Basic Black; 3904; Discriminatory Lending

Predatory Lending and the Black Community, coming up on Basic Black. Hi, I'm Kim McLaren. The subprime mortgage crisis and the wave of resulting foreclosures have devastated communities of color across the nation. Families in Massachusetts have also been hit hard. Joining me for a discussion on how the crisis developed and where we go from here are Asiya Adams Heath from the Massachusetts Affordable Housing Alliance, James Kampen from Americans for Fairness and Lending, and Kimberly Blanton, business reporter for the Boston Globe. Welcome all to Basic Black. Thank you. Let's start with a found work definition. What is a subprime mortgage anyway? A subprime mortgage loan is typically a loan that has a high loan that has balloon payments.

A lot of times it has teaser rates to get you in, but it has a lot of penalties. And typically it's a loan that you can't afford. Is there anything good about a subprime mortgage? James, Jim, did you want to add something about that? The word subprime is contrasted to prime mortgages, which prime are the best standard mortgage at a relatively low rate. Subprime mortgages are more expensive. Conceivably, there can be responsible subprime lending because someone doesn't qualify for a prime loan. They could get a loan, pay a little bit more, which compensates the company for the higher risk, and allows them to build up credit. perhaps once they do pay that loan on time for two or three years, they can get into a prime loan. But often subprime loans are not, the costs are way out of proportion to the actual extra risk. And they're a chance to rip off consumers and give them loans that will make them pay money they can't afford. And often make, throw their house into jeopardy. Okay, so there may have been a legitimate reason for subprimes, but now the crisis has developed. And Kimberly, can you help us understand

what this crisis is and how it developed? Yeah, absolutely. You know, in the around 2003 and 2004 interest rates were really, really low. The housing market was really hot. And the subprime lenders moved into the housing market and they were making loans. It was a really booming business at the time. The mortgage business was a booming business as well. These subprime loans have been around for a long time, but lenders became much more aggressive about marketing these loans as another way. People who were thinking about buying a house are saying, I have got to get in the market now because prices are going up so much. If I don't get in now, I'm never going to get in. Okay. So the subprime loans, the loan brokers would say, look, I can get you this loan with this really low rate. Well, these rates were only low for a couple years, for two years. After two years, the rates increased. And the peak of the subprime industry was in 2005 and 2006. We're now at the point where the low interest rates, introductory interest rates, the teaser

rates that Asia talked about are now popping and these payments are going up, up. People can't afford their payments and they're going into foreclosure. Okay. Well, what was the responsibility of the borrowers on their point though? mean, how would someone get into something even for two years? Do they expect that at the end of two years they would be able to afford it? Yeah, well, I think people are definitely responsible for their own mortgages. But on the other hand, and I get a lot of emails at the globe from angry people saying, why did somebody take out this mortgage in the first place? But I've also sat down and looked at these loans and I know Asia's seen many of them and Jim has too. These are really complicated loans that I had to sit down with a broker and say, help me figure out how this loan works. Secondly, there have been a lot of allegations by regulators that the marketing of these loans has been really aggressive and maybe disclosures have not been great about your payments going to go up in two years and things like that. So people were walking into a mind field. And maybe we understand that it might have been particularly aggressive in certain communities.

Exactly. Certain communities where people are not as experienced as their first time buying a home. They've been saving for pretty much most of their adult lives. what it is is that a lot of people, just like Kimberly said, I've got to get into this market. I have a couple of pennies saved. Let me jump right in. And some of the products that are out there, subprime products, as they said, they get you in with those teasers, low rate, affordable, you'll be fine because by the time the balloon payment comes, you'll have a better job, you'll have tenants. And you're leaning on someone that's been experienced. You're leaning on the broker that, okay, you know what you're talking about. But why communities of color in particular? Because I know Jim has done some work on statistics that it has been disproportionately, communities of color, homeowners of color have been affected. Yeah, these subprime loans, as you can measure them in the federal data, out of all the home buyers in the city of Boston, if you break them down by major neighborhoods, over

50 % of the people who buy homes in Roxbury and Dorchester and Matapan got these subprime loans. 50%. Compared to 4 % in Charlestown and Beck Bay, Beacon Hill and so on. So it's huge, more than a tenfold difference. And in fact, I think you did some work on, that even holds true as income rises, is that true? Exactly. The disparities between blacks and whites actually get worse at higher income levels. And one of the most striking numbers I found was that in the city of Boston in the year 2005, of all the black home buyers who got a mortgage loan whose income was more than $150 ,000, 71 % got these high -cost loans, compared to only 9 % for whites. That's a very startling statistic. So what do we take from this? Asiya, what does this mean? You can look at it as it being marketed to a certain demographic, certain communities in regards to knowing that we're being taken advantage of. as you look at people

with higher and higher incomes, they're working more. They're working longer hours. So a lot of times they're leaning on someone else that's in the field, you've been doing this for so long. You're looking out for my best interest and I think we're putting our trust in the wrong places. Okay. So is this what we talk about when we use the phrase predatory lending? I'll throw it to you, Kimberly. And how easy is that to prove or how difficult is that to prove? Predatory lending is basically defined by state law and it says that if an interest rate goes so high, you have a predatory lender. I think one of the interesting, I don't know, I've talked to co -workers that I work with who talk about some of the cultural or economic reasons in the black community, why there are more loans in this community, and why the lenders targeted those neighborhoods. One of the interesting things to me is you have more first -time, first -generation homeowners, maybe in the black community than you have in the white community. So maybe you didn't have a parent who bought a house, so you don't have somebody that you could ask about, hey, how... basis of

understanding. Yeah, you may not have that basis of understanding. And Jim's statistics are so compelling that I think they raise a lot of questions. There's a lawsuit out against Countrywide, which is a very large, one of the largest lenders in the country, one of the largest sub -prem lenders in the country, actually charging discrimination and saying that these lenders were charging extraordinarily high fees to make these loans in the black community much higher than they were in the white community. So the lenders deny this. They say they make these sub -prime loans to people who have low credit ratings, around 620, whereas sort of a good credit rating might be in the 700s. So they say, we're just making the loans to people with poor credit ratings. But you do wonder about what's going on, given Jim's statistics, some of the suits that we've seen. Jim. One of the things that's going on is the structure of the way that brokers are compensated. A lot of these loans are made through brokers. Okay. And a broker is someone who's not a lender, but it's someone who sets themselves up. They're saying, look, there's a very complicated world. I'm going deal with a lot of lenders. I'll help you find the best deal. And about 70 % of all

loans to all groups of people are now made through brokers. Okay. And you may think the broker is working for you, but the broker is an independent contractor working for themselves. That's an important point. And the way that it is set up is basically they get commissions, depending not just on whether they make a loan. They get nothing if they don't make a loan. Yeah. But if they make a loan to you at a higher interest rate, they get a higher commission. Okay. And so they have an incentive, just like a used car salesman, has an incentive to bargaining with you. That seems like a pretty serious conflict of interest. Yeah. It's not like going out to buy a refrigerator. You walk into a best buy and the refrigerator is the same price for everybody. It's marked right there in black and white. But typically, if you go to buy a used car, there's a price on it, but no one expects you to pay that price. You bargain. Right. a time of bargaining process. Okay. And in fact, there's interesting studies that show that if you're black, you get a worse initial offer. If you're a woman, you get a worse initial offer. Right. And the same thing happens with mortgages. Okay. And they, whether this is because people are prejudiced or because they

just think, probably, that blacks are less sophisticated. And so they can, you know, get higher rates from them. They do, in fact. Okay. I tend to believe that they will, you know, they'd like to get as much as they can from anybody. From anyone. But they think, seems to be true, that they're able to more successfully use these kind of tactics on African -Americans and Latinos. Well, let's, let's bring this down to the personal level. Kimberly, as a reporter, you've interviewed some people. you, can you give us some, put this in, you know, perspective? What does this mean to an individual? Some of the people that you've interviewed. What does it mean? Were caught up in this crisis. Oh, these, you know, these are devastating, devastating stories. First of all, people buy home and they're filled with a lot of hope. They're going to have a home for their children. They're going to be able to take care of them well, have a stable life. You know, that's what parents want. And a lot of people who have these loans are parents. lot of single mothers actually in the black community as well. So they're very filled with hope about buying the house. And it really turns into an absolute financial disaster. They can't pay the loans. So they, they lose the, they're going to lose the home. They're at the stress of foreclosure.

The credit ratings are often ruined. Maybe they had not a great credit rating, but not a bad one. But after trying and being unable to pay these subprime loans for a few months, your credit rating is just plunges. then you can't even rent. know, you want to move out. You need to move out. You don't have any choice. You need to rent a new place and you may not be able to rent a place. So I've talked to so many families with just unbelievable stories. You know, I know a mother, her daughter and the mother sister, all three of them had the same type of loan from the same company. And they're all three in foreclosure right now. I mean, these are financially devastating stories. They're, this year going to be about 26 ,000 foreclosure filings. Now this is the initial notice. They may not all end up in foreclosure, but that's up from 19 ,000 last year. Every one of those 26 ,000 stories, whether they go into foreclosure or not, is a devastating financial crisis. Absolutely. I see you. And also what happens now is before when you got into trouble, you lost your jobs. Someone got sick that was

contributing to the household. You can go down to your local neighborhood bank and say, hey, know, Mr. Smith, you gave me this loan, having some of the financial problems. Can I work out some kind of payment plan? And right now people don't have a person to talk to. They have a 800 number to call. Because these mortgage companies are not in the community. Exactly. So you don't have that personal relationship. mortar place to go. Which makes it more difficult to work it out. let's, I want to talk a little bit about the testing procedure that your organization did in trying to codify, I guess, discriminatory lending. Can you tell us a little bit about that test process? It's very interesting. Actually, this was in collaboration with, I want to say, Mass Fair Housing Center. And what we did was we had two staff members with comparable credit scores, savings, and going to banks, the same branches, and ask about a mortgage loan. And what we found out was a person of color didn't get a follow -up call with a person of non -collar. The got a couple follow -up calls. You know, they got information about down payment assistance. The

person of color did not. The person of color actually called back. And it wasn't just at one bank. It wasn't just, you know, I don't want to say it was just one entity. It was a couple of banks. And that's one of our issues right now is trying to get greater enforcement of our fair lending practices. So we have the laws are on the books. laws are on the books, but enforcing them. Exactly. So just to be clear, the two testers presented with the same background, same credit. Yes. some of this issue is about credit and worthiness, right? Yes. About whether someone... we actually stacked it where the person of color actually had a little bit better scores, a little bit better savings. you know, on paper, actually the person of color should have been followed up on. But as I said, the proof is in the pudding and the test. Mm -hmm. You know, the companies could say one thing, but the actions... Okay. 20 paired tests. in nine of the cases, there was serious discrimination. So that's 45%. That's almost the time. That's significant. Okay. I want to talk about... Kimberly talked a little bit about the impact on individuals. What is the impact on communities, Jim? If a community, Roxbury or

Dorchester, has a large percentage of these crisis loans, what is the impact on the community, not just on individuals? Well, wealth is sucked out of the community. And if a house is foreclosed, then it may sit there empty. may be... That becomes... All kinds of bad things happen around empty houses. a few with houses like that are in a block, that's worse. It means the houses nearby lose value. It's a ripple effect. It's a ripple effect, and it can be really devastating for a community. I'll see you. And then you also have the sense of shame that's developed. What do mean by that? The sense of shame that, you know, I lost my home. I attained my dream, and then I lost it quickly. We also have more violence going on right now. And is that because, you know, mom and pops are working two and three jobs to try to keep hold of the house who's parenting the child. But typically, when you own a home, you're paying taxes.

You're paying taxes to the city. You're paying taxes to the state. You don't own your home anymore. And just like Jim said, a couple of houses on the block are foreclosed on. That's money that doesn't come into the city to help fund social programs, to help fix roads, stuff like that. So it's just like you said, a ripple effect. Another thing that's not, I think, appreciated enough is that when a foreclosure happens, say it's a three -family house, that one family is a owner or occupier, two other units are rented. That's true. And when that happens, though, unless you've got a federally subsidized Section 8 rental voucher, you don't have the lease ends when the foreclosure happens. it. you're out on the street. That's it. Well, that leads us to the question of what... Lots and lots of... This is not just a few people. This is thousands of people involved. It's huge, it's a huge triple of that. So what is the responsibility of the federal government in this? What should our elected officials be doing in this crisis? What are they doing? Kimberly, I'll throw Well, first you have to look at what they haven't done. There are not a lot of

strong regulations on the books for these independent mortgage companies. ACO is talking about how all the companies, the subprime companies, they're all out in California, you know? They're not local. It's some odd coincidence. There's a law that was passed in 1970s to crack down on redlining of the black community. Can you explain what redlining is? Yeah, absolutely. Redlining said that there was sort of this imaginary redline around which a bank would draw around a community and say, we're not going to lend there. You've got the opposite problem happening. You've got too many loans going in, loans that are being made that shouldn't be made. you Reverse redlining. Yeah, it's sort of a reverse redlining, in a sense. But the law that was passed in the 1970s, the Community Reinvestment Act, it was imposed on commercial banks, so like your Bank of America, Citizens Bank, Sovereign Bank. And it said, if you want to take deposits out of a community, you also have to make loans in a community. So if you go into the black community and have checking accounts, you've got to make home loans. So the banks have gotten a lot better because of that regulation. These independent

mortgage companies are not regulated by the Community Reinvestment Act, so you've got a huge gap in regulation. And I think that's something that the federal government is talking about. Congress hasn't really done much about that. Some laws have been passed in Massachusetts. Passing a state community reinvestment act is sort of working its way through the state legislature, but Congress really needs to act because this is a foreclosure problem that's happening at Atlanta, Georgia. It's happening in the Midwest. It's happening all over the country. it really needs a federal solution. Well, I'm sure some people would argue, just to get the other side, that the government shouldn't be in the business of bailing out people who have simply made bad decisions. I mean, what do you say to that, Jim? Is there some legitimacy that people have simply made bad decisions and gotten themselves overreached and the government shouldn't bail them out? We're talking about 2 million people facing foreclosure now. Some of those people were greedy and made bad decisions. They speculated and they lost. Other people have been speculating the real estate market for a long time, and a lot of people have made a lot of money in the last 10 years. So no, people shouldn't be balanced out. But there are many people who have

actually been taken advantage of by mortgage brokers who sat down with them and lied to their face and built up their trust. If I'm going to get a mortgage loan, I'm going to basically find somebody I trust. I'll probably hire a lawyer too to read it. But basically, if I go to a local bank, they're trustworthy. They may not have the absolute best rate to the fraction of a point, but they're going to give me an honest loan. But the brokers come to you and they tell you they're your best friend. They're very slick. They're very friendly. And they just lie to you and they rip you off. And those people who have been the victims of that kind of misrepresentation deserve to be helped. That's an important point. Asiya, what do you think about that? Definitely, one of the things with the CRA is we need to build up good lending. We constantly talk about the bad lending, but stuff like the soft second mortgage product that we have here in Massachusetts. Explain to us what is. The soft second actually is a mortgage product that's made up of two loans. One that carries 80 % of it and the other that carries 20%. And it has a low interest fee for the first 10 years, and then it's fully

amortized, the last 20. What is amortized? Just because we don't know. Meaning that is rolled all into one after the first 10 years, but the second loan actually has a public subsidy. the loan's originated at a lower rate than the market rate for a person of a lower moderate income to help you stay on track with the loan, to help you be able to affordably pay for your loan. But we need to have some legislation to actually strike at the predatory model that some of the mortgage companies are operating under. Where we need to have you operating good faith. We need to have you transparent in your lending. Wherever you're getting most of your market share, you need to be transparent. I mean, the banks go, think they report every three years. Under the CRRA, they have to report every three years where they're lending, who they're lending to. Community Reinvestment Act. I the Community Reinvestment Act, but they actually have to show, if you're getting a lot of money out of here, where are you investing at? And the mortgage companies right now are largely unregulated, and they don't have to. They don't

have to tell us. And so you're saying, you're both saying there needs to be some government here, because as you mentioned, Jim, it is such a huge process buying a house. At some point, almost do have to put your trust into someone. so the lenders have to be trustworthy, as well as the borrowers have to be responsible. Let me just elaborate a little bit on this Community Reinvestment Act. I think it's really important, as Kim said. There is a Federal Community Investment Act. There's also one Massachusetts, one of the few states that has a Community Reinvestment Act. And there's really three different classes of lenders in the state. One is lenders who have branches here, banks who have branches, who collect deposits, and their CRRA performance is evaluated. Okay, local lenders. Local lenders. There are banks which don't have branches here, like Wells Fargo and Chase, Manhattan, and Washington Mutual. They do a lot of lending here. lending where they have branches, that's covered by the CRRA, but the lending they do in Massachusetts is not covered. Then there are independent mortgage companies, which aren't connected to banks at all. And that's where all the trouble is. The worst, almost none of the subprime loans in Massachusetts are made by

Massachusetts banks, regulated by the CRRA. A pretty significant amount are made by the out -of -state banks, but the worst are the independent mortgage companies. Now, the state, and all those could be covered by a Federal Community Reinvestment Act, but the state can't regulate out -of -state banks, but they can regulate the unregulated mortgage companies. And those unregulated mortgage companies are making non -fedrally regulated. They're making 74 % of all the subprime loans. And those are the ones that would be covered by this, passed by both houses, both of the Massachusetts legislature. And so there's going be a conference committee, and we hope that law will be signed in the back. Jim did a really interesting study that he's alluding to, and that I wrote about, you know, 15 years ago, 20 years ago, maybe I don't have exactly the right numbers, but the vast majority of loans were made by commercial banks, like a Bank of America citizen sovereign, and often local banks with local branches. Now, the vast majority of mortgages are made by these independent mortgage companies. The banks are regulated by CRRA, but they've lost so much market

share. Is that true? I just want to get into where Massachusetts stands compared to the rest of the nation, and perhaps this applies to that, Kimberly. I mean, are we worse off? Are we better off? Are we about par? Well, in terms of the subprime crisis itself, we're a fairly small state. We actually have a fairly high per capita income, so there are other states that have a lot bigger problems than we do. in terms of the, I'm not sure about the percentage of population, a percent of owner -occupied homes, I don't think we stand out. I think states like Georgia have a really big problem. Some of the Midwestern states like Ohio, Michigan have bigger problems, because they've had economic problems as well, which is another reason you can't pay your mortgage. In terms of our regulation, though, recently, Attorney General Martha Coakley and Governor Deval Patrick have done some things that put us a little bit further ahead in terms of dealing with this. Okay, all right. Well, let me just wrap up. sorry, just a point about, because equal

housing access was an important part of the civil rights agenda. And I'm wondering if you might see this as a new aspect of that agenda, or where that might correlate, Asiya? We do see it, but we definitely, as I said, we need greater enforcement of the fair lending laws we do have, but also get legislation out there to kind of cover these unregulated companies. Okay, Jim, were you going to add to that? mean, where does this, is this an important issue for particular communities? this a civil rights issue? Definitely. mean, this is issue that affects everybody, and probably in absolute terms, given the relatively small African -American population in Massachusetts, there's more white people facing this problem than there are black people. But as a percentage of black people, it's hitting much harder in the black community. And in fact, we may be not among the states facing the worst crisis in foreclosures, but we are among the states in the metro areas with the worst disparities in terms of percentage of black borrowers who get high -cost loans compared to the percentage of white borrowers who get high -cost loans. Okay, Kimberly, last words? Yeah, I think it is. it's just an incredible irony that you've gone from this period where the black community couldn't get loans

to this period where you can get a loan, it may very well be there's a high probability it's going to be a really bad loan. So we need to really shift our focus and think about the mortgage industry and the black community in a completely new way because we've got a brand new problem. Okay, very good. Well, thank you. Asiya Adams, James Campin, and Kimberly Blanton, thank you so much for shedding some light on this crisis. Thank you. I'm Kim McLaren for the Basic Black Team. Thank you for joining us. For questions or comments, please email us at basicblackatwgbh .org. For further information and program schedules, please visit wgbh .org slash basic black. Thank

Thank you. Thank you.