FDIC Federal Register Citations Edgemont Neighborhood Coalition, Inc.
From: Hirtle Stanley [mailto:firstname.lastname@example.org]
Sent: Tuesday, March 28, 2006 2:34 PM
To: email@example.com.; firstname.lastname@example.org.;
Subject: Comments of Edgemont Neighborhood Coalition on nontraditional
March 28, 2006
Docket No. 05-21
Attention: Public Information Room, Mail Stop 1-5
Office of the Comptroller of the Currency
250 E Street, SW
Washington, DC 20219
Docket No. OP-1246
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
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Attention: Docket No. 2005-56
Chief Counsel’s Office
Office of Thrift Supervision
1700 G Street NW
Washington, DC 20552
Re: Interagency Guidance on Nontraditional Mortgage Products, 70 Fed.
Edgemont Neighborhood Coalition, Inc. wishes to comment on the proposed
Interagency Guidance on Nontraditional Mortgage Products, issued in 70 Fed.
Reg. 77249. We are glad that regulators are calling attention to these
products which have often been abused by predatory mortgage lenders. However
we think that regulators need to take stronger action to prevent abuse.
EDGEMONT NEIGHBORHOOD COALITION, INC.
Edgemont Neighborhood Coalition, Inc. is a nonprofit community organization
located at 919 Miami Chapel Road, in Dayton, Montgomery County, Ohio. The
group consists of residents of the Edgemont neighborhood, a low-income
African American neighborhood in Dayton, who have associated in order to
foster pride in their neighborhood and address the issues of crime, youth
and adult joblessness, inadequacy of educational opportunities,
affordability of utilities, and business and community development.
One issue of importance of the Edgemont Neighborhood Coalition, Inc. has
been the availability of affordable financial services in the community.
Edgemont has been active in Community Reinvestment Act activities in order
that residents have access to mainstream financial services at mainstream
prices, and not be relegated to high-cost “fringe lenders” such as payday
lenders, “subprime” mortgage lenders, rent-to-own vendors and pawnshops.
In furtherance of these goals, Edgemont has commented on proposed
regulations by federal agencies and has appeared as amicus curiae in court
cases involving payday lending and predatory mortgage lending. Edgemont has
been a party in proceedings in the Public Utilities Commission of Ohio, and
has also cosponsored conferences concerning payday lenders and their effects
on the community. Edgemont supports the work of the National Community
Reinvestment Coalition and of the Community Reinvestment Institute Alumni
Association here in Dayton.
In addition to being a community organization, Edgemont Neighborhood
Coalition, Inc. functions as a small business, operating an office,
community garden and community computer center.
Ohio is the center of the mortgage foreclosure epidemic, Montgomery County,
Ohio, where we are located, leads the state in mortgage foreclosures. There
were more than 4,300 foreclosures in Montgomery County in 2003, and nearly
4,000 filed through 2004, and 3888 to date in 2005. This is up 250% in six
Minority homeowners, particularly women and the elderly, in our community
have frequently been the targets of predatory mortgage lending. Predatory
mortgage lending is primarily found embedded in the subprime mortgage
market. Even when subprime loans do not contain predatory features, their
cost appears to be higher than is justified by the increased risk of loss
that the lender faces. Freddie Mac also found that a good percentage of
people who got subprime loans were eligible for prime loans. These features
suggest that credit markets are segregated in practice and this segregation
contributes to high loan cost.
Nontraditional mortgage products have been frequently abused in Dayton,
particularly variable rate loans with initial teaser rates. These are
unsuitable loans for people with fixed incomes, such as most elderly
homeowners in our neighborhoods. Other nontraditional mortgage products that
have been a problem here are loans with large balloon payments and “spurious
open end loans” that do not require payments on principal for the first few
years of the loan.
Subprime mortgage lending is more prevalent in minority neighborhoods. A
recent study by ACORN found that 23% of all refinance loans to
African-Americans in the Dayton/Springfield area were made by higher cost
subprime lenders, as opposed to 6% to whites. A study by the National
Community Reinvestment Coalition found that African-Americans are more
likely to get a subprime loan than whites even if the borrowers’ credit
scores are the same.
The University of Dayton based study report “Predation in the Sub-Prime
Lending marker: Montgomery County – 2001” examined of a random sample of
mortgages associated with foreclosure filings and found that a significant
minority of sub-prime loans involved with foreclosures exhibit interest
rates or other features that are predatory in nature.
Studies from Pennsylvania and North Carolina showed that more than 20% of
subprime mortgages will end in the filing of a foreclosure, and most of
those will result in loss of a home. Foreclosed homes add to the problem of
abandoned properties which blight the neighborhood and contribute to crime.
Minority neighborhoods like ours tend to appreciate less than some suburban
areas, and Midwest areas like ours appreciate less than some other parts of
the country. Thus while some borrowers can get out of trouble by using their
appreciated home value to get a more favorable loan, we can not.
The Federal Reserve Board has found that the median value of financial
assets for non-whites is only 1/5 of that of whites. The equity in a family
home is the most common financial asset for African Americans. Thus
borrowers in our community come to a mortgage transaction at an inherent
disadvantage compared to a lender. To the lender, the risk in the
transaction is a business risk which it can easily manage by spreading
losses over many transactions, improving its servicing, or looking elsewhere
for business. Consequences to the lender are comparatively minor. However,
to the borrower the home may be her sole major financial investment as well
as the center for family life and the social capital that accompanies it.
Unreasonably high cost mortgage loans with predatory features attack the
equity in the home, prevent upward mobility and ultimately can result in
losing both the home and what the home means to the American dream.
COMMENTS ON NONTRADITIONAL MORTGAGE PRODUCTS
We are glad that the regulators are calling attention to the problems
inherent in “nontraditional” mortgage products. This is a first step in the
adequate regulation of these products.
A problem with regulating predatory mortgage lending is that many mortgage
products are suitable for some customers but unsuitable for others. A number
of these, such as adjustable rates and balloon payments, became widespread
in the inflationary 1970s, and some were given special legal protections at
that time. These products were suitable for some borrowers, particularly
during a period of inflation. Adjustable rates and balloon payments are good
for younger people at early stages of their careers whose incomes are going
to increase. They are, however, unsuitable for people on fixed incomes. “No
doc” income stated loans may have originated to benefit entrepreneurs who
have income but are not paid a salary. However they also enable predatory
lenders to make loans that are certain to fail.
Recently it appears that nontraditional mortgage products are proliferating.
There are interest only loans, negative amortization loans, and others. This
makes it difficult for people who have “old-time” expectations about what a
mortgage should be to keep up, particularly when they are getting bad advice
from a lender or mortgage broker.
The dynamics of predatory lending are often that lenders or brokers seek to
turn the borrower’s home equity into fees for themselves. Predatory mortgage
lending exists because loan originators can make very large short term
profits by selling a borrower on a loan. However these originators have no
long term stake in the success of the loan, or in the loan’s effects on the
community. Mortgage loans used to be made and then held by local banks or
savings and loans rooted in their communities. But today many loans are
originated by commissioned salespeople and then eventually held by distant
institutions, sometimes “securitization trusts” with no real independent
existence at all.
In practice, originators profit by making as many loans as possible, whether
or not they are suitable for the borrower. Often they do this by finding
people who have been refinanced previously and are vulnerable to doing so
again, a practice known as “loan flipping.” In fact a loan that has been
unsuitable and gotten the borrower in trouble often results in repeat
business for loan originators.
PREDATORY LENDERS SEEK TO LOWER THE INITIAL MONTHLY PAYMENT
NONTRADITIONAL MORTGAGE PRODUCTS MAKE THIS POSSIBLE
In such a dynamic, the ability to generate a lower monthly payment is often
crucial to selling the loan. Adjustable rate loans and their cousins
interest-only loans have proven to be crucial to selling loans that are
otherwise highly unfavorable to the borrower, and getting origination fees.
Adjustable rate loans tend to have lower monthly payments than fixed rate
Particularly pernicious is an initial “teaser rate” that is artificially
lower than the formula for computing the loan interest. Such a teaser rate
generally insures that the loan payment will eventually increase regardless
of what changes occur in interest rates.
While we have had a relatively long period of comparatively low interest
rates, many expect that a costly war, high budget and trade deficits and
other economic factors will cause interest rates to go up, and with them
monthly payments for ARM borrowers. Thus any adjustable rate mortgage is
risky for the borrower. Mortgage loan obligations last for long periods, 30
years in many cases, and elderly people face probable increases in health
care costs and other expenses in the foreseeable future.
Many subprime ARMs are “one sided”, that is interest rates can increase but
not decrease as interest rates fluctuate. This disadvantage to borrowers has
not been a factor with historically low rates but is likely to become so as
rates fluctuate in the future.
WHAT SHOULD REGULATORS DO?
We first recognize that this guidance will apply only to regulated
depositories, and that many mortgage loans are made by other lenders that
are not regulated. The agencies should support rather than resist national
predatory lending legislation that will uniformly make predatory practices
illegal throughout the market.
As to the lenders that the agencies can regulate, this Guidance is only a
guidance. It does not give legal rights to consumers, nor does it subject
lenders to sanctions. Stronger measures are needed.
I. Underwriting. Lenders should be required to evaluate the ability to the
borrower to repay the loan under any likely scenarios. The proposed guidance
does call for this as to “initial teaser rate” ARM loans. This is good.
However lenders should also have to evaluate for other foreseeable changes
that could increase the monthly payments or decrease the borrower’s income.
1. The maximum possible interest rate for an ARM. These are often quite
high, even if actual rates have not been that high for decades.
2. The interest rate changes that are reasonably probable based on the
majority of predictions in the financial press and the lender’s own business
3. The payments expected to result when periods of negative amortization,
resulting from initial low or minimum payments, increase the loan balance.
4. The payments expected when a supposedly “open end loan” begins repaying
principal as well as interest.
5. The borrower’s income includes temporary or sporadic income sources that
can not reasonably be expected to be there in the future.
II. Stated income loans. Stated income loans constitute closing the lender’s
eyes to the ability to repay. This is an invitation to abuse. Furthermore
since the income is not verified, it is impossible to look at the loan and
say whether or not there has been abuse. While there are conceivable
situations where someone is self employed and will have problems documenting
their income, regulators should require at least some alternative means of
verification of potential income and comparison to other debt and living
expenses. This should be used conservatively, if at all, and not be
routinely applied say to people who primarily receive fixed incomes but
supposedly have some small business on the side. Stated income loans are
particularly suspect in the subprime market due to the prevalence of
predatory lending there.
III. Disclosures. You provide some improvements to the present disclosure of
the risk of nontraditional mortgage products. The Federal Reserve should
particularly reexamine the ARM disclosures under TILA such as the “Consumer
Handbook on Adjustable Rate Mortgages” that have been approved for lenders
to use or modify. The disclosures that are used presently are often
incomprehensible to the average borrower. At worst they can describe a loan
that is much more benign than the one that the borrower is considering, and
are therefore deceptive about the risk the borrower faces.
Disclosures should be required which show both when and what the greatest
amount that borrowers may be required to pay to avoid default on the
mortgage – in other words, the maximum-minimum monthly payments, and the
soonest possible date these payments may be required.
Please remember that written disclosures tend to be of less useful in
protecting borrowers than some expect. Many borrowers have low reading
levels and even those who don’t may be from a culture that makes decision
based on personal contact with trust generated by spoken and unspoken cues
rather than by reading complex and unfamiliar documents. Also a loan closing
can be a pressured and chaotic event where a borrower may not feel in
control of the situation.
IV. Dangerous products. Some products provide for “risk layering” with
multiple mortgages. These are dangerous, particularly in places like inner
city Dayton where home values do not appreciate rapidly.
V. Foreclosure avoidance. Too many homes are being lost in foreclosure. In
part this is because lenders are making riskier loans, particularly in times
when high paying jobs are being lost and health care costs are increasing.
Lenders have changed their business models to make loans that are riskier to
borrowers. They need to change their models of dealing with default so that
people do not lose their homes due top periods of hardship. In particularly
loans should be modified and unaffordable or unnecessary fees, particularly
large lump sums like fees to foreclosure attorneys, need to be reduced.
VI. Community Reinvestment Act. Regulators should impose Community
Reinvestment Act consequences on the use of nontraditional products which
put homes at risk. Regulators should particularly scrutinize this when, as
often happens, the lender using the risky nontraditional products is a
subprime affiliate of a regulated depository.
Thank you for consideration of our comments.
Stanley A. Hirtle
Attorney for Edgemont Neighborhood Coalition
Advocates for Basic Legal Equality
333 W. First St. #500
Dayton OH 45402