Today is the first of two hearings on "Predatory Mortgage Lending: the Problem, Impact and Responses." This morning we will hear first, from a number of families that have been victimized by predatory lenders. Then, later this morning and tomorrow, an array of public interest and community advocates, industry representatives, and legal and academic experts will have the opportunity to discuss the broader problem and the impact predatory mortgage lending can have on both families and communities.
Homeownership is the American Dream. It is the opportunity for all Americans to put down roots and start creating equity for themselves and their families. Homeownership has been the path to building wealth for generations of Americans; it has been the key to ensuring stable communities, good schools, and safe streets.
Predatory lender play on these hopes and dreams to cynically cheat people of their wealth. These lenders target lower income, minority, elderly, and, often, unsophisticated homeowners for their abusive practices. It is a contemptible practice.
Let me briefly describe how predatory lenders and brokers operate. They target people with a lot of equity in their homes, many of whom may already be feeling the pinch of growing consumer and credit card debts; they underwrite the property often without regard to the ability of the borrower to pay the loan back. They make their money by charging extremely high origination fees, and by "packing" other products into the loan, including upfront premiums for credit life, disability, and unemployment insurance, and others, for which they get significant commissions but for which homeowners continue to pay for years beyond the terms of the policies.
The premiums for these products get financed into the loan, greatly increasing the loan's total balance amount. As a result, and because of the high interest rates being charged, the borrower is likely to find himself in extreme financial difficulty.
As the trouble mounts, the predatory lender will offer to refinance the loan. Unfortunately, another characteristic of these loans is that they have high prepayment penalties. So, by the time the refinancing occurs, with all the fees repeated and the prepayment penalty included, the lender or broker makes a lot of money from the transaction, and the owner has been stripped of his or her equity and, oftentimes, his home.
Nearly every banking regulator has recognized this as an increasing problem.
Taken as a whole, predatory lending practices represent a frontal assault on homeowners all over America.
I want to make clear that these hearings are aimed at predatory practices. There are people who may have had some credit problems who still need access to affordable mortgage credit. They may only be able to get mortgage loans in the subprime market, which charges higher interest rates. Clearly, to get the credit they will have to pay somewhat higher rates because of the greater risk they represent.
But these families should not be charged more than the increased risk justifies. These families should not be stripped of their home equity through financing of extremely high fees, credit insurance, or prepayment penalties. They should not be forced into constant refinancings, losing more and more of the wealth they've taken a lifetime to build to a new set of fees, with each transaction. They should not be stripped of their legal rights by mandatory arbitration clauses that block their ability to go to court to vindicate their protections under the law.
Some people argue that there is no such thing as predatory lending because it is a practice that is hard to define. I think the best response to this was given by Federal Reserve Board Governor Edward Gramlich, who said earlier this year:
"Predatory lending takes its place alongside other concepts, none of which are terribly precise - safety and soundness, unfair and deceptive practices, patterns and practices of certain types of lending. The fact that we can't get a precise definition shouldn't stop us. It doesn't mean this isn't a problem." [emphasis added.]
Others, recognizing that abuses do exist, contend that they are already illegal. According to this reasoning, the proper response is improved enforcement.
Of course, I support increased enforcement. The FTC, to its credit, has been active in bringing cases against predatory lenders for deceptive and misleading practices. However, because it is so difficult to bring such cases, the FTC further suggested last year a number of increased enforcement tools that would help to crack down on predators. I hope we will get an opportunity to discuss these proposals as the hearings progress.
I also support actions by regulators to utilize authority under existing law to expand protections against predatory lending. That is why I sent a letter, signed by a number of my colleagues on the Committee, strongly supporting the Federal Reserve Board's proposed regulation to strengthen the consumer protections under current law. I also note that the Federal Trade Commission voted 5 to 0 last year in support of many of the provisions of the proposed regulation.
Campaigns to increase financial literacy and industry best practices must also be a part of any effort to combat this problem. Many industry groups have contributed time and resources to educational campaigns of this type, or developed practices and guidelines, and I applaud and welcome this as an integral part of a comprehensive response to the problem of predatory lending.
But neither stronger enforcement, nor literacy campaigns are enough. Too many of the practices we will hear outlined this morning and in tomorrow's hearing, while extremely harmful and abusive, are legal. And while we must aggressively pursue financial education, we must also recognize that education takes time to be effective, and thousands of people are being hurt every day. At his recent confirmation hearing, Fed Governor Roger Ferguson summed it up well when he said that "legislation, careful regulation, and education are all components of the response to these emerging consumer concerns."
Again, I want to reiterate, subprime lending is an important and legitimate part of the credit markets. But such lending must be consistent with and supportive of the efforts to increase homeownership, build wealth, and strengthen communities. In the face of so much evidence and so much pain, we must work together to address this crisis. Before taking your testimony, let me express my appreciation to all of you for your willingness to leave your homes and come to Washington to speak publically about your misfortunes. I know it must be very difficult. In my view, you ought to be proud that you are contributing to a process that I hope will lead to some action to put an end to the kinds of practices that have caused each of you such heartache and trouble