NCRC Presentation on CRA and Fair Lending Patterns & Policy Josh Silver, Vice President of Research and Policy January 2010.

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 Anti-Predatory 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

CRA Commitments (in Trillions of Dollars)

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

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National Community Reinvestment Coalition ▪ http://www.ncrc.org ▪ 202-628-8866

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.

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)

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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)


Grandma with an ARM

Monthly payments of loans adjusting in 2009 and 2010 are expected to increase with $1,053 on average .

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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


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

71.43%

47.28%

0%10%20%30%40%50%60%70%80%

Pe

rce

nt

MS

As

Middle- and Upper-Income

Low- and Moderate-Income

Metro Areas Where African-Americans are Twice or More Likely to Receive High-Cost Loans Than

Whites

Five Worst MSAs for MUI African-Americans

4.20 4.15

3.593.39 3.35

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Hig

h-c

os

t D

isp

aru

ty R

ati

o

Greenville,NC

Durham,NC

Raleigh-Cary, NC

Madison,WI

Milwaukee-Waukesha-West Allis,

WI

The Five Metro Areas Where MUI African-Americans are Most Likely to Get More High-Cost Loans Than MUI Whites

Distribution of Loans to LMI Borrowers in Greenville, NC MSA, 2006

LMI African-AmericansLMI Whites

46%

54%

13%

87%

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

47%

53%

11%

89%

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 442 12,091 14,851

Total Loans 1,697 37,078 118,061

Market Share % 26.05% 32.61% 12.58%

Disparity Ratio 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

Bank Branch Locations by Minority Level of Neighborhood

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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

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

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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

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 Anti-Predatory 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-to-

income 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 900Washington, DC 20005 P: (202) 628.8866 F: (202) 628.9800

www.ncrc.org

NCRC Presentation on CRA and Fair Lending Patterns & Policy Josh Silver, Vice President of Research and Policy January 2010.

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