NCRC Testimony before the FDIC, May 24th, 2005
Regarding Petition for Rulemaking to Preempt Certain State Laws
The National Community Reinvestment Coalition is a national organization comprised of more than 600 community organizations from across the county. Through our data collection and research we have been instrumental in bringing national attention to lending disparities in the United States. Since our inception we have advocated an agenda that would strengthen and empower communities to economically thrive and prosper.
We believe that an affirmative decision in favor of the petitioner’s request would diminish the power of the states to enforce and enact meaningful public policy and consumer protections for its citizens with regard to state chartered banks. The implications of this request are profound. Essentially state chartered banks would enjoy pre-emption of most state laws including where the bank is not chartered nor has branches. The end result would be a race to the regulatory bottom and the stripping away of states rights. Both outcomes will further exacerbate predatory lending and fair lending disparities we have seen in the recent HMDA pricing data.
A large number of states including North Carolina, New York, New Mexico, New Jersey, and California have enacted comprehensive anti-predatory lending laws in order to protect their citizens from the increasing amount of abusive lending in their states. If the petitioner’s request is granted, state-charted banks headquarted in states with weaker anti-predatory laws will be able to override the rigorous and comprehensive laws when they make loans or buy loans from brokers operating in states like North Carolina and New Mexico. At a time when minorities, immigrants, and women disproportionately receive high cost loans, it is counterproductive to strip states of their rights to protect citizens who are striving for their American dreams of first time homeownership and wealth building.
This March, NCRC released a report using 2003 Home Mortgage Disclosure Act (HMDA) data examining lending trends in every metropolitan area in the country (report is available on http://www.ncrc.org). The report found that minorities, women and low- and moderate-income borrowers across the United Sates of America receive a disproportionate amount of high cost loans. Prime loans are loans made at prevailing interest rates to borrowers with good credit histories. Subprime loans, in contrast, are loans with rates higher than prevailing rates made to borrowers with credit blemishes. The higher rates compensate lender for the added risks of lending to borrowers with credit blemishes. While responsible subprime lending serves credit needs, public policy concerns arise when certain groups in the population receive a disproportionate amount of subprime loans. When subprime lending crowds out prime lending in traditionally underserved communities, price discrimination and other predatory and deceptive practices become more likely as residents face fewer product choices.
NCRC compared lending disparities to the level of segregation and housing affordability across the metropolitan areas. We discovered that as segregation increased the portion of subprime loans to African-Americans, women and minority census tracts increased faster than prime lending to these borrowers and communities. The data also indicated that as homeownership became more affordable, sub prime lenders made a higher portion of loans to low- and moderate-income and minority borrowers than prime lenders made to these borrowers. All else equal, prime lending should increase faster than subprime lending in more affordable metropolitan areas as more modest income families should be able to qualify for loans at prevailing interest rates.
NCRC also found that subprime lenders reached more women in every single metropolitan area observed and reached more African-American and low- and moderate-incomes neighborhood in 98 percent of the nation’s metropolitan areas. Prime lenders were outperformed by subprime lenders in 89.1 percent and 85.8 percent of the metropolitan areas, in reaching Hispanics and low- and moderate-income borrowers, respectively. Prime lenders also lagged subprime lenders in percent of loans to minority communities in 76.7 percent of metropolitan areas.
Right on the heels of our report examining lending trends in every metropolitan area, NCRC released another report that found national level fair lending disparities using the new 2004 HMDA data. As you know, the new data contains pricing information for subprime loans; NCRC conducted a sample of 15 large lenders that made more than 5 million loans across the country. We found that 30 percent of the loans received by African-Americans were subprime while just 10 percent of the loans received by whites were subprime. Disparities also occurred by gender and income level of borrower.
These disparities occur at a time when regulatory officials are eroding the laws and regulations that empower communities to thrive and prosper. Regulators are now considering regulations that would chip away at the regulations implementing the Community Reinvestment Act (CRA), a law prohibiting lending discrimination against neighborhoods. Last year, the Office of the Comptroller of the Currency (OCC) joined the OTS in preempting state laws prohibiting predatory lending. In light of the recent HMDA data and the widespread scourge of predatory lending now is not the time to again weaken regulations for state chartered banks.
As we have stated the lending disparities are stubborn and persistent. The granting of the petitioners request would handcuff states and prevent them from enforcing their laws and protecting consumers from predatory lenders and price discrimination. The totality of further weakening of banking regulations in the guise of regulatory relief will further undermine the gains we have seen in CRA, but more importantly undermine the wealth building strategies of communities and individual consumers. NCRC strongly requests that you deny the petition by the Financial Services Roundtable and send a message that state chartered banks have a moral and civic responsibility to respect the will and the rights of the states to protect its citizens.
If you have any questions, please feel free to contact NCRC on 202-628-8866.