ACORN
April 6, 2004
Docket No. 04-06
Communications Division
Public Information Room, Mailstop 1-5
Office of the Comptroller of the Currency
250 E. St. SW
Washington, DC 20219
Docket No. R-1181
Jennifer J. Johnson
Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551
Robert E. Feldman
Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th St., NW
Washington, DC 20429
Regulation Comments, Attention: No. 2004-04
Chief Counsel’s Office
Office of Thrift Supervision
1700 G Street NW
Washington, DC 20552
Dear Federal Banking Regulators:
On behalf of
ACORN’s
more than 150,000 member families, I urge you to withdraw the proposed
changes to the Community Reinvestment
Act (CRA) regulations. The proposed changes will reduce access to
capital in hard-pressed low- and moderate-income neighborhoods, while
doing nothing to eliminate the scourge of predatory lending that
continues to devastate our neighborhoods.
ACORN believes that since the passage of the CRA in 1977, great
progress has been made in ending redlining and pushing banks to improve
their lending performance in underserved communities. We have worked
with banks to improve their outreach efforts, remove barriers in
underwriting criteria that excluded credit-worthy low- and moderate-income
applicants, and create loan counseling programs that assist first-time
homebuyers.
There is still a long way to go, however, and the proposed changes
to the CRA do not help us get there. In several key areas, the changes
are either inadequate or make the problem worse.
Predatory Lending Standard
The proposed
new standard for predatory lending, barring loans based on the
liquidation or
foreclosure value of the collateral, where
the borrower cannot be expected to make the payments on the loan,
is “new” in name only. As is indicated in the agencies’ own
description of the proposed changes, this practice is already banned
under HOEPA and by the OCC. This change would do nothing to address
the wide range of practices that make up predatory lending.
A story illustrates
some of these practices. Kathleen and Thomas, a couple from Minnesota,
have owned their home since 1971, and their
previous mortgage had a 7.8% interest rate. They have always had
an excellent credit record; Thomas, who is the primary wage earner,
had ‘A’ quality credit scores last year of 682, 731,
and 680.
In August 2002,
Kathleen and Thomas received an unsolicited live check in the mail
from
Wells Fargo for a little over $1,000. After
cashing the check, which resulted in a very high rate loan, they
began receiving calls from Wells Fargo Financial offering more money
and urging them to consolidate debts. At the time, Kathleen and Thomas
did not know that there was any difference between Wells Fargo Bank
and Wells Fargo Financial, which is the company’s primary subprime
lending institution. Since they had wanted to pay off some bills
and buy new windows for the house, they started talking to Wells
Fargo Financial about a debt consolidation.
The Wells Fargo loan officer came out to their house and told them
that they could get a 6% interest rate and would close in ten days.
A few weeks later, another Wells representative came out to their
house. He said that because of their credit and debts, their interest
rate would actually be closer to 8%. He said that he would see if
he could get them a better rate.
After another
couple weeks, Kathleen and Thomas went to the Wells office for
the closing in
September 2002. Once there, they found
out that their interest rate would actually be 10.0% – at a
time when ‘A’ rates were 6.0%. When they asked about
why the interest rate was so high, the Wells representative said
it was because of their credit. Despite the high rate, Wells financed
their standard (at the time) seven “discount points” – stripping
away close to $8,000 of their home’s equity – into the
$112,000 loan. Kathleen and Thomas thought about not taking out the
loan, but they had been expecting to close earlier that month and
so hadn’t paid the bills that the refinancing was paying off,
and they felt that they had no choice.
Last June, ACORN Housing Corporation helped Thomas and Kathleen
refinance with another lender into a 5.3% interest rate, lowering
their monthly payments by over $400.
This is just
one story among tens of thousands. Unfortunately, too many loan
features
that are totally legal are profoundly anticompetitive
and nontransparent. Since they are still legal, these predatory features
would not harm a bank’s CRA rating. The regulations proposed
here will do nothing to prevent the vast majority of these abuses.
Stronger regulations need to be adopted to eliminate these practices.
One important
feature of predatory lending, seen in the case of Thomas and Kathleen,
is the steering of borrowers with good credit
into the subprime market. This is particularly true of minorities.
The annual study we released last month, “Separate and Unequal:
Predatory Lending in America”, shows that minority homeowners
continue to be much more likely to receive a subprime loan than white
homeowners. Among refinances—which accounts for nearly two-thirds
of subprime loans—African-American homeowners were four times
more likely to receive subprime loans, while Latinos were two and
a half times more likely. This disparity was true even among borrowers
of the same income level. 27.8% of the refinance loans received by
middle-income African-Americans were subprime, as were 19.4% of the
loans received by Latinos at this income level. Meanwhile, only 7.6%
of the loans given to middle-income white homeowners were subprime.
These differences
have huge effects on families’ finances.
A loan with a higher interest rate can cost a family tens or even
hundreds of thousands of dollars over the life of the loan. What
makes this particularly egregious is that a large percentage of these
borrowers actually qualify for a prime loan, but are “steered” into
the subprime market. A recent report in Inside B & C Lending
indicates nearly 83% of subprime loans went to customers with A-
or better credit ratings.1
The Chairman
of Fannie Mae, Franklin Raines, has estimated that as many as half
of all borrowers in subprime loans could have qualified
for a lower cost conventional mortgage, which could save the borrower
more than $200,000 over the life of a thirty year loan. 2
Freddie Mac’s
estimate, while somewhat lower, was still extremely high—they
found that as many as 35% of subprime borrowers could have qualified
for prime loans.3 The CEO of HSBC, when discussing
plans to purchase Household International, said that 63% of the subprime
lender’s customers had prime credit.4 Huge numbers of homeowners
with good credit, particularly people of color, are being steered
towards subprime loans. This is itself a form of predatory lending.
It also increases the risk of foreclosure, as borrowers are often
paying hundreds of dollars more each month on their loan.
Banks have an important role to play in ending this discrimination.
They need to step up to plate and ensure access to credit on fair
terms. This progress should be monitored by requiring financial institutions
to report the numbers of prime and subprime loans they make. CRA
ratings on the lending test should reflect the goal of fairly meeting
the credit needs of all communities with credit priced at fair terms:
A loans for those who qualify for A loans, and fairly priced subprime
loans where these are appropriate. Lenders making subprime loans
when they could be making prime loans are not fulfilling their CRA
responsibilities. What they are doing is ripping borrowers off.
Increased Threshold for Large Retail Institution Test
Regulators propose
to raise the threshold for the large retail institution test from
$250 million in assets to $500 million. The requirement
that small institutions that are part of bank holding companies with
at least $1 billion in assets be subject to the large institution
test is eliminated. This would double—from 11% to 22%--the
number of banks that are subject to the weaker small institution
test, affecting over 1,100 banks with more than $350 billion in assets.
Excluding these banks from the large institution test is a bad idea.
The large institution test, with its investment and service components,
is an important tool for our communities. The investment component
plays a major role in meeting affordable housing and economic development
needs in our communities. The service test, while not as strong as
it should be, helps push banks to provide vital banking services
to underserved neighborhoods, helping give alternatives to the check
cashers and payday lenders who prey upon poor people.
Under the proposed changes, more than a thousand banks would no
longer be subject to the investment and service tests. This would
mean less investment and legitimate banking products in the areas
that need them most.
Holding mid-sized banks accountable for serving local communities
is particularly important now, as mergers and consolidation create
a set of giant national banks, less accountable to local needs and
less susceptible to local pressure. This only increases the importance
of mid-sized banks, and means it is particularly important to continue
to subject them to the large institution test. Too many lenders we
have talked to in the small bank category think of this test as a
virtual exemption from the CRA. For these reasons, the threshold
for the large institution test should be left where it is.
Affiliates and Assessment Areas
Currently, banks can choose whether to include the activities of
their affiliates in their CRA evaluations. This is a holdover from
an era when a vast majority of loans were made by depository institutions.
With bank affiliates now making large numbers of loans, these affiliates
must be included in CRA evaluations.
Many abusive loans we have seen have been made by Wells Fargo Home
Mortgage, a non-depository affiliate of a bank. Banks cannot be allowed
to behave one way with their depository institutions and another
with their nondepository affiliates. ‘Cherry picking’ among
affiliates, only including those that improve a bank’s CRA
performance, must end.
Similarly, with
more loans being made through channels other than deposit-taking
branches
or ATMs, assessment areas of banks need to
be expanded. They should include all areas in which a bank is making
a substantial share of the lending market. A good standard would
be 0.5% of the total loans made in a metropolitan standard area (MSA)
or non-metro county. This would ensure a more accurate evaluation
of a bank’s activities under the CRA.
Conclusion
The CRA needs to be strengthened to ensure fair access to credit
to all Americans. When 98% of banks are getting passing marks, yet
our communities continue to be underserved or, in too many cases,
exploited by financial institutions, something is wrong. We urge
you to reject these proposed changes. It is time to go back to the
drawing board and come up with new regulations that will really help
our low- and moderate-income communities. Stronger curbs against
predatory lending, including the practice of steering into the subprime
market, retention of the current large institution threshold, and
inclusion of affiliates and expanded assessment areas in examinations
are all needed to create a more just and equitable banking system
in this country.
Sincerely,
Maude Hurd
ACORN National President
_____________________________
1 FICO Scores Hold the Line but Deep MI Drops in 4th
Quarter” Inside
B & C Credit Vol. 9 Issue 4 p. 9 (February 23, 2004)
2 Business Wire, “Fannie Mae has Played Critical Role in Expansion of Minority
Homeownership Over Past Decade,” March 2, 2000.
3 Automated Underwriting,” Freddie Mac, September 1996.
4 HSBC: Why the British Are Coming: Chairman John Bond Explains Why the
Usually Cautious British Bank Paid a 30% Premium to Acquire American Lender Household,” Business
Week Online, November 18, 2002, Daily Briefing.
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