Senate Subcommittee Eyes Reform of Subprime Home Lending Industry
Feature Story by Lindsey Catlett - 7/15/2007
Senators scolded representatives of the subprime mortgage industry for practices that have triggered a growing epidemic of housing foreclosures across the country at a June 26 Senate Subcommittee on Housing, Transportation, and Community Development hearing
Subprime loans are mortgages that are offered to borrowers with relatively troubled credit histories. They generally carry higher interest rates and other costs.
Witnesses at the hearing said that careless and even unscrupulous brokers and lenders provide these more-expensive loans with terms that they do not always explain to borrowers - who are finding themselves increasingly unable to make the payments.
As a result, one in five subprime mortgages originated during the past two years will result in foreclosure, according to a December 2006 Center for Responsible Lending (CRL) report.
"This kind of activity is an insult to the country, and it's about time that we cracked down on it and I don't care who is standing in our way," said Sen. Bob Casey, D. Pa.
Several witnesses noted that minority borrowers were especially vulnerable to abusive subprime lending.
According to recent CRL statistics, African Americans and Latinos are two to three times more likely to receive a higher-cost loan than whites. These racial disparities still exist even after accounting for differences in income and credit scores.
"It is evident that the race or ethnicity of borrowers – factors that should never play a role in lending decisions – frequently determines the cost of a mortgage loan. And as foreclosures continue to increase nationwide, minority communities are likely to be hit especially hard as a result," said Wade Henderson, president and CEO of the Leadership Conference on Civil Rights (LCCR).
Henderson added that subprime lending can serve a useful role in increasing minority home ownership. But the problem, he said, "is that the 'responsible' part of "responsible subprime lending" has essentially gone out the window."
Committee Chairman Charles Schumer, D. NY, argued that the subprime market was failing and needed more controls: "the fact that these loans are underwritten almost exclusively to borrowers that can't afford them is a market failure."
He added that "there is an unregulated world that is on the loose without adequate supervision – and we need to change that."
The committee also focused on the role the Federal Reserve could have played in preventing the growing wave of subprime foreclosures. The agency has the authority under federal law to stop any lending practices that are "not in the interest of the borrower," but it has not done so.
"To date, the Federal Reserve has utterly and inexcusably failed to use its authority to curtail abusive subprime mortgage lending practices," Henderson noted.
Several committee members sponsored legislation, the Borrower's Protection Act, which would cut down on irresponsible mortgage lending in the future.
It would establish federal regulations for independent mortgage brokers, who originate more than 70 percent of subprime loans. It also outlines standards for lenders to more carefully assess a borrower's ability to repay a mortgage, and prohibits brokers and lenders into "steering" borrowers into more expensive loans than they need.
Many civil rights organizations expressed their support for the legislation, including LCCR and CRL. Several industry groups, including the National Association of Realtors and the Mortgage Bankers Association, agreed with some of the bill's overall goals.
"Particularly in light of the Federal Reserve's inaction to date, we are pleased that Senators Schumer, Brown and Casey have taken the affirmative step of proposing the Borrower's Protection Act of 2007. This proposal offers key protections that would help prevent unnecessary subprime foreclosures in the future," said CRL President Michael D. Calhoun.
