LEGAL ASSISTANCE FOUNDATION OF METROPOLITAN CHICAGO
April 6, 2004
Re: Proposed Revisions to CRA Rule
OCC Docket No. 04-06
FRB Docket No. R-1181
FDIC RIN 3064-AC50
OTS Docket No. 2004-04
Docket No. 04 06
Communications Division
Public Information Room, Mailstop 1 5
Office of the Comptroller of the Currency
250 E St. SW,
Washington 20219
(f) (202) 874 4448
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
(f) (202) 452 3819
Robert E. Feldman
Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th St NW
Washington DC 20429
(f) (202) 898 3838
Regulation Comments, Attention: No. 2004 04
Chief Counsel’s Office
Office of Thrift Supervision
1700 G Street NW
Washington DC 20552
(f) (202) 906 6518
Officials of the Federal Bank and Thrift Agencies:
I am writing on behalf of the Legal Assistance Foundation of Metropolitan
Chicago (LAF) on proposed changes to the regulations enforcing the
Community Reinvestment Act (CRA). For over 25 years, LAF has provided
free legal services to low-income Chicagoans. I serve as the Supervisory
Attorney of the Home Ownership Preservation Project (HOPP), a special
project of LAF which was formed in the mid-1990's in response to
the crisis of escalating foreclosures in the Chicagoland area. Our
project has advised and represented thousands of homeowners faced
with the loss of their homes due to the aggressive marketing of high-cost
mortgage loans, a problem as prevalent here in Chicago as anywhere
in the country. Many of our clients are seniors who are not only
facing the loss of their homes, but of their only significant asset.
While we have
been able to save the homes of many of our clients, we are only
able to represent
a small fraction of the thousands of
homeowners sued in foreclosure court every year. That is why we are
also active participants in the Chicago CRA Coalition and the Illinois
Coalition Against Predatory Home Loans. We know that preventing bad
lending practices is far more effective that trying to fix them.
Amending the CRA regulations provides one such opportunity, and it
makes sense to use the CRA in this way: predatory lending, also known
as “reverse redlining,” exists largely because unscrupulous
lenders have moved in to fill the vacuum left after traditional lenders
have disinvested from urban minority communities.
Unfortunately, the proposed changes to the regulation move in the
wrong direction: they offer less coverage, and they miss an important
opportunity to include meaningful review of predatory lending activities.
1. Small Bank Limits
The proposed
CRA regulation would change the definition of “small
bank” from any institution with less that $250 million in assets
and not part of a holding company with over $1 billion in assets
to include all institutions with less than $500 million in assets
regardless of holding company size. This change would dramatically
increase the number of banks considered “small” that,
for CRA purposes, are not examined for their levels of community
investment and services under the streamlined small bank CRA examination.
In Illinois, it would reduce the number of institutions covered by
the comprehensive CRA exam by about 63%, from 198 banks to 74. This
would significantly reduce available data on small business lending
despite the fact that it has been shown that small banks have a larger
share of their lending dedicated to small businesses than larger
banks.
We are also concerned
that by removing the holding company threshold from the definition
of small bank, regulators will not only reduce
the number of institutions covered by comprehensive CRA, but also
have created a potential loophole for large holding companies to
exploit when trying to evade CRA compliance. This change raises the
possibility that large holding companies will re form their banking
subsidiaries as a series of local “small banks” to avoid
comprehensive CRA examinations. In the Chicago area, such an institution
already exists. Harris Trust and Savings currently has 26 separately
chartered institutions in the Chicago area totaling over $30 billion
in assets. Of these institutions, 19 would be considered “small” under
the new CRA regulation despite being part of Bancmont Financial Corp,
a holding company with over $39 billion in assets in the United States.
Of those Harris institutions not covered, at least three serve communities
with significant low income or minority populations. Although we
do not feel that Harris has structured its holding company to evade
CRA compliance, we feel that holding companies could use this structure
as a model to avoid significant compliance with CRA.
2. Affiliate Lending and Assessment Areas
Regulators missed
a significant opportunity to modernize CRA by not requiring affiliate
lending
to be considered in CRA exams. As
bank holding companies increasingly use non bank lenders to originate
mortgages, it is critical that all lending affiliates be required
to report lending in an institution’s CRA exam. As currently
structured, the CRA regulation allows banks to choose which affiliate
loans in a given assessment area they want to apply toward the lending
test. This allows institutions to select the best lending affiliates
for each assessment area and to exclude affiliates in assessment
areas where those affiliates might not be adequately serving the
community. As holding companies increasingly acquire non bank lenders,
often subprime lenders, it is critical that this loophole be closed
and all lending affiliates be considered in CRA exams.
3. Predatory Lending Standard
By mirroring
the OCC and setting a weak anti predatory lending standard, regulators
are
missing a significant opportunity to send a strong
statement about predatory lending. The proposed standard allows that
loans originated based on the foreclosure value of the collateral
rather than a borrower’s ability to repay can negatively affect
a bank’s CRA exam. This is a weak standard which fails to target
numerous identifiable predatory loan terms and practices. For instance,
the agencies could use the list of predatory lending in the recent
GAO Report on Predatory Lending: excessive fees, excessive interest,
single premium credit insurance, loan flipping, balloon payments
and prepayment penalties. As the GAO Report points out, some of these
lending practices can sometimes be useful for borrowers, but often
they are not, and so their prevalence in a loan portfolio should
trigger heightened scrutiny of the CRA record of the lender. Below
are our comments focusing on three of these areas (excessive fees,
loan flipping, and prepayment penalties), as well as comments on
two additional we feel are vitally important: mandatory arbitration
clauses and certain (dangerously) “loose” underwriting
procedures.
High fees
Most legitimate loans have relatively low financed fees of 3% or
less. A pattern of loans made with high financed fees should create
concern and should be cause for a reduction of the CRA rating.
Most lenders now are careful in the refinance context to finance
less than 8% of the loan amount, in order to avoid HOEPA coverage.
Indeed, many states (including) have recently passed laws modeled
on HOEPA but which define as high-cost or high-risk mortgage loans
including financed fees in excess of 5% (still a high threshold).
North Carolina led the way in setting the 5% threshold, and after
five years the volume of mortgage lending in that state has not
been adversely affected.1 Therefore, any institution that routinely
finances more than 5% of the total loan amount in fees should receive
additional scrutiny as to its potentially predatory practices.
Loan flipping
One of the most
common methods of stripping equity from low-income communities
is the repeated refinancing of homes, with ever increasing
principal, made up of new fees and costs for the refinancing. Many
states (including Illinois) attempt to address abusive lending practices
by limiting the repeated refinancing of some or all home loans.2 Collecting
a prepayment penalty on a loan refinanced by the same lender or an
affiliate is already prohibited for HOEPA loans.3
For most borrowers,
there is no reason to refinance a loan that is less than 12 months
old.
Certainly there is no reason for most
borrowers to refinance a loan less than 12 months old without a significant
drop in the interest rate. In order for a refinancing to benefit
a borrower who is not in urgent financial distress, the borrowers’ monthly
loan payments should drop and the total amount the borrower is paying
over the life of the loan should also decline, adjusted perhaps for
real cash to the borrower (not cash paid for unsecured debt or the
costs of refinancing).
Any individual refinancing may make sense, but in the aggregate,
most lenders and most borrowers should not be refinancing loans within
12 months of the initial transaction. A pattern and practice of refinancing
loans less than 12 months old should subject the lending institution
to heightened scrutiny and adverse CRA treatment, if other circumstances
warrant.
Prepayment penalties
Prepayment penalties in the subprime market tie borrowers into expensive
loans and seldom function to reduce the actual cost of credit.
There is no good reason (other than to trap borrowers) for imposing
prepayment penalties which last longer than three years, and this
is the length of time used as a standard in most new local and
state laws (as in Illinois). A pattern and practice of imposing
prepayment penalties of more than three years in duration or of
imposing prepayment penalties without a corresponding drop in the
interest rate offered should subject the lending institution to
heightened scrutiny and possible adverse CRA treatment.
Mandatory arbitration
There are two additional practices we believe should also trigger
heightened scrutiny of a lender’s portfolio. The first is
a lender’s insistence on binding arbitration. The presence
of binding arbitration often guarantees that abusive practices
will not be challenged, since it is often not economically feasible
for an individual borrower to challenge an abusive practice, and
arbitration agreements typically prevent class-wide arbitration.
Perhaps even more troubling from a policy viewpoint, mandatory
arbitration prevents full disclosure as to the extent of a problem
at an institution, since arbitration decisions are not public documents.
“
Lite doc” or “No doc” loan underwriting
Finally, there
are certain loose underwriting standards which go to the heart
of predatory
lending, that is, to the practice of improvident
lending. Brokers arrange loans which borrowers cannot really afford,
based on loan applications which do not accurately reflect true income.
Brokers (and sometimes loan officers) “cook the numbers” to “make
the loan work,” either insisting to the borrowers that “this
is how it’s done,” or without the borrower even knowing
what is happening. The end result is the same: the borrower is stuck
in a loan that is doomed to lead them into foreclosure.
This practice
is facilitated more than anything else by loose underwriting policies
(or “programs”) known as “lite doc,” “no
doc,” or “stated income”: in each case, the lender
is willing to make the loan based upon little or no reliable verification
of income (as would be provided, for example, by pay stubs or W-2
statements). This practice is widespread in the (predatory) lending
industry, and by now it should surprise absolutely no one familiar
with the industry that these loose underwriting programs encourage
brokers to fraudulently report income: there are simply no strong
safeguards in place to counter the heavy incentives for doing so.
Indeed, these loose underwriting programs lead back to the one area
the proposed regulation does target: asset-based lending, or lending
based upon the value of the collateral, rather than on the affordability
of the loan. In a sense, these underwriting programs represent the
smoking gun of improvident, or asset-based, lending. For that reason,
the routine presence of these underwriting programs in loans issued
or bought by a lending institution should subject them to heightened
CRA scrutiny.
Thank you for the opportunity to offer the above comments.
Sincerely,
Daniel P. Lindsey
Supervisory Attorney
Home Ownership Preservation Project
Legal Assistance Foundation of Metropolitan Chicago
111 W. Jackson, 3rd Floor
Chicago, Illinois 60604
_________________________________
1 The study entitled, “North Carolina’s Subprime Home Loan
Market
After
Predatory Lending Reform,” is available on-line at (http://www.responsiblelending.org/pdfs/HMDA_Study_on_NC_Market.pdf).
2
E.g., 815 ILCS 137/45(“No
lender shall refinance any high risk home loan where such refinancing
charges additional points and fees within a 12-month period after the
original loan agreement was signed, unless the refinancing results
in a tangible net benefit to the borrower.”); 815 ILCS 120/3(e)
(complete ban on “loan flipping,” defined as “refinancing
a loan secured by the person's principal residence for the primary
purpose of receiving fees related to the refinancing when (i) the refinancing
of the loan results in no tangible benefit to the person and (ii) at
the time the loan is made, the financial institution does not reasonably
believe that the refinancing of the loan will result in a tangible
benefit to the person.”)
3
12 C.F.R. §226.32(d)(6)(ii).
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