KATHLEEN SCHRECK
Report fuels ‘campaign’
Loans from subprime lenders have significantly increased, with high concentrations of those loans distributed among members of minority groups and the neighborhoods where they live, according to a new report. The fifth edition of the Massachusetts Community & Banking Council report titled “Borrowing Trouble?” provides information on subprime purchase and refinance loans in the Metropolitan Area Planning Council region. Meanwhile, lawmakers, MCBC and other associations are pushing for legislation that would require community reinvestment requirements for mortgage companies. Local mortgage trade associations, however, say imposing quotas on lenders is not the solution.
“Borrowing Trouble? V: Subprime Mortgage Lending in Greater Boston 2002-2003” was prepared by Jim Campen of the Gaston Institute at the University of Massachusetts Boston. The study found that subprime lenders made disproportionately large shares of loans to black and Latino borrowers. The study focused on the MAPC region, which includes Boston and 100 surrounding cities and towns, as well as the seven largest Massachusetts cities outside the region. In those areas in 2003, subprime lenders made 27 percent of all home purchase loans to blacks and 26 percent of all home purchase loans to Latinos, compared to 7 percent of all home purchase loans to whites. Subprime lenders made 21 percent of all refinance loans to blacks and 17 percent to Latinos, compared with 4 percent to whites.
Campen’s findings, which were based on Home Mortgage Disclosure Act filings, information from the U.S. Department of Housing and Urban Development and 2000 U.S. Census data, also revealed that subprime lenders made a disproportionately large share of mortgage loans in neighborhoods with high concentrations of minority households.
Campen said that the report is meant to provide information and is an observation of activity in the mortgage industry.
“It is beyond the scope of this descriptive report either to offer explanations of causes and mechanisms underlying the observed patterns of subprime lending or to investigate the extent to which subprime lenders engage in predatory lending and opportunity pricing,” the report read.
The Massachusetts Mortgage Bankers Association points out that the study admits there is no data available on interest rates, fees, loan terms or credit data that could identify a loan as a subprime loan. Because of this, the association said it had a difficult time accepting the study as a fair and accurate description of the subprime market.
Campen acknowledges the lack of data and said he is also frustrated by it.
In the study’s concluding comments, it offers an explanation of several aspects of public policy toward subprime lending. It mentions the new predatory lending law, which was enacted in 2004 and intended to curb predatory lending practices in the Bay State.
The report also discusses legislation that would require that each licensed mortgage lender that makes at least 50 loans per year in Massachusetts has an obligation to help meet the housing needs in the Bay State, including low- and moderate-income neighborhoods and residents.
Addressing the Issue
Sen. Jarrett T. Barrios, D-Cambridge, is the author and a sponsor of the legislation being called the “Homeownership Investment Act.” State Rep. Marie St. Fleur, D-Dorchester, also is sponsoring the bill.
The bill was refiled in Dec. for the current legislative season. It was originally filed in the 2001-2002 term but never made it out of the House of Representatives. During the most recent legislative season, the bill did not come out of committee to the floor.
Barrios said the Community Reinvestment Act works for depository institutions because requests to open branches or to merge are tied with to the bank’s community reinvestment performance rating.
Barrios admits that requirement has little relevance to mortgage companies, which are less likely to seek expansion or merger approval. However, he suggests tying licensures with a lender’s community reinvestment performance.
“It’s a natural way to level the playing field,” Barrios said.
He said the proposed legislation is about providing access to affordable credit and not necessarily subprime loans, but competitively priced loans. Barrios said Latinos have ended up with a substantial amount of subprime loans because no one has marketed a competitively priced loan to them.
Campen also said mortgage companies need to look at where they aim their marketing efforts.
MCBC and the Massachusetts Bankers Association both support the legislation, but mortgage lenders are not as enthusiastic about the bill.
Kathleen Schreck, chairwoman of the MMBA and sales manager at Mortgage Network in Danvers, said while it may be unintended, the report, by specifically referencing the proposed legislation, is helping the push for new community reinvestment requirements for mortgage companies.
“The intention of the report is probably good in maybe analyzing trends,” Schreck said. “[But] it is being used to fuel a campaign.”
James Dougherty, executive director of the Massachusetts Mortgage Association, said the report’s finding did not surprise him, but imposing quotas to create added pressure to lend in certain communities won’t solve the problem.
“Quantifying it doesn’t address the issue,” Dougherty said.
Dougherty said the study implies there is a level of discrimination, but he is unsure if the study has identified the causes or whether there is a simple answer to the problem.
An MMBA spokesman said the group shares concerns about subprime lending with MCBC, but does not believe Community Reinvestment Act obligations are the “recommended solution.”
The MMBA opined that CRA requirements are not the “cure-all” for providing access to prime credit in low- to moderate-income areas. It said consumer education is tantamount to a successful program. Education in financial literacy along with regulatory enforcement of fair lending laws included in the Predatory Home Loan Practices Act is a viable solution, according to the MMBA. The MMBA also said it was interested in working with nonprofit agencies to determine what is needed and what lenders can do for the betterment of the community.
Mortgage practitioners also suggest allowing existing laws to take effect. The state’s new predatory lending law should be factored in and given a chance to work, Dougherty said.
“It is essential for them to try to give the law a chance to operate,” Dougherty said.
The MMBA also suggested that before additional regulation are implemented the new predatory lending law should be allowed time to gauge its effectiveness. The association argues that the state Division of Banks has complete regulatory authority over all of the state’s licensed mortgage lenders and brokers – a power that has been strengthened by the predatory lending law – and therefore more oversight is not necessary.
Barrios, Campen and MCBC Manager Kathleen Tullberg all said the predatory lending law tackles a different problem than what Barrio’s bill is trying to accomplish.
The predatory lending law is approaching a lending problem from a different angle, Barrios said.
Tullberg said the predatory lending law is directed at a particular product – high-cost loans. She said the new bill is looking at the overall performance of serving the interest of low-income borrowers. Campen said the mortgage industry is arguing against passage of a new lending law, but said the recently passed predatory lending law does not cover community reinvestment issues.
“The mortgage companies have basically been in denial about this [CRA requirements],” Campen said. “They can make loans to every skin color and every gender. They can do everything banks can do.”
Campen does say the one thing mortgage companies can’t do is make portfolio loans. Banks often use deposits to fund their own loans and do not necessarily have to structure the terms for sale on the secondary market, making them more flexible about borrower qualifications. Mortgage firms generally must structure loans that conform to certain guidelines so that they may be sold to secondary market to buyers such as Fannie Mae and Freddie Mac.
Daniel J. Forte, president of the Massachusetts Bankers Association, a chief supporter of the proposed legislation, said mortgage companies should have rules regarding outreach because of the amount of business they do. In recent years, mortgage companies have begun originating a greater percentage of home loans, an area once dominated by banks.
“Mortgage companies generate more loans today than the banking business does,” Forte said, adding the CRA is a much more basic tracking mechanism to ensure the transparency of what institutions are doing.
But the MMBA argues that mortgage companies simply do not possess the same financial resources and access to government lending programs as banks, do not take deposits and therefore should not be subject to the same requirements.
