lending


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

2
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?

3
World Income Levels
4
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.

5
Lack of Growth Real Family Income
6
Unemployment
7
Growth in Food Stamp Use
8
Growth in Food Stamp Participation
9
Our Debt Where It Comes From
10
Credit Card Debt
11
Growth in Foreclosures
12
1940s and 1950s Housing and the GI Bill
  • 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.

13
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
    communitieslow income, communities of color,
    female headed households, and rural residents

14
Source The Atlanta Journal Constitution, The
Color of Money Home mortgage lending practices
discriminate against blacks, May 1988
15
1980s 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

16
1980s 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

17
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 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.

18
Beginnings of Predatory Lending Mid to Late 1990s
  • 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

19
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 dont originate loans so have no input
    into who gets a loan
  • Private companies who buy loans do not always
    monitor underwriting policies

20
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.

21
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

22
Why did Borrowers become Victims of Predatory
Lending?
  • FraudLenders lied about loan terms
  • Confusionborrowers believed they are being given
    one loan, when really they are given another
  • Ignorancemost borrowers did not know or
    understand the loans they were being offered
  • Fearhomeowners in financial trouble believed
    they had no other options

23
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.

24
Predatory Lending Practices
  • 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

25
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

26
2nd Wave of Abuses
  • 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

27
Predatory Lending Exposed
  • 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.

28
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.

29
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.

30
Growth of Subprime Loans
31
Subprime Share of All Mortgages (by origination
year)
32
Impact of Subprime Lending 1998-2006
33
Top Ten BC Originators, Selected Years
  • 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

34
Top Ten BC Originators, Selected Years
  • 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

35
Top Ten BC Originators, Selected Years
  • 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

36
Top Ten BC Originators, Selected Years
  • 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

37
Top Ten BC Originators, Selected Years
  • 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

38
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
  • Thats over 2.2 million homeowners losing their
    homes
  • 164 billion in lost equity

39
Foreclosures Disproportionately Impact Borrowers
of Color
40
2009 Projected Foreclosures
41
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

42
Mortgage Fraud
43
Mortgage Foreclosure Schemes
44
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.

45
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.

46
Upcoming Mortgage Loan Resets
47
Upcoming Mortgage Loan Resets
48
Continuing Problems
49
Continuing Problems
50
Continuing Problems
51
Lack of Federal Government and Bank Loan
Modifications
52
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)

53
Types of Foreclosure
  • Judiciallender must first obtain judgment in an
    affirmative lawsuit (e.g. New York, Ohio,
    Florida)
  • Nonjudiciallender can foreclose without filing
    suit (e.g. California, Texas, Virginia, Georgia)
  • Hybrid nonjudiciallenders can foreclose after
    limited quasi-judicial process (e.g. North
    Carolina proceeding run by Clerk of Court)

54
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

55
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.

56
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.

57
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.

58
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.

59
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 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.

60
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

61
Consumer Financial Protection Bureau organization
chart
62
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 back-end tricks
    and traps. Authority TILA.

63
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.

64
Years Needed to Save for 10 Down payment
65
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.
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