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Civil Rights Groups Oppose a New Bill that Opens the Door to Predatory Lenders

Wednesday, March 23, 2005

WASHINGTON, D.C., -- Civil rights groups joined consumer organizations in opposing a bill in Congress that would gut protections against predatory lenders.

That bill, introduced by Reps. Bob Ney of Ohio and Paul Kanjorski of Pennsylvania, would make it easier for unscrupulous lenders to rob the nation's most vulnerable families of their homes and savings.

NAACP Chairman Julian Bond urged lawmakers to reject the bill and pass instead a bill by Reps. Brad Miller and Mel Watt of North Carolina and Barney Frank of Massachusetts that strengthens defenses against predators.

"Representatives Ney and Kanjorski have failed to provide meaningful protections in their mis-named 'Responsible Lending Act,'" said the national civil rights leader. "Their bill demonstrates a failure to address the real pain caused by predatory lending and the harm it is doing to African-American families.

"I call on all our allies in Congress to reject the Ney-Kanjorski bill and work with the other members of Congress who are providing real solutions to the crime of predatory lending."

Predatory lending costs American homeowners more than $9 billion a year through excessive, hidden fees and other deceptive practices. It menaces those least able to resist: the poor, immigrants, minorities. In fact, it threatens the hard-won gains of entire neighborhoods with the specter of foreclosed, boarded-up houses and homeless families.

Research by the Center for Responsible Lending (CRL), a nonprofit, nonpartisan policy group, shows that borrowers in minority neighborhoods are far more likely to be targeted for abusive practices, such as penalties for paying off a mortgage early. These penalties can lock homeowners into predatory, high-priced loans and ultimately even cost them their home. One in five subprime loans -- loans made to people with less than perfect credit records, the market where predatory lenders flourish -- end in foreclosure.

The Rev. Jesse Jackson, president of Rainbow/PUSH Coalition, also urged legislators to reject the Ney-Kanjorski bill and support the Miller-Watt-Frank bill.

"I fully support the 'Prohibit Predatory Lending Act' sponsored by Representatives Watt, Miller, and Frank that would encourage home ownership by eliminating predatory lending," Jackson said.

"Representatives Ney and Kanjorski fail to provide meaningful protections that will stop abusive mortgage lending targeted at African-Americans, Latinos, women, and elderly citizens."

Wade Henderson, executive director of the Leadership Conference on Civil Rights, criticized the bill for pushing homeowners into mandatory arbitration, which is often stacked in favor of the lender and leaves the cheated homeowner no legal recourse.

"Predatory lending is a cancer on the financial health of communities of color," Henderson said. "Unfortunately, Representatives Ney, Kanjorski and the co-signers of their bill tackle this cancer with a bandaid and then tell borrowers they can't seek a second opinion – either from the courts or from states legislatures.

"We must ban mandatory arbitration on all home loans, not just the rare high-cost home loan. States have been leaders against predatory lending, and Congress should not override those efforts."

Shanna Smith, president and CEO of another prominent civil rights group, the National Fair Housing Alliance, said, "Predatory lending is a major threat to African-American and Latino communities everywhere, where people are trying to build some equity and a decent life through owning a home. Shamefully, the predators are robbing these people of their savings and putting them out on the street.

"For instance," Smith said, "Ohio, Rep. Ney's home state, and Indiana have the highest foreclosure rates in the nation. And Pennsylvania, Rep. Kanjorski's home, isn't far behind. The Ney-Kanjorski bill would actually increase the threat to homeowners in these states and others, not help them, and that is why, in good conscience, we cannot support this bill."

These civil rights leaders join consumer-rights organizations such as the National Consumer Law Center, which says the Ney-Kanjorski bill would "eviscerate" state and federal protections; the U.S. Public Interest Research Group, which says predatory lenders are seeking "federal safe harbors from strong and innovate state consumer protections"; and the Consumer Federation of America, which says the bill "does not provide the necessary safeguards that would truly eliminate incentives for lenders to make predatory loans."

Ira Rheingold, executive director of the National Association of Consumer Advocates, said predatory lenders are pushing the Ney-Kanjorski bill so they can spread even faster than they are already growing.

"This legislation is just another immoral attempt by the banking industry, with help from their Congressional enablers, to avoid their own responsibility for the plague of predatory lending," Rheingold said.

"This bill does little or nothing to protect the American homeowner, but instead stands as yet another cynical retreat from the fundamental societal values embodied by our country's long tradition of strong consumer protection laws."

Also opposing the bill is John Taylor, president and CEO of the National Community Reinvestment Coalition, which promotes community development.

"NCRC applauds the efforts of Congress to eradicate predatory lending practices for all Americans," said Taylor. "However, the current offering by Rep. Ney and Rep. Kanjorski is simply too weak and so fraught with loopholes and exceptions that it will have little or no impact.

"In fact, it can be argued that the bill in its current form would do damage to prospective consumers because it would preempt some of the existing state anti-predatory lending laws. A federal bill must duplicate or expand on the most effective state anti-predatory lending laws before preemption could even be considered."

The California Reinvestment Committee, a c oalition of more than 200 organizations that advocates increased access to credit for low-income communities, said the bill would hurt the groups the committee represents.

"The Ney Kanjorski bill represents a victory for all who profit from predatory lending," said Kevin Stein, associate director of the committee. "Unscrupulous mortgage brokers, high cost lenders, and Wall Street investment banks will be able to rest secure in the knowledge that they can continue to arrange, make and finance predatory loans virtually unfettered. The only losers are the unsuspecting families that struggle to keep up with oppressive payments on abusive loans, and the communities in which they live."

"Congress should encourage wealth creation for all households by providing meaningful protections from predatory lending, not facilitate wealth stripping through a bill that protects too little and preempts too much."

Mark Pearce, president of the Center for Responsible Lending, also said the bill is inadequate.

"The numerous loopholes in this bill show a lack of understanding of how predatory lending steals the home equity of thousands of American families every year," said Pearce. "We simply can't afford the costs that come with it: The boarded-up houses in struggling neighborhoods, the hard-earned gains of working-class people wiped out by predatory lenders. At bottom, that is what this debate is all about."

Here are some of the biggest holes in the Ney-Kanjorski bill, according to an analysis by CRL.

  • It fails to count fees, such as the penalties for paying off a loan early that trap borrowers in expensive loans or the kickbacks to brokers called yield spread premiums, in deciding whether a borrower is protected by federal predatory lending law. Under the Ney-Kanjorski bill, lenders can dodge the law by shifting their compensation to these excluded fees. The Miller-Watt-Frank bill, in contrast, takes the approach of numerous state laws by including these fees. The Ney bill also revives a loophole the Federal Reserved closed a few years ago. The bill excludes the costs of single-premium credit insurance when calculating fees. Single-premium credit insurance is an abusive practice that essentially disappeared from the market once it was included as an upfront fee; the bill would open the door again to this abusive practice.
  • It fails to stop abusive loan flipping -- when lenders make repeated loans to homeowners simply to generate fees. The Ney-Kanjorski bill addresses flipping only for high-cost loans, allowing lenders to repeatedly flip borrowers as long as the upfront fees are only 4.99% of the loan each time. And the bill's exceptions create a road map for abusive flips that would actually be permitted under the law. In contrast, Miller-Watt- Frank follows the approach of North Carolina and other states by prohibiting abusive flipping practices on all home loans.
  • The bill lets lenders strip borrowers of their equity by imposing high upfront fees. In many high-cost loans, borrowers never realize the significance of the exorbitant hidden fees on the loan because they don't pay for them in cash but instead finance the points by rolling them into the loan. The state of North Carolina and the Miller-Watt-Frank bill prohibit the financing of any fees on a high-cost loan. The Miller-Watt-Frank bill and at least seven states, including Arkansas, Georgia, Massachusetts, North Carolina, New Jersey, New Mexico, and South Carolina also require counseling for loans that have an extremely high interest rate or excessive points and fees so that borrowers know what they're getting into. The Ney-Kanjorski bill does not
  • It fails to ban mandatory arbitration on all home loans. Being forced into mandatory arbitration leaves homeowners cheated by their lenders with no legal recourse. While the Ney-Kanjorski proposal bans mandatory arbitration on high-cost home loans only, the Miller-Watt-Frank bill prohibits the use of mandatory arbitration clauses in all home loans, which is, in fact, the current standard for the mortgage industry.
  • It fails to prevent abusive prepayment penalties on sub-prime loans, or loans to people with less-than-perfect credit records. While the bill limits prepayment penalties on all home loans to three years, it permits lenders to charge a high prepayment fee, typically 4% to 5% of the loan. These penalties often lock people into expensive loans.
  • The bill would roll back provisions of federal law that protect borrowers from abusive lenders after their loan has been sold to an investor. Because most subprime loans are sold into this secondary market, borrowers with predatory loans may be unable to defend their home against foreclosure. In contrast, numerous states, including Illinois, Massachusetts, New Mexico and North Carolina have found an approach to liability that balances the ability of the secondary market to purchase subprime loans and the need for borrowers to be able to protect their home against abusive lenders.
  • The bill razes state protections for homeowners. Rather than preserve and strengthen state and federal protections for homeowners, the Ney-Kanjorski bill wipes out state anti-predatory lending laws and significantly weakens some protections now available under the federal Home Ownership and Equity Protection Act.
  • The bill includes numerous loopholes that undercut its stated purpose. For instance, it encourages carving up high-cost loans into several loans to avoid triggering protections for homeowners.
For a more detailed analysis of both bills, please go to CRL's website, www.responsiblelending.org.

Contact: Michael Flagg at 202-349-1862 or mike.flagg@responsiblelending.org