The Leadership Conference on Civil and Human Rights

The Second Annual Conference on Housing Opportunity

Speech by Wade Henderson on April 6, 2000.

THANK YOU FOR INVITING ME HERE TODAY. I STRONGLY BELIEVE THAT THE AMERICAN HOMEOWNER EDUCATION AND COUNSELING INSTITUTE AND THE RESEARCH INSTITUTE FOR HOUSING AMERICA PLAY VALUABLE ROLES IN EXPANDING HOUSING OPPORTUNITIES FOR ALL AMERICANS AND WORKING TO ELIMINATE DISCRIMINATION IN THE HOUSING AND MORTGAGE MARKETS. YOU SHOULD BE APPLAUDED FOR YOUR HARD WORK AND FOR SPONSORING THIS CONFERENCE, TO PRESENT NEW AND EXCITING WAYS TO IMPROVE HOUSING OPPORTUNITIES.

THE SUBJECT I WANT TO FOCUS ON THIS AFTERNOON HAS SUDDENLY EMERGED AS ONE OF THE MOST CONTROVERSIAL ISSUES IN THE HOUSING INDUSTRY TODAY. HOW WE -- THE GOVERNMENT, THE INDUSTRY, POLICY-MAKERS, COMMUNITY ACTIVISTS AND CIVIL RIGHTS LEADERS -- CONFRONT IT WILL DETERMINE WHETHER MANY FAMILIES LIVING IN AMERICA'S MOST NEGLECTED URBAN AND RURAL COMMUNITIES CAN OBTAIN CREDIT AT REASONABLE RATES.
MY TOPIC, THE SUBPRIME LENDING MARKET, HAS RAPIDLY GROWN FROM A $20 BILLION BUSINESS IN 1993 TO A $150 BILLION BUSINESS IN 1998, AND ALL INDICATIONS ARE THAT IT WILL CONTINUE TO EXPAND. THE ENORMOUS GROWTH OF SUBPRIME LENDING HAS CREATED A VALUABLE NEW SOURCE OF LOANS FOR CREDIT-STRAPPED BORROWERS. ALTHOUGH THESE LOANS HAVE HELPED MANY IN AN UNDERSERVED MARKET, THE OUTCOME FOR AN INCREASING NUMBER OF CONSUMERS HAS BEEN NEGATIVE.

ON A SCALE WHERE "A" REPRESENTS PRIME, OR THE BEST CREDIT RATING, THE SUBPRIME CATEGORY RANGES DOWNWARD FROM A-MINUS TO B, C AND D. BORROWERS PAY MORE FOR SUBPRIME MORTGAGES IN THE FORM OF HIGHER INTEREST RATES AND FEES. LENDERS CLAIM THIS HIGHER CONSUMER PRICE TAG IS JUSTIFIED BECAUSE THE RISK OF DEFAULT IS GREATER THAN FOR PRIME MORTGAGES. YET EVEN WITH AN INCREASED RISK, THE INDUSTRY CONTINUES TO RING UP HEFTY PROFITS AND THE NUMBER OF LENDERS OFFERING SUBPRIME PRODUCTS IS GROWING.

THE FLIP SIDE OF THIS MORTGAGE INDUSTRY SUCCESS STORY IS A GROWING PROBLEM OF ABUSIVE LENDING PRACTICES INCLUDING WHAT IS REFERRED TO AS "PREDATORY LENDING." MANY CONSUMERS ATTRACTED TO THIS MARKET ARE THE MOST VULNERABLE TO DECEPTIVE AND UNFAIR LENDING SCHEMES. TYPICAL VICTIMS INCLUDE MINORITY AND LOWER-INCOME BORROWERS, FEMALE SINGLE-HEADS OF HOUSEHOLDS AND THE ELDERLY.

RECENT INVESTIGATIONS BY FEDERAL AND STATE REGULATORY ENFORCEMENT AGENCIES, AS WELL AS A SERIES OF LAWSUITS, INDICATE THAT LENDING ABUSES ARE BOTH WIDESPREAD AND INCREASING IN NUMBER. WE KNOW THAT PROBLEMS SUCH AS RACE DISCRIMINATION, DECEPTIVE MARKETING AND PREDATORY LENDING ARE NOT UNIVERSAL IN THE MORTGAGE LENDING INDUSTRY. YET, THE PERSISTENCE OF THESE PROBLEMS TAINTS THE ENTIRE INDUSTRY AND UNDERMINES THE VALUABLE ROLE MORTGAGE LENDERS PLAY IN FACILITATING HOME OWNERSHIP AND HOME EQUITY LOANS.
LET ME REPEAT THIS IMPORTANT POINT: TODAY, THE SUBPRIME LENDING INDUSTRY IS BEING DEFINED BY ITS WORST ELEMENTS. COMPANIES LIKE FIRST ALLIANCE AND OTHERS ARE BECOMING WELL KNOWN WHILE THE COMPANIES THAT ARE MEETING CREDIT NEEDS ON A DAILY BASIS IN UNDERSERVED COMMUNITIES ARE NOT RECOGNIZED.


WHY IS SUBPRIME LENDING NECESSARY?
SOME HAVE SUGGESTED THAT SUBPRIME LENDING IS UNNECESSARY. THEY CONTEND THAT IF AN INDIVIDUAL DOES NOT HAVE GOOD CREDIT THEN THE INDIVIDUAL SHOULD NOT BORROW MORE MONEY. BUT LIFE IS NEVER THAT SIMPLE. EVEN HARD WORKING, GOOD PEOPLE CAN HAVE IMPAIRED CREDIT, AND EVEN INDIVIDUALS WITH IMPAIRED CREDIT HAVE FINANCIAL NEEDS. THEY SHOULD NOT BE DOOMED TO A FINANCIAL CASTE SYSTEM, ONE THAT PERMANENTLY DEFINES THEIR FINANCIAL STATUS AS LESS THAN "A."
UNTIL A DECADE AGO, CONSUMERS WITH BLEMISHES ON THEIR CREDIT RECORD FACED LITTLE HOPE OF FINDING A NEW MORTGAGE OR REFINANCING AN EXISTING ONE AT REASONABLE RATES. WITHOUT LEGITIMATE SUBPRIME MORTGAGE LOANS, THOSE EXPERIENCING TEMPORARY FINANCIAL DIFFICULTIES COULD LOSE THEIR HOMES AND SINK FURTHER INTO RED INK OR EVEN BANKRUPTCY.

MOREOVER, TOO MANY COMMUNITIES CONTINUE TO BE LEFT BEHIND DESPITE THE ECONOMIC BOOM. MANY COMMUNITIES WERE "RED-LINED," WHEN THE NATION'S LEADING FINANCIAL INSTITUTIONS EITHER IGNORED OR ABANDONED INNER CITY AND RURAL NEIGHBORHOODS. REGRETTABLY, PREDATORS ARE FILLING THAT VOID - THE PAY-DAY LOAN SHARKS; THE CHECK-CASHING OUTLETS; AND THE INFAMOUS FINANCE COMPANIES.

CLEARLY THERE IS A NEED FOR BETTER ACCESS TO CREDIT AT REASONABLE RATES. AND LEGITIMATE SUBPRIME LENDING SERVES THIS MARKET. HOWEVER, PREDATORY LENDING IS NEVER ACCEPTABLE, AND IT MUST BE ERADICATED AT ALL COSTS.


CHALLENGE TO THE MORTGAGE LENDING INDUSTRY
THE CONGRESS, STATE LEGISLATURES AND LOCAL GOVERNMENTS, AS WELL AS A HOST OF REGULATORY AGENCIES ARE ALL POISED TO TAKE ACTION. HOWEVER, REGULATORY RELIEF IS MONTHS AND PERHAPS YEARS AWAY. IN THE INTERIM, THERE ARE STEPS THAT MUST BE TAKEN TO PREVENT MORE PEOPLE FROM BEING VICTIMIZED BY THE SCOURGE OF PREDATORY LENDING.
WE BELIEVE THAT A SMALL WINDOW OF OPPORTUNITY EXISTS FOR THE MORTGAGE LENDING INDUSTRY, HOUSING AND CONSUMER ACTIVISTS, AND THE CIVIL RIGHTS COMMUNITY TO JOINTLY CRAFT SOLUTIONS TO THE PROBLEM.

WHAT I WILL OUTLINE TODAY IS A THREE-PART APPROACH THAT WILL IMMEDIATELY CURB PREDATORY LENDING PRACTICES. THIS PLAN CALLS FOR
1) TARGETED FEDERAL LEGISLATION TO CURB THE MOST EGREGIOUS LENDING PRACTICES; 2) A DEMAND FOR INDUSTRY ACCOUNTABILITY; AND 3) A MASSIVE CONSUMER EDUCATION CAMPAIGN.

THE LEGISLATIVE COMPONENT WILL FOCUS ON STOPPING ACTIVITIES SUCH AS:
A) LENDING TO PEOPLE WHO CANNOT AFFORD THE LOANS . SOME PREDATORY MORTGAGE LENDERS PURPOSELY STRUCTURE LOANS WITH MONTHLY PAYMENTS THEY KNOW THE HOMEOWNERS CANNOT AFFORD. WHEN THE HOMEOWNER REACHES THE POINT OF DEFAULT, THEY MUST REFINANCE, WHICH PROVIDES THE LENDER WITH ADDITIONAL POINTS AND FEES. OTHER PREDATORY LENDERS STRUCTURE LOANS WITH UNAFFORDABLE MONTHLY PAYMENTS TO OBTAIN THE HOME BY FORECLOSURE.

B) ANOTHER PRACTICE THAT MUST BE STOPPED IS LOAN "FLIPPING," OR MULTIPLE REFINANCING THAT CREATES NO FINANCIAL ADVANTAGE FOR THE BORROWER. SUCH SCHEMES ARE ALWAYS PROFITABLE FOR THE LOAN AGENT AND THE LENDER, WHILE THE BORROWER IS OFTEN MISLED ABOUT THE BENEFITS AND SOMETIMES PURPOSEFULLY OVERBURDENED WITH DEBT. IN SOME CASES, THE AMOUNT OF CASH TAKEN OUT BY THE HOMEOWNER IS LESS THAN THE LOAN FEES.

C) AND LAST BUT NOT LEAST, WE MUST ALSO STOP BORROWERS FROM BEING STEERED TO HIGH COST LOAN PRODUCTS. SOME BANKS AND MORTGAGE COMPANIES STEER CUSTOMERS TO LOANS WITH HIGH INTEREST RATES AND FEES, INCLUDING BORROWERS WITH GOOD CREDIT WHO WOULD BE ELIGIBLE FOR PRIME LOANS. IN SOME CASES, THE CUSTOMER IS TURNED AWAY BEFORE COMPLETING A LOAN APPLICATION. IN OTHERS, THE LOAN APPLICATION IS WRONGFULLY DENIED AND THE CUSTOMER IS THEN REFERRED TO A HIGH RATE LENDER. THE HIGH RATE LENDER IS OFTEN AN AFFILIATE OF THE BANK OR MORTGAGE COMPANY AND KICKBACKS OR REFERRAL FEES ARE PAID FOR STEERING CUSTOMERS TO THEM.

THE SECOND ELEMENT OF THE STRATEGY CALLS FOR INDUSTRY ACCOUNTABILITY. THE INDUSTRY MUST BE MORE AGGRESSIVE IN POLICING ITSELF.

THE MORTGAGE INDUSTRY HAS A RESPONSIBILITY THAT IT CANNOT ABDICATE. IN THE FACE OF WIDESPREAD ABUSES, THE INDUSTRY MUST STEP-UP AND IDENTIFY THOSE WHO ENGAGE IN PREDATORY LENDING PRACTICES. INDUSTRY POLICING WILL RESULT IN MORE CREDIBILITY FOR LEGITIMATE SUBPRIME LENDERS.

IN ADDITION, I BELIEVE THAT WHILE THE NATION AWAITS NEW REGULATIONS, THE INDUSTRY MUST TAKE A DRAMATIC STEP AND ESTABLISH HIGH STANDARDS FOR ITSELF, INCLUDING INDUSTRY POLICING. THIS SHOULD INCLUDE SOME KIND OF SELF-CERTIFICATION, WHICH WILL ALLOW CONSUMERS TO KNOW WHICH LENDERS ARE ENDORSED BY THE MORTGAGE BANKERS ASSOCIATION OR ANOTHER TRADE GROUP. SUCH A MOVE WOULD ALERT CONSUMERS IMMEDIATELY WHEN THEY HAVE A CAPITAL CITIES MORTGAGE, FIRST ALLIANCE OR DELTA REPRESENTATIVE AT THEIR DOOR. NO CERTIFICATION: NO BUSINESS SHOULD BE THE RULE.

THE THIRD AND FINAL ELEMENT MUST BE A MASSIVE PUBLIC EDUCATION CAMPAIGN PAID FOR BY THE INDUSTRY AND DIRECTED AT ALL LEVELS OF CONSUMER ACTIVITY. THIS CAMPAIGN MUST ENSURE THAT BOTH CONSUMERS UNDERSTAND THE INTRICACIES OF THE SUBPRIME MARKET. CONS