Still Scapegoating Community Organizers for Housing Crisis

Some right wing pundits seem confused about predatory lending: what it is, why it’s wrong and what should be done about it. They misleadingly suggest that the Community Reinvestment Act (CRA) encourages predatory lending. By singling out community organizers and their allies in government, the Right is trying to tap two powerful themes: race-based resentment and distrust of activist government.

In this kind of discourse, facts don’t seem to matter very much. Nonetheless, some facts cry out for recognition in relation to the Right’s attempt to use the banking and housing crisis as an excuse to attack programs for low-income communities of color.

1. What is predatory lending?

According to the National Association of Consumer Advocates, predatory mortgage lending covers a wide array of abusive practices, such as:

• Excessive fees: Points and fees are costs that not directly reflected in interest rates. Predatory mortgages may include fees that are more than 5% of the loan amount. 

• Low 'teaser' introductory rates that explode later. 

• Prepayment penalties. These include a fee for paying off a loan early. Such penalties make it harder for borrowers to refinance when their credit improves.

• Kickbacks to brokers who deliver a loan with an inflated interest rate.

• Loan flipping: A lender refinances a loan to generate more fee income.

A lot of foreclosures are linked to home equity financing. Home equity loans and lines of credit have increased greatly over the past 15 years. Dishonest brokers use these products to capture the equity that low- and moderate- income homeowners have built up.

• Steering: This occurs when a borrower is steered into a high-interest, subprime loan, even if the borrower’s credit history is good. Fannie Mae estimates that 50 percent of borrowers who receive high-interest subprime loans actually qualified for a prime rate loan.

Why would brokers and lenders steer qualified borrowers into subprime mortgages? Because brokers are rewarded for closing a loan with the highest possible combination of fees and mortgage interest rates. As noted, they earn kickbacks for higher interest rate loans. And the mortgage-backed securities process means the broker’s relationship with the borrower ends once the deal is done, so they have no long-term interest in the success of the loan.

• Targeting: Subprime mortgages have been heavily marketed to minority borrowers, who are steered toward these products even when they can qualify for prime mortgages. Even when controlling for income and credit-worthiness, African American and Latino borrowers are 30 percent more likely than white borrowers to be steered toward subprime mortgages.

• Non-mortgage lending. In neighborhoods with few conventional banking services
residents are forced to conduct their banking at high cost currency
exchanges and to use payday loans and pawnshops for their credit needs.

In summary, predatory loans target communities with few options. In effect, these loans drain wealth from those communities. 

2. The CRA and predatory lending.

Moderate and low-income communities, especially minority communities, have always struggled with limited access to credit, higher-than-normal foreclosure rates and high rates of vacant properties. What is different about the most recent crisis is that subprime mortgages and predatory lending have managed to unravel almost three decades’ worth of progress in these communities.

Since the late 1970s, community groups have had some success in using tools like the Community Reinvestment Act and affordable housing programs to redress discriminatory lending practices, open up credit, expand access to home mortgages and reclaim abandoned properties. Because of CRA, hundreds of individual bankers and lenders have chosen to serve their communities in creative and constructive ways.

Instead of recognizing the progress that groups have made using CRA, the Right likes to blame CRA for the subprime lending crisis. Blaming the poorest victims of the banking crisis gives them an easy scapegoat that deflects attention from the failures of the financial sector (and the effects of deregulation). It also helps them further attack ‘big government,’ while referencing race without ever mentioning it. The story goes like this: the Federal Government created the crisis by forcing banks to make loans to minorities and the undeserving poor. And the community organizers who represent low and moderate income neighborhoods want government to keep forcing bankers to make risky loans. This is why they support financial reforms.

The Right’s story is full of holes, starting with the fact that the vast majority of subprime loans were issued by institutions that are not covered by CRA. Far from promoting subprime loans, community groups and the Federal Government have used CRA to craft prime loans targeted for low-and-moderate income borrowers. CRA-backed loans for low and moderate income borrowers have good track records, unlike the subprime loans peddled by predatory lenders.

3. Deregulation and the subprime mortgage crisis.

The Gramm Leach Bliley Act, passed in 1999, broke down the firewall that separated commercial banks from investment banks. This allowed investment banks, securities firms, hedge funds and insurance companies to enter into mortgage markets, creating a variety of financial products with high yields for securities investors. The resulting web of financial entities offering, bundling, and trading mortgages was not covered by the CRA. The strength of CRA was significantly weakened when these firms were allowed to enter the mortgage world.

Deregulation paved the way for subprime mortgages to out-compete other kinds of mortgages in low and moderate income neighborhoods. Mortgage brokers peddling subprime mortgages targeted borrowers who felt they had few options. These products were marketed dishonestly, so that they looked less expensive than other available products.

If CRA had been more stringently enforced, and if it had been extended to cover secondary financial markets, community groups, non-profits and responsible bankers could have used CRA to curtail subprime lending abuses.

Deregulation and the failure of existing regulatory mechanisms exacerbate both discrimination and predatory lending, while making it harder for communities to hold financial institutions accountable. Greater community control is essential for addressing both discrimination and predatory lending, and financial reforms that bring greater transparency to financial transactions helps pave the way. This is not in step with the Right’s agenda. They are desperate to stop meaningful financial reform, and they hope to scare the American people with images of the ‘wrong sort’ of people getting loans. But when we bring in the facts and strip away their arguments, it becomes clear that they are standing with the big banks, not with the communities that need credit and housing.

---Sandra Hinson