Partners (Summer 2000)

Consumer Advocate Perspective
By William J. Brennan, Jr.

On May 24, 2000, William J. Brennan, Jr., gave testimony before the House Committee on Banking and Financial Services concerning predatory lending. Mr. Brennan, an attorney, is the director of the Home Defense Program of the Atlanta Legal Aid Society, Inc., and a national spokesman on predatory lending issues. Below is a summary of his recent remarks.

Based on my 32 years at the Atlanta Legal Aid Society, 12 years as director of the Home Defense Program, and hundreds of subprime lending cases that have come through my program, I have never seen a subprime mortgage lender not engage in one or more of three distinct categories of predatory practices.

They overcharge on interest and points. Since these companies only lend at 70-80% loan-to-value ratios, they have a 20-30% cushion to protect them if they have to foreclose.

They perpetrate other profitable abuses. They purposely engage in other abusive lending practices that effectively allow the lenders to collect hidden, indirect interest and thereby increase profits. Examples are loan flipping; packing the loan with overpriced single premium-financed credit life, disability and unemployment insurance; balloon payments; high prepayment penalties; using scam home improvement companies to generate originations; paying kickbacks to mortgage brokers to generate originations; and paying off low cost or forgivable mortgage loans.

It is crucial to understand that the profitability of the subprime mortgage lending business is derived not just from overcharging on interest and points, but also from engaging in the listed abusive lending practices set out above. The profitability is inextricably intertwined. While the price of the loan product should be related to actual risk, the abusive practices listed have nothing to do with risk and cannot be justified.

They target groups based on age, race, income, and sex. Predatory mortgage lenders purposely target vulnerable elderly, minority, low and moderate income, and women homeowners with high cost abusive mortgage loans. Elderly homeowners, who tend to have substantial equity but live on fixed incomes are perhaps the principal targets. Some banks and other mortgage lenders engage in redlining by designating entire communities as bad financial risks and refusing to make them prime rate loans. Redlining creates a credit vacuum filled by the predatory lenders. These predators target these same areas with overpriced loan products, knowing that the residents are a captive market with no access to reasonably-priced credit. This is called reverse redlining. Finally, a disproportionate number are women. Most of these are elderly, African American, and widowed.

Although most banks have played no role in the subprime lending business, some banks have played a very significant role. We have numerous cases involving these bank-owned subprime entities. In these cases, we have seen countless examples of abusive lending practices, including high interest rate and points, loan flipping, home improvement scams, credit insurance packing, high prepayment penalties, etc.

Some banks make capital loans to support the operations of subprime mortgage companies. Other banks support subprime mortgage companies by acting as trustees in the securitization process. Some banks down stream [prime credit] potential customers to their subprime mortgage subsidiaries where they are subjected to high cost, abusive mortgage lending practices. Some banks engage in redlining practices. In sum, the involvement of these banks with subprime lending has been a devastating development in terms of the expansion of abusive, predatory mortgage practices in low and moderate income and minority communities.

The fact that these banks are federally regulated has made little difference. So far, the bank regulators have done little to stop the overcharging on cost and the other abusive practices. Now, to my dismay, Fannie Mae and Freddie Mac have announced they are getting into the subprime mortgage lending business. Unfortunately, self-reform does not seem to be occurring. Lenders might very well refrain from the few prohibited practices, but would simply expand into the permissible abuses because they are so closely tied to profitability.

William Brennan, Jr.
All the abuses must be stopped. HOEPA should be amended by substantially lowering the interest rate and points and fees triggers. Further, all of the abuses discussed above should be prohibited. In addition, HUD and/or Congress should require that Fannie Mae and Freddie Mac expand their support for conventional mortgage lending in minority and low and moderate-income communities, and prohibit them from entering into subprime mortgage lending.

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