WORD ON THE STREET: Homeownership has long been the primary asset for most Americans, steadily building modest wealth that can leverage education, entrepreneurship or retirement opportunities. When nurtured over a life cycle, home equity can be shared with the next generation and further their financial security.
Communities of color do not own homes at rates comparable to their white peers, contributing heavily to the racial wealth gap. Civil rights groups have fought for decades for policies that ensure that homeownership opportunities enjoyed are by the rest of the market. Unfortunately, policies to this end have been undermined by lax oversight of financial institutions, faulty implementation, and predatory lending.
An abundance of research has shown that black and Hispanic borrowers were disproportionately sold subprime loans, even when their income and credit profiles warranted standard prime loans. There is overwhelming evidence demonstrating that minority borrowers pay more to access credit than similarly situated white borrowers. This pattern of overpayment, abuse and discrimination disrupts the financial stability of low-income and minority communities, and impedes their upward mobility toward the middle class.
There are four critical barriers that our organization identified prior to the Dodd-Frank Act, which characterized how the banking and financial services markets drain wealth rather than build it. These barriers demonstrate the need for improved regulatory systems, industry practices and consumer supports.
Shopping for credit is nearly impossible. Few shopping tools exist that can help borrowers create true apples-to-apples cost comparisons. As a result, some borrowers forgo shopping altogether, while others rely on intermediaries, such as mortgage brokers or auto dealers, to shop on their behalf. Numerous studies and reports showing deception and hidden costs through these delivery channels demonstrate that brokers and dealers do not operate in a manner that truly benefits the borrower.
Borrowers are steered toward expensive products, regardless of creditworthiness.
Many low-income and minority borrowers have unique borrower profiles – such as thin credit files, multiple co-borrowers or multiple sources of income – that are not easily processed through automated underwriting. Rather than taking the time to match these consumers with existing products that accurately measure their true risk, lenders would steer borrowers toward products that were easier to originate and highly profitable. Prior to Dodd-Frank, mortgage brokers and loan officers were paid kickbacks for putting consumers in loans with higher interest rates than their credit warrants.
Creditors trap borrowers in cycles of debt. For some subprime borrowers, excessive fees, high interest rates, prepayment penalties and mounting debt effectively trap them in the subprime market. For example, the pervasive use of loose underwriting criteria led to the origination of loans that homeowners could never afford to repay.
The mortgage industry wagered that the value of home prices would continue to climb and clients would refinance if their mortgage product became too expensive. This practice led many families into a downward spiral of wealth-draining refinances that has contributed heavily to the current mortgage crisis.
Fraud and scams are rampant. Compounding the impact of predatory lending and the gaps in consumer protections is the rise of fraud and scams targeting victims of burdensome debt and foreclosure. Research conducted by the Federal Trade Commission shows that 14.3% of Hispanics are victims of fraud, compared to 6.4% of non-Hispanic whites. From fake credit cards claiming to help families build credit to foreclosure rescue scams claiming to help families save their home, fraud is on the rise.
Many have recognized the shortcomings of the mortgage system that led to the housing bubble and the foreclosure disaster. The lack of transparency and accountability, as well as the increasing complexity of mortgage products, made it difficult for even the most diligent borrower to shop effectively. In such an environment, deceptive actors had their way at the expense of responsible lenders, homeowners and taxpayers.
The protections established in Dodd-Frank respond directly to this situation. Implemented properly, the regulations should advance a mortgage market that works more fairly for all.
Preventing unfair and deceptive steering
The misalignment of incentives at the origination level was a primary cause of the housing bubble. Simply put, brokers and originators were paid more for steering creditworthy borrowers into expensive loans with risky terms, such as high up-front fees, interest-only payments, negative amortization, and exploding interest-rate adjustments. This practice was especially common among Hispanics. To address this issue, the Federal Reserve solicited public comment on a proposed rule, which was the product of years of study, public hearings and earlier rulemakings.
Steering was one of the most egregious deceptive lending tactics employed against Hispanic borrowers. Therefore, we strongly support the commonsense regulations proposed by the Federal Reserve, further cemented by Dodd-Frank. The proposed rule rightly prohibits compensation based on the terms of the loan, excluding principal, as well as institutes other protections. The rule does not eliminate the ability of originators to be paid for their work to package and close a mortgage loan.
Mortgage brokers play an essential role in helping Hispanic families purchase their home, especially when Spanish is their preferred language. Like housing counselors, many brokers use a one-on-one style that appeals to consumers who are making such a critical and confusing decision.
Unfortunately, this trust was not honored by many unscrupulous brokers – and this caused irreparable harm to families and honest brokers. In fact, the harm done by deceptive brokers and the inability of banks to control the delivery channel is one reason why lenders have all but eliminated their wholesale units.
The steps taken by the Federal Reserve are reasonable and will help to restore trust and confidence in the system. We support the full implementation of the final rule. In addition, as the Consumer Financial Protection Bureau assumes oversight, we encourage the Federal Reserve to work closely with the bureau to harmonize its work. Such opportunities lay in the development of the new mortgage disclosure forms and the proposed rule on Qualified Residential Mortgage and Qualified Mortgage.
Furthermore, we recommend strict oversight of other mortgage fees to protect consumers from absorbing potential cost shift on the part of mortgage lenders, and full disclosure of all associated fees.
Janis Bowdler is director of the wealth-building policy project at the National Council of La Raza. This article is adapted and edited from testimony delivered before the House Subcommittee on Insurance, Housing and Community Development. The original text is available online.
