Calhoun Statement: Response to Subprime Lender Proposed Principles
Center for Responsible Lending
May 22, 2007
We're glad subprime lenders have recognized that their industry needs to be cleaned up with responsible lending practices. Their statement comes in the wake of a reckless lending spree that, for the most part, was entirely legal under current law. The consequence has been a massive loss in homeownership that is setting millions of hard-working families back, and causing economic hardship in hundreds of communities across the country. The Center for Responsible Lending estimates that over 2.2 million families have lost or will lose their home in the subprime market.
We agree with the lenders that existing subprime loans should be modified so as to be sustainable. We disagree in the strongest terms that an existing, distressed borrower currently in an exploding ARM should be refinanced over and over into a series of unaffordable loans that deplete the families' home equity. Down this path, foreclosure is the inevitable result.
Mortgage loans should be made to borrowers with substantiated ability to repay the loan—period. No ifs, ands, or buts. The lenders' proposal creates so many exceptions to the "documented ability to repay" standard that there is little or no substance remaining. Proposed exceptions include:
- loans with exploding payment shock starting in month 37 or later,
- loans to existing subprime ARM borrowers,
- stated income loans with FICO score as compensating factor, and
- stated income loans with appraised equity as compensating factor.
The proposed principles are a defense of "business as usual." For example, look at principles 1 and 4.
#1: For "existing borrowers" (which represent a majority of all new subprime loans), "lenders should not be required to use the fully-indexed, fully-amortizing standard in underwriting a loan." Are we seriously going to let an abusive initial loan to a homeowner be the rationale for another fee-heavy loan that is not affordable even at the fully-indexed interest rate?
#4: Any loan with a "demonstrable benefit" should be made. Do subprime lenders really believe that any subprime home purchase loan is a good loan, no matter how abusive the terms? Do they really believe that any loan that consolidates credit card debt into a mortgage (which will lower the monthly payment) is per se a net benefit to the homeowner, regardless of the abusive terms of the loan? Do they really believe that refinancing a borrower from a conventional mortgage with escrows for taxes and insurance into a subprime mortgage that does not escrow is a benefit to the borrower because it appears to lower the monthly payment?
In addition, the lenders' statement specifically would limit states' ability to take action against predatory lending in the subprime market. For the past fifteen years, the federal government has steadfastly refused to take any significant action against abusive lending practices, even in the face of mounting evidence of abuses in the subprime market. During that time, at least two dozen states have taken positive actions to protect homeowners—without hindering access to credit. The states, which can act more quickly and effectively to address local issues, must be allowed to build on federal law when necessary.
Subprime loans, which disproportionately fall on African-American and Latino homeowners, should have the same consumer protections that are routinely provided for prime mortgage loans targeted to white borrowers. The lenders' statement simply provides a clever defense of the status quo, where subprime lenders knowingly make reckless loans to families who have no prospect of repaying those loans. Have subprime lenders learned nothing from the subprime meltdown and widespread devastation in communities across America?
Disclosures have proven to be a useless defense against predatory lending, and access to credit does no good when the credit isn't affordable. In fact, while access to subprime credit was abundant in recent years, it produced a net drain in homeownership. From 1998 through 2006, less than 10% of subprime borrowers used subprime loans to purchase their first home, thereby increasing the homeownership rate, but at least 15-20% of all subprime borrowers will end up losing their home to foreclosure.
We need strong, specific standards for approving loans that will be affordable to borrowers for the life of the loan, and we agree that these standards should apply to all lenders. Without strong, common-sense policies in place to prevent abuses, the abuses will remain.
Sharon Reuss at 919-313-8527
Carol Hammerstein at 919-313-8518
CRL Durham office
Additional comments regarding the subprime lender release follow:
"The Association of Community Organizations for Reform Now (ACORN) has assisted thousands of distressed borrowers facing foreclosure and therefore, we are encouraged that industry representatives have acknowledged indirectly that serious mistakes have been made in the loan origination process. However, the principles laid out by industry stakeholders fails to lay out a serious solution that prevents future unscrupulous lending practices, and more importantly, it fails to assist families facing financial catastrophe as a result of being trapped in an unaffordable loan. We call on the mortgage industry and the investor community to offer real, workable solutions to the current crisis."
Maude Hurd, president of ACORN
"We welcome the industry's promise to change, but we believe strong federal rules are needed to protect consumers from abusive mortgage loans and we disagree that sound consumer protections would reduce the rate of homeownership in America. The price of homeownership should not be a family's financial instability," said Linda Sherry, Consumer Action's director of national priorities. "In addition, federal law must provide strong protections for borrowers who face losing their homes to foreclosure. Voluntary industry efforts just won't cut it."
Linda Sherry, director of national priorities, Consumer Action
"Today's announcement is an admission from mortgage lenders that their own lax underwriting standards and misleading marketing are the cause of today's foreclosure crisis. The response to this dismantling of whole neighborhoods must be a legal requirement for lenders and all market players to provide sustainable lending and a guarantee that homeowners will be able to obtain meaningful relief from past and future abusive loans."
Alys Cohen, staff attorney, National Consumer Law Center
We are pleased that the mortgage lending industry is taking this first step in acknowledging the extent of the problems caused by subprime and predatory loans. These loans are particularly devastating to families and communities of color, where these loans are heavily concentrated. We expect that the industry will make every effort to assist borrowers by offering loan modifications that result in fixed-rate products, including prime products wherever possible.
Shanna L. Smith, president and CEO, National Fair Housing Alliance
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For more information: Kathleen Day at(202) 349-1871 or firstname.lastname@example.org; Sharon Reuss at (919) 313-8527 or email@example.com; or Ginna Green at (510) 379-5513 or firstname.lastname@example.org.
About the Center for Responsible Lending
The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.