Mortgage lenders need more oversight from federal regulators, critics urge
By Jonathan D. EpsteinUpdated: July 19, 2009, 7:47 AM
Consumer advocates nationwide are calling on lawmakers and regulators, especially the Federal Reserve, to strengthen a pair of decades-old laws governing lending in low-income and minority communities.
Consumers and activists in Buffalo got their own chance to speak out last week as two Federal Reserve officials from Washington came to town and got an earful from more than 130 residents and about a dozen community group representatives. The goal was to give the Fed a better idea of what is really happening on the ground.
Again and again, the two Fed officials and colleagues from New York City heard the call to expand the federal Community Reinvestment Act and Home Mortgage Disclosure Act, and to tighten oversight of all lenders to regulate and prevent irresponsible behavior. Activists also want to see more CRA investment in communities.
“We want to see CRA and HMDA reform, because we need to keep our homes,” said Jennifer Mecozzi, chairwoman of People United for Sustainable Housing, or PUSH-Buffalo, which sponsored the community meeting and moderated the discussion. “We want the feds to hold banks accountable.”
The Fed officials also heard advocates and residents denounce abusive lending practices and blast lenders for making irresponsible loans.
In particular, advocates criticized banks and others for taking billions of dollars in federal bailout money from taxpayers, and then resisting changes to regulations and laws now that they’re back in the black.
The meeting came as investment bank Goldman Sachs & Co. reported record earnings and J. P. Morgan Chase & Co.’s profits blew away Wall Street.
“They’re making record profits while the neighborhoods where we work and live are being allowed to slide into chaos,” said Joan Davison, Empire State Housing Alliance coordinator.
Advocates have been particularly critical of the Fed itself, which they say has long had the authority necessary to implement tighter rules and supervision over the entire lending industry, but didn’t do so until it was too late. In doing so, critics say, regulators failed.
“Not only are the Federal Reserve governors friends of Wall Street bankers, they are Wall Street bankers,” said Kevin Connor, Public Accountability Initiative co-director.
“When the fox is guarding the henhouse, of course, nothing is going to happen . . . It’s not the consumers we need to study. It’s the bankers, the lenders and the people who run the federal government.”
The Community Reinvestment Act requires regulated banks and savings banks to make loans and investments in communities from which they take deposits, including low-income areas. The Home Mortgage Disclosure Act requires lenders to report an array of data about every mortgage loan and application, including factors such as race and ethnicity of the borrowers. Both have been widely cited for increasing access to credit for low-income and minority consumers.
The rare public meeting in Buffalo is the second in a series of nine events nationwide that Federal Reserve Chairman Ben S. Bernanke agreed to under intense lobbying pressure from a pair of national activist coalitions, National People’s Action (NPA) of Chicago and the PICO National Network of California.
“These hearings provide an opportunity for people across the country to stand face-to-face with Federal Reserve officials and share their frustrations and struggles, give Fed officials a clear picture of what the foreclosure crisis and economic crisis looks like on the ground, and put forth common sense proposals for how the Fed can help clean up this mess,” said NPA executive director George Goehl, on a conference call with groups and reporters.
The meetings also demonstrate the power and influence that community and consumer advocacy groups now have with federal officials in the wake of the financial crisis, after years of feeling almost ignored when they pleaded for action. “This was not a result of a letter or phone call,” said Jordan Estevao, director of NPA’s Save the American Dream Campaign. “We pushed for this and it’s important for us to keep pushing.”
Connor said luminaries like former Fed Chairman Alan Greenspan, former Treasury Secretary Robert Rubin and investor Warren Buffett, whose Berkshire Hathaway owns The Buffalo News, have described the crisis as a “once in a lifetime credit tsunami,” a “perfect storm,” and an “economic Pearl Harbor,” respectively.
“It’s as if this was a natural disaster that we never saw coming,” Connor said.
“We’ve been dealing with this crisis for the last six to eight years,” said Amanda Pascal of Syracuse United Neighbors. “This is nothing new for us. We’ve been seeing people kicked out of their houses. And don’t forget, they were targeted by those crooks.”
According to NPA research cited by Estevao, 40 percent of the loans in Erie County from 2005 to 2007 had fixed rates over 10 percent or were adjustable-rate mortgages. In Buffalo, he said, most of the worst loans were in minority areas with low income. Indeed, black borrowers were more than twice as likely as white borrowers to get high-cost loans, even when both groups are low-income.
But Connor said it wasn’t until the problems went “beyond the neighborhoods and affected Wall Street,” that lawmakers and regulators took notice, and banks asked and received help — to the tune of more than $1 billion. “The water had been coming in the hull, and finally it reached the captain’s deck,” he said. “Imagine what communities could do with that kind of money.”
Conservatives and other critics of CRA have attacked the 32-year-old federal law for causing the crisis, saying CRA pressured banks to make loans to low-income and minority borrowers.
But the advocates noted that 65 percent of mortgage lending, and 81 percent of the subprime and high-cost loans, were made by lenders that aren’t subject to CRA. Bank loans covered by CRA, on the other hand, were sound and represented only a very small part of the problem. So, “we need an expansion of CRA to make it apply to all these loans,” Estevao said.
Expanding CRA and HMDA to cover all lenders would also ensure better data is collected on all of the loans that are made. Currently, there’s not enough information on loans and foreclosures at either the state or national level, and the national research firms most commonly cited are “not reliable,” said Kathleen Lynch, senior attorney at the Western New York Law Center.
“We agree that the current regulatory structure is inadequate to detect or prevent a problem,” she said. “How do you detect a problem and come up with a solution if you can’t even measure a problem?”
The problem doesn’t stop with foreclosures, though. About 20 percent of foreclosed properties nationwide are rental properties, so the tenants end up getting kicked out. And since they often have fewer financial resources and savings than homeowners, “they have a much greater chance of winding up homeless,” said Bill O’-Connell, executive director of the Homeless Alliance.
Erie County officials are already seeing “unprecedented levels” of homeless, O’Connell said, with 2,800 people in Buffalo and Erie County last year. And last year was the first time that foreclosures was cited ahead of mental illness as a cause of homelessness.
Buffalo is also suffering “a crisis of property abandonment,” said Anthony Armstrong of Local Initiatives Support Corp. in Buffalo. About 30,00 housing units in the city, or 23 percent of the total, are vacant, and 13 percent are “chronically in distress,” he said. Some neighborhoods have vacancy rates of more than 35 percent. And 12 percent of all the land in the city, or 3,200 acres, is vacant.
“This vacancy problem is not new. In fact, it’s worsening and spreading,” Armstrong said. “This is not just a city problem.”
Once vacant, a home “basically has a target or bulls-eye on it,” said Beverly Moore, housing counselor at Buffalo Urban League.
Finally, advocates want to make sure loans are affordable. “If a person has an affordable loan, they’re going to be able to stay in their homes,” said John Anderson, Buffalo director of Neighborhood Assistance Corp. of America, a nonprofit.
“Policies have to change, so we can make sure that this nonsense doesn’t happen ever again,” said Pascal.