After Years of Inaction, the Fed Could Clean Up Subprime Market, Say Advocates.

WASHINGTON -- This morning the Federal Reserve Board will hold a hearing on abusive lending that, with the right outcome, could mark a key turning point for American families with subprime home loans. According to consumer groups, for 13 years the Board has largely ignored Congress's mandate to take strong action against abusive, unfair or deceptive mortgage lending practices, but today's hearing signals an opportunity for meaningful change.

Organizations representing millions of members across the nation are urging the Board to act swiftly to require common-sense protections on subprime mortgages. It is time for the Board to use its authority to stop mortgage lending practices that place homeowners at a high risk of foreclosure.

Among those testifying at the hearing are Janis Bowdler of the National Council of La Raza, Alys Cohen of the National Consumer Law Center, Ira Rheingold of the National Association of Consumer Advocates and Martin Eakes of the Center for Responsible Lending. In addition, several state officials will discuss the impact of mortgages abuses on their home state, including Attorneys Generals from Iowa and Minnesota and Banking regulators from Arizona, Massachusetts, and North Carolina.

In the past, the Federal Reserve Board, along with other banking regulators, has issued guidance for banks and their affiliates aimed at the safety and soundness of issuing subprime home loans, including general statements in 1999 and 2001 recommending that lenders consider a borrower's ability to repay before approving loans. Subprime lenders became increasingly bold in ignoring the spirit of this guidance, turning to dangerous loan products and looser underwriting. The result is today's rash of subprime foreclosures, which is expected to rise to one out of five subprime loans made in recent years. It is clear that more specific bright-line rules are needed.

The Federal Reserve Board has asked participants in this week's hearing to comment on certain dangerous features that typically have been included in subprime mortgages in recent years: prepayment penalties, lack of escrows for taxes and hazard insurance, stated income and low-documentation and loans made without adequate consideration of the borrower's ability to repay.

Some observers have said that no regulatory action is necessary because of market corrections, but in spite of the alarming rate of foreclosures, subprime lenders are continuing to make loans packed with risky features, and Wall Street is continuing to accept these loans. Based on a review of five mortgage-backed securities offered in the first quarter of this year, CRL found that loans containing characteristics shown to increase the risk of foreclosure continue to constitute a large portion of subprime offerings. The risky characteristics--seldom found in the lower-priced prime market--include a high portion of loans with adjustable interest rates, prepayment penalties and unverified income.

The most common type of mortgage issued in recent years has been dangerous hybrid mortgages, which begin with a fixed-rate, but shift to a much higher adjustable-rate with multiple interest rate increases. Lenders have been aggressively marketing these loans to debt-strapped families and approving the loans based on the initial interest rate rather than considering long-term affordability.

Consumer advocates and civil rights leaders all over the nation have expressed deep concerns about the financial harm resulting from typical subprime loans. Brief statements from a number of groups follow:

"Our neighborhoods are being torn apart by predatory lending and foreclosures. American homeowners shouldn't have to wait for Congress to pass new legislation. How many more families have to lose their homes before the Federal Reserve will use its power and do something to stop this problem? The time for them to act is now." Maude Hurd, ACORN National President

"We applaud the Federal Reserve for holding this hearing. The Fed is empowered under HOEPA to act, and it must do so now. The foreclosures we're seeing today have effects very much like Hurricane Katrina, except in this case homeowners all over the country are going under water. The Fed must protect future homeowners from unscrupulous lenders marketing defective products." Wade Henderson, President and CEO - Leadership Conference on Civil Rights 

"The Federal Reserve must act decisively under its authority to protect families from bad lending practices, predatory mortgage loans and deliberate fraud and abuse. Families make many sacrifices to become homeowners--the Fed should have no tolerance for irresponsible mortgage practices which make it difficult if not impossible for many families to keep the homes they have worked so hard to buy. Access to fair home loans is vital--but it should not come at the expense of a family's financial stability." Linda Sherry, Director of National Priorities - Consumer Action

"Irresponsible subprime lending practices have put millions of households at risk of losing their homes and are having a corrosive effect on other parts of the home loan market. Congress has directed the Federal Reserve to write rules to put a stop to unfair and deceptive mortgage practices that would apply to all mortgage lenders. Consumer Federation of America urges Chairman Bernanke and the other Fed governors to move quickly and decisively to put a halt to mortgage lending that place homeowners at high risk of foreclosure." Allen Fishbein, Director Housing and Credit Policy - Consumer Federation of America

"Because predatory lenders have long targeted African Americans, other racial and ethnic minorities, women and the elderly, Americans of color and the communities in which we live stand to lose the most from the foreclosure boom. The Federal Reserve has the ability, as well as the moral obligation, to exercise its authority under HOEPA and help stem the tide of predatory mortgage abuses. We need clear and concise rules that require lenders to responsibly underwrite loans, including considering borrowers' repayment ability. As long as abuses are legal, mandatory disclosures and increased financial literacy will not be enough." Hilary Shelton, Director, NAACP Washington Bureau

"Abusive lending is devastating American communities. The Board must take bold steps to address this problem by issuing rules that require affordable loans with verified income, access to loss mitigation, and protection from other unfair practices. The cost of not acting will be the continued explosion in foreclosures and the destruction of wealth for working people." Alys Cohen, Staff Attorney - National Consumer Law Center

"It is imperative that the Federal Reserve use its rulemaking authority to curb abusive lending practices in the home mortgage market. Until then, homeowners and neighborhoods across America, especially integrated neighborhoods and communities of color, will continue to bear the costs and consequences of irresponsible lending. By taking action, the Federal Reserve will also send a message to Wall Street about its responsibility not to pay higher premiums for ARMs that have a discriminatory and adverse impact on those protected under the Fair Housing Act." Shanna L. Smith, President/CEO - National Fair Housing Alliance

"It is possible and profitable to lend responsibly for home purchases and refinancing without resorting to predatory practices, loans, and fees. Responsible mortgage lending benefits everyone, while abusive lending benefits greedy predators. We need a prudent policy response that puts an end to predatory lending, a prudent financial response that preserves the assets of homeowners at risk due to predatory lending, and a responsible market strategy that demonstrates that low-income and low-wealth people are good borrowers and good homeowners. The Federal Reserve needs to take this opportunity to act now." Mark Pinsky, President & CEO of Opportunity Finance Network and Former Chairman of the Federal Reserve's Consumer Advisory Council

"There is an urgent need to address the epidemic of foreclosures in the subprime market today. The Federal Reserve has a responsibility to prohibit abusive, unfair or deceptive lending acts, as mandated by Congress, and we hope they will take action soon." Martin Eakes, CEO - Self-Help and the Center for Responsible Lending

"Federal bank regulators have long failed to require basic standards of decent lending, especially for debt-strapped families and communities of color targeted by subprime lenders. We expect that the entire country will suffer adverse effects from the massive wave of subprime foreclosures--foreclosures that could have been prevented if the Board and other agencies had not ignored rampant predatory activity in the marketplace." Ed Mierzwinski, Consumer Program Director - U.S. PIRG