JAMES DOUGHERTY
‘Fatal flaw’
Members of the mortgage industry defended their lending record while being accused of everything from redlining to ducking community responsibility at last Wednesday’s public hearing before the Legislature’s Joint Committee on Banks and Banking on establishing Community Reinvestment Act obligations to mortgage brokers and lenders.
In what became a battle of the mortgage industry vs. the banking industry, affordable housing and neighborhood development groups, as well as the city of Boston, members of the state’s two mortgage associations said they were aghast at the allegations that brokers redline – the very reason CRA was adopted for the banking industry in Massachusetts in 1982.
Before the much-anticipated hearing in the basement of the State House began, Rep. John Quinn, D-New Bedford, and co-chairman of the banking committee, laid the groundwork for giving testimony on the CRA bill and other legislation dealing with predatory lending regulations.
“All testimony will be limited to three minutes,” said Quinn. “There will be no outbursts, cheering or clapping during testimonies.”
Community activists and residents told their stories of debt and despair resulting from predatory lending practices to begin the hearing, but it was discussion of the CRA bill, one of the most anticipated within the financial services sector this session, that created the most tension at the hearing.
The testimony for Senate Bill 4 – “An Act Establishing Community Reinvestment Obligations for Certain Mortgage Lenders” – has had members of the mortgage industry and mortgage associations drafting positions of opposition and offering alternatives to CRA requirements since the beginning of the year.
S. 4 would require licensed mortgage lenders making more than 500 loans per year in Massachusetts to comply with the laws of CRA, which requires lenders to make an affirmative obligation to meet the credit needs of all income groups.
Members of the mortgage industry who opposed the CRA bill took turns with others speaking in support the bill at the hearing, which, in a somewhat unusual procedure, was run much like a high school debate tournament where the pro and con positions alternated in giving testimony.
“There was a time before the 1970s when it was hard for some people to get credit. The process was called redlining and banks and credit unions, and other financial institutions, wouldn’t lend in those areas,” said Sen. Jarrett T. Barrios, D-Cambridge, who authored the proposed CRA bill.
Since the government passed CRA legislation in 1977, Barrios said banks were forced to contribute back to the communities from which they received deposits and, as a result, more citizens now have had equal access to credit.
“How has [the bank] done in terms of offering credit and extending credit to low and moderate-income folks in [that] community? That is the beauty of CRA – it has changed the way access to credit works,” said Barrios. “The reason we are here is because we see a change and an evolution in the industry – specifically, the home mortgage industry.”
Members of the mortgage industry, however, said they do not have the funds or capital necessary to lend to those communities, unlike depository banks, which receive money from the communities they serve in the form of account deposits.
In 1990, depository institutions and banks originated 78 percent of the mortgages in the state. Today, depository institutions that are subject to CRA obligations issue only 26 percent of mortgages in the Bay State.
Members of the Massachusetts Mortgage Bankers Association declared during their testimony that “we believe the current laws work” despite the changing market share among loan originators.
Based on the changing percentage of market share held by the mortgage industry, Quinn asked if the CRA proposal should be more properly viewed as a competitive issue between banks and mortgage lenders.
Thomas Hollister, president of Citizens Bank of Massachusetts who provided joint testimony with Barrios, said, “There is a competitiveness to this, but in the end the mortgage industry has the majority of the market.”
Fact or Fiction?
Charles A. Ferraro, chairman of the MMBA’s CRA Task Force, opposed the CRA legislation by stating, “This is not a CRA issue; this is about how can [mortgage brokers] access capital and leverage capital to borrowers needing the funding.
“It’s about providing equal access of credit to consumers. If we can work out a model that allows our industry to access the leverage and capital, we will make the promise to give to the low-income and minority communities. This is an important issue, but it’s not a CRA issue,” said Ferraro.
As previously reported in Banker & Tradesman, the MMBA and MMA have worked together in recent months to prepare for and present a united front at the hearing. The associations propose that the mortgage industry be given access to the same government-subsidized funds and statewide lending programs available to banks, and said they believe that, since the mortgage industry is subject to Fair Lending laws, expanding CRA to the mortgage industry is not necessary.
Ferraro said that while banks receive money from deposits and quasi-government lending programs – programs to which mortgage lenders do not have access. “Additional CRA legislation would require mortgage lenders to make loans without the necessary capital or leverage,” he said.
Members of the Massachusetts Mortgage Association also testified in opposition to the bill, reiterating the apparent differences between banks and non-banks and citing their concern over the proposed CRA legislation.
“There is a fatal flaw in the legislation as it is presented. A bank has access to subsidized loans through government subsidiaries or they have access to their own [mortgage] portfolio,” said James Dougherty, chief executive officer and president of the MMA. “We need to marry the talents of the mortgage brokerage industry — which clearly knows how to effectively and efficiently deliver mortgage products – with the resources of those who are already under CRA obligations.”
While it is possible for mortgage companies to partner with local banks, John Brodrick of First Service Home Mortgage and chairman of the MMA, said most mortgage companies do not have a bank partner to help provide additional funding for specialized loan programs.
“[Mortgage lenders] can’t access Fannie Mae, Freddie Mac and Federal Home Loan Banks to partner with, otherwise we’d be happy to comply,” said Brodrick.
Brodrick said the mortgage industry has succeeded because of the products available to lenders.
“We took 70 percent of the [mortgage] marketplace because we are good at our business, but we don’t have the products to fulfill the needs of CRA in the mortgage industry,” said Brodrick.
While the crux of the debate was whether or not products are available to mortgage companies, some proponents of the CRA bill said the mortgage lenders are overall confused on the legislation.
Members representing the Massachusetts Affordable Housing Association – the last to testify on CRA at the daylong hearing – vehemently disagreed with the mortgage companies’ testimony.
“The mortgage banking industry seems to have a fundamental misunderstanding of what CRA is and what it isn’t and how this bill would apply,” said Thomas Callahan, executive director of MAHA.
The bill as written requires only those mortgage lenders making 500 or more loans a year to comply with CRA legislation, but none of those larger companies were present at the hearing, Callahan said.
Callahan took the opportunity to address the arguments made by members of MMBA and MMA, which he called “confusing and conflicting … reasons that are outright misleading and have no basis in fact.”
Callahan said the mortgage industry’s claim that brokers and lenders do not have access to government-sponsored programs is “just not true.”
According to Callahan, MassHousing – the state’s affordable housing bank which lends money at below-market rates to support rental and homeownership opportunities for low- and moderate-income residents – lists 23 of its 95 approved lenders in the state as mortgage companies or mortgage brokers.
“If the [mortgage industry] bothered – instead of coming here to testify against this bill – to talk with the director of MassHousing, he would tell them he is very open to adding mortgage companies to that list. But the [mortgage] industry is spending more resources to defeat a good piece of legislation instead of investigating how they can do more lending,” said Callahan.
Quinn said that piece information is new to him and he plans to sit down with the committee and investigate further.
“Years ago, non-banks were not allowed to participate [with MassHousing] unless they had enough revenue. But things have changed, and we are going to research this further,” said Quinn.
According to Callahan, the problem today is that mortgage companies are redlining specific communities.
“There were no mortgage companies back in 1977 and the industry was concerned about redlining,” said Callahan. “Now, we have mortgage redlining in a segment of the industry, and without CRA laws, we are waiting for a crisis to happen as mortgage lenders and brokers take more and more percentage of the industry.”
Members of mortgage industry refuted Callahan’s redlining accusations, but Dougherty said that given the characteristics of the membership of the MMA, “That is an anecdotal statement and is not quantified.”
Taking the initiative to avoid a protest over Callahan’s remark, which one member of the mortgage industry called a “racist” statement, Quinn said the committee required all the groups testifying to produce the data that supports their opinions.
Following the testimony of MAHA, Quinn hit the gavel, signifying the end to all testimony for the day, and igniting a round of clapping that was originally banned at the beginning of the day’s session.
But the battle over imposing CRA will continue beyond the close of the hearing, and Dougherty said members of the mortgage industry would continue to educate others on the issue.
“The free-market system is capable of creating products for individuals whose credit is not perfect … those products may be available, but they are in the hands of banks,” said Dougherty. “They are products that are delivered on a silver platter in the form of government subsidiaries. Mortgage lenders do not have those products at their fingertips.”
Going forward, Dougherty said he would continue to have the CRA vs. predatory lending dialog with members of the state Legislature, “because we feel that there remains a disconnect between predatory lending and CRA as a tool to solve access to credit problems. We will continue to lay out the case regarding the issue of mandating without the means.”
Quinn said he believes there is an overlap between CRA and predatory lending, “but both sides stated their cases quite well and the hearing are only the first step in the process.”
Melanie Nayer can be reached at mnayer@thewarrengroup.com
