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i
CHAPTER I. EXECUTIVE SUMMARY1CHAPTER II. INTRODUCTION AND BACKGROUND12
A. T
HE
HUD-T
REASURY
T
ASK
F
ORCE
12B. O
THER
F
EDERAL
, S
TATE AND
L
OCAL
E
FFORTS
13
CHAPTER III. SUMMARY OF THE PROBLEM 16
A. W
HAT IS
P
REDATORY
L
ENDING
?16B. T
HE
E
FFECTS OF
P
REDATORY
L
ENDING
23
CHAPTER IV. BACKGROUND ON THE SUBPRIME MORTGAGE MARKET25
A. T
HE
R
OLE OF
S
UBPRIME
M
ORTGAGE
L
ENDING
25B. G
ROWTH AND
C
HARACTERISTICS OF THE
S
UBPRIME
M
ARKET
27
1. The Growth of the Subprime Market27 2. Subprime Mortgages and How They Are 293 . Subprime Mortgage Lending,Consumer Debt and Bankruptcy304. Characteristics of Subprime Borrowers32
a. Credit Characteristics32b. Delinquency and Foreclosure Characteristics 33c. Borrower Demographics34
C. O
VERVIEW OF THE
S
UBPRIME
L
ENDING
P
IPELINE
: F
ROM
B
ORROWERS TO
I
NVESTORS
36
1. Borrower Entry into the Lending Pipeline37 2. Sources of Funds393. Securitization Increases Wall Street’s Participationin the Lending Pipeline404. Changing Industry Fortunes in the Latter 1990s415. New Entrants in the Subprime Market43
D. S
UBPRIME
L
ENDING AND
L
OW
-I
NCOME AND
M
INORITY
N
EIGHBORHOODS
45
1. Subprime Concentration in Low-Income and Minority Neighborhoods452. The Effects of Foreclosure on Low-Income and Minority Neighborhoods47
E. C
ONCLUDING
O
BSERVATIONS
49
CHAPTER V. CURRENT LEGAL CONTEXT51
A. H
OME
O
WNERSHIP AND
E
QUITY
P
ROTECTION
A
CT
(HOEPA)52B. T
RUTH IN
L
ENDING
A
CT
(TILA)53C. R
EAL
E
STATE
S
ETTLEMENT
P
ROCEDURES
A
CT
(RESPA) 53
CHAPTER VI. RECOMMENDATIONS FOR REFORM55
A. C
ONSUMER
L
ITERACY AND
D
ISCLOSURE
56
1. Need for Greater Financial Literacy56 2. Need for Housing Counseling57 3. Improving Disclosures60
B. H
ARMFUL
S
ALES
P
RACTICES
69
1. Targeting Minority, Female, Elderly and Low-Income Borrowers
69
2. Loan “flipping”713. Lending to Borrowers without the Ability to Repay734. Mortgage Broker, Home Improvement Contractor and Appraiser Misconduct 76 5. Lenders’ Incomplete Reporting to Report to Credit Bureaus81
C. A
BUSIVE OR DECEPTIVE
T
ERMS AND
C
ONDITIONS
81
1. Limited set of borrowers benefit from HOEPA’s protections812. Credit Insurance and Other Insurance Products Paid in a Single Premium86 3. Negative Amortization884. Prepayment Penalties89
ii
5. Balloon Payments926. Mandatory Arbitration957. Financing of points and fees96
D. M
ARKET
S
TRUCTURE
96
1. Inadequate Data Collection96 2. The Prime Market1003. The Secondary Market104
E. O
THER
I
SSUES
106
1. Foreclosure Prevention106
F. A
CTIONS THAT THE
F
EDERAL
R
ESERVE
B
OARD
S
HOULD
T
AKE TO
C
URB
A
BUSIVE
L
ENDING
P
RACTICES
107
VII. RECOMMENDATIONS FOR APPROPRIATIONS109VIII. RECOMMENDATIONS FOR FHA AND OTHER POLICY INITIATIVES 110
A. N
EW
I
NITIATIVES FROM THE
B
ALTIMORE
T
ASK
F
ORCE
110
1. Helping Victims Avoid Foreclosure and Retain Their Homes1112. Protecting FHA Homeowners From Predatory Lending112
B. N
EW
I
NITIATIVES FROM THE
P
UBLIC
F
ORUMS
114
1. Housing Counseling1142. Cooperative Initiatives with Industry114
1
Chapter I. Executive Summary
In April, the home ownership rate reached a record high with 67.1% of American familiesowning their own homes. A total of 70.7 million American families owned their homes in the firstquarter of the year – more than at any time in American history.Despite these gains, too many low- and moderate-income families have seen the dream of homeownership become a nightmare because of predatory or abusive lending practices. These practices areconcentrated in the subprime mortgage market, where record numbers of Americans are refinancingtheir homes for consumer credit purposes. Subprime lending serves an important role, by providingloans to borrowers who do not meet the credit standards for the prime mortgage market. Someborrowers in the subprime market, however, may be particularly vulnerable to abusive lending practices.This report details the recommendations of the Department of Housing and Urban Development(HUD) and the Department of Treasury for legislative and regulatory action to combat predatorylending, while maintaining access to credit for low- and moderate-income borrowers. In addition, thereport describes regulatory and policy changes that HUD is implementing to combat predatory lending.The recommendations contained in this report are based, in significant part, on information gathered bythe HUD-Treasury National Predatory Lending Task Force. Secretary Cuomo announced the Task Force in March 2000, in response to inquiries made by Senator Mikulski in the context of a VA/HUDAppropriations Subcommittee hearing. Secretary Cuomo and Secretary Summers jointly convened theTask Force in April 2000.The Task Force drew its members from a wide range of parties interested in and affected bypredatory lending, including consumer advocacy groups; industry trade associations representingmortgage lenders, brokers, and appraisers; local and state officials; and academics. Task Forcemembers collected information about predatory lending and provided testimony on the effects of predatory practices through a process that included field forums held in Atlanta, Los Angeles, NewYork, Baltimore and Chicago.
What is Predatory Lending?
Although home mortgage lending is regulated by state and federal authorities, none of the statuesand regulations governing mortgage transactions provides a definition of predatory lending. Predatorylending -- whether undertaken by creditors, brokers, or even home improvement contractors -- involvesengaging in deception or fraud, manipulating the borrower through aggressive sales tactics, or takingunfair advantage of a borrower’s lack of understanding about loan terms. These practices are oftencombined with loan terms that, alone or in combination, are abusive or make the borrower morevulnerable to abusive practices.Predatory lending generally occurs in the subprime mortgage market, where most borrowersuse the collateral in their homes for debt consolidation or other consumer credit purposes. Most
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US Treasury: treasrpt
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| Upload Date: | 01/22/2008 |
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