Financial Regulatory Reform – Nancy Zirkin

Location: House Committee on Financial Services

Chairman Frank, Ranking Member Bachus, and members of the Committee: I am Nancy Zirkin, Executive Vice President of the Leadership Conference on Civil Rights (LCCR). Thank you for inviting LCCR to become a part of your Committee’s incredibly important discussion on improving consumer protections in the financial services industry.

LCCR is the nation’s oldest and most diverse coalition of civil and human rights organizations. Founded in 1950 by Arnold Aronson, A. Philip Randolph, and Roy Wilkins, LCCR seeks to further the goal of equality under law through legislative advocacy and public education. LCCR consists of more than 200 national organizations representing persons of color, women, children, organized labor, people with disabilities, older Americans, LGBT Americans, and major religious groups. On behalf of LCCR, I am privileged to represent the civil and human rights community in submitting testimony for the record to the Committee.

Incidentally, LCCR itself recently became a member of another sizeable coalition, Americans for Financial Reform. Organized in response our nation’s worst financial crisis since the Great Depression, Americans for Financial Reform is a coalition of nearly 200 national, state and local consumer, employee, investor, community and civil rights organizations that have come together to spearhead a campaign for real reform in our banking and financial system.

Why LCCR Favors a Very Different Approach to Consumer Protection

Because this is my first opportunity to speak before your Committee, I would like to begin by explaining what has brought LCCR to the table today, and why we believe that the creation of a Consumer Financial Protection Agency would be such an important step forward in protecting the civil rights of the communities that we represent. Much of LCCR’s interest in the proposal relates squarely back to what has always been one of the key goals of the civil rights movement: expanding and preserving the right to the American Dream of homeownership.

Homeownership, I am sure you can agree, is vital because it is the means by which most Americans build wealth and improve their own lives and the lives of their families, and because it is essential to the development of stable, healthy communities that make all Americans proud. With this in mind, for decades, the civil rights community has struggled to break down the barriers to fair housing, as well as the barriers to the credit that most Americans need to obtain housing. Despite the considerable progress that we have witnessed since the enactment of the Fair Housing Act more than four decades ago, the resistance that racial and ethnic minority communities have faced in the effort to obtain fair and sustainable mortgage loans – from the practice of redlining to the scourge of predatory lending that emerged in its place – lies very much at the root of the financial and economic crisis in which we now find ourselves today.

For years, LCCR, our member organizations, and our allies argued that the modern system of mortgage lending was profoundly flawed. While we have long believed that responsible subprime lending serves a valuable role in creating opportunities for many people who might otherwise never own a home or obtain credit, we grew increasingly concerned throughout the past decade that much of the financial services industry had essentially thrown the “responsible” part of “responsible subprime lending” out the window. We saw that countless numbers of irresponsible and abusive loans were being made, not only in the communities that we represent but throughout our nation, with terms that were virtually guaranteed to strip borrowers of wealth and plunge them deeper into debt. Moreover, we also saw that mortgage loans were often extended in a discriminatory fashion, with racial and ethnic minority borrowers being two to three times more likely to be steered into higher-cost subprime loans than white borrowers – and with strong disparities persisting even after credit factors were taken into account.¹

To make matters worse, however, our alarm in recent years over rampant predatory and discriminatory lending practices was matched only by our immense frustration in trying to get policymakers to actually do something about it. Indeed, until the national housing boom had already turned into a national foreclosure epidemic, we were unable to get most policymakers to even acknowledge the existence of a problem.

The efforts of civil rights and consumer advocacy organizations to enlist the help of federal banking regulators fell on deaf ears² – which, of course, is essentially why we are here today. In  particular, even though the Federal Reserve Board had been equipped by Congress since 1994 with the legal authority³ to eliminate predatory subprime lending practices, it inexplicably refused to exercise that authority until July 2008 – well after many subprime lenders had already collapsed, others were in the process of exiting the market, and countless numbers of Americans had already lost their homes because they were stuck in mortgage loans that they had no hope of repaying.

Two other key federal bank regulators, the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC) also repeatedly failed to use the regulatory and enforcement tools at their disposal. From 1987 to the present, for example, the OCC brought only four formal enforcement actions under the Equal Credit Opportunity Act (ECOA)⁴ and its implementing regulations, and from 2000 through 2008, it did not refer a single case under ECOA to the U.S. Department of Justice on matters involving racial or national origin discrimination in mortgage lending.⁵ Likewise, the OTS made no referrals for racial or national origin discrimination in mortgage lending from 2000 through 2006, even though the Department of Justice filed its own complaint in 2002 against Mid America Bank, an OTS-regulated thrift, in such a case.⁶

At the same time that the OTS and OCC failed to enforce laws to protect consumers and eliminate discrimination in the lending practice, they also went far out of their way to prevent state regulators from picking up the slack – which is particularly troubling given the federal government’s proud history of usually taking the lead in protecting civil rights. Most notably, the OCC in 2005 blocked the New York Attorney General from trying to investigate whether federal banks violated that state’s civil rights laws, a move that was thankfully just rejected by the U.S. Supreme Court.⁷ In another instance, the OCC’s preemption rules stopped the West Virginia Attorney General from investigating allegations of abusive credit card practices by Capital One, after it converted into a national bank in 2008 – even though the investigation had begun in 2005 and was limited solely to the years before Capital One’s conversion.⁸

I could provide additional examples where federal regulators failed to enforce antidiscrimination or predatory lending laws while preventing other entities from doing the same. Instead, I have attached to my statement, to be included as part of my testimony, a policy brief by the Center for Responsible Lending that goes into far greater detail, very appropriately entitled “Neglect and Inaction: An Analysis of Federal Banking Regulators’ Failure to Enforce Consumer Protections.” I should note that the Center for Responsible Lending is far from alone in finding that federal bank regulators have been asleep at the switch. As the Committee is surely aware, for example, the Department of Treasury’s Inspector General concluded that the OTS’ supervision of IndyMac Bank FSB “failed to prevent a material loss to the Deposit Insurance Fund” and that “the thrift’s high-risk business strategy warranted more careful and much earlier attention.”⁹

While LCCR has been particularly focused in recent years on the problems associated with discriminatory and predatory mortgage lending, our concerns with inadequate federal regulation certainly extend to other financial products and services as well, such as abusive credit card practices and payday lending. Travis Plunkett of the Consumer Federation of America, in his testimony before the Senate Banking Committee earlier this week,¹⁰ provided an excellent review in his written statement of the consequences of inadequate or nonexistent federal regulation of those areas of consumer finance, and I very much share his concerns.

The problem with relying on federal bank regulators to protect our communities is fairly simple; it lies in the basic structure of our current regulatory system. It is a structure that is virtually designed to fail consumers. When regulators are financially dependent on the institutions they are tasked with policing, particularly in the case of extraordinarily powerful ones that always have the option of seeking more friendly police, the resulting relationship will inherently be too close to make room for the interests of other parties.

I see no reason to believe that the dynamics of this relationship will change, especially because the mainstream financial services industry lobby has not expressed any serious interest in changing them. On that note, I would remind the Committee that this is the very same lobby that, for years, insisted to Congress that predatory lending was not a widespread problem in its industry, and that any additional regulation would undermine “access to credit.” It is the same lobby that insisted to Congress that the problems would be “contained” to the subprime sector, when it was surely in a position to know what lay ahead. And as home foreclosure rates skyrocketed, to the point where it brought our entire financial system to its knees in the process, it is the same lobby that insisted to Congress that the industry didn’t need legislation to keep borrowers in their homes. Everyone should be far more skeptical of the industry lobby this time around. It is time to let others call the shots when it comes to protecting American consumers.

Safeguarding Civil Rights in the Consumer Finance Protection Agency  

Given the obvious inability of the existing financial regulatory system to adequately look out for the interests of our communities, LCCR strongly believes that the only option is to create a new regulator that will. Your new legislation, the “Consumer Financial Protection Agency Act of 2009” (H.R. 3126), will move the responsibility for enforcing most consumer protection laws into an agency whose sole mission is, simply put, to protect consumers. While that appears to be a radical concept to some, LCCR very much appreciates all of the efforts that you and President Obama are making to turn it into a reality.

Because systemic racial and ethnic discrimination was such a significant underlying cause of our nation’s financial crisis, LCCR believes that the proposed Consumer Financial Protection Agency (CFPA) needs to be set up in a way that makes effective civil rights enforcement a key part of its mission. To that end, I am happy to provide the following recommendations:

1. Civil rights must be part of the agency’s stated mission. The bill’s mandate is to “promote transparency, simplicity, fairness, accountability, and access” in the consumer financial products and services market. In addition, we believe the CFPA must explicitly be tasked with protecting the civil rights of consumers as a way of reducing the disparities I have noted above.
   
2. Fair lending compliance and enforcement must be built into the agency’s formal structure. Civil rights must be prioritized as a part of the agency structure. The best way to do this would be to create a Civil Rights/Fair Lending Compliance and Enforcement Office. Such an office should serve a dual function – first, to ensure that the CFPA itself operates in a manner that affirmatively furthers fair housing; and second, to ensure that financial market players comply with fair lending statutes. The CFPA must also have the appropriate power and resources to vigorously enforce the fair lending laws under its auspices – the Equal Credit Opportunity Act (ECOA), the Home Mortgage Disclosure Act, and other appropriate fair lending statutes. It should have sufficient authority and resources to conduct fair lending examinations, engage in compliance activities, and write rules. In addition, this office needs to be headed by a senior position who reports directly to the Director of the CFPA.
   
3. The enforcement authority under the Fair Housing Act, currently held by HUD and the Department of Justice, should not be diminished. The Department of Housing and Urban Development (HUD) should be encouraged to write fair lending rules for the Fair Housing Act in consultation with the CFPA. HUD’s already developed mechanism for processing individual fair lending complaints and enforcing the fair lending provisions of the Fair Housing Act should be left intact.
   
4. All agencies engaged in regulating financial institutions, or enforcing civil rights and fair lending statutes, must cooperate and openly share information. Many federal agencies and departments are engaged in enforcing the fair lending laws. For instance, the Department of Justice investigates companies that have demonstrated a pattern and practice of violating the ECOA or the FHA, HUD enforces the Fair Housing Act, and the CFPA will enforce the ECOA (among many other enumerated laws). In order for each department or agency to do its work efficiently and effectively, it is vital that they are able to cooperate with each other. For example:
   
   
   
   • The agencies should consult with each other when issuing rules, guidance, or investigation procedures.   ? The CFPA should be given authority to engage in joint investigations with HUD and the Department of Justice.
     
   • Regulatory and enforcement agencies should create a shared database of complaints received, examinations initiated, reports issued, violations found, and enforcement actions taken. Such information should be available to any federal or state consumer protection, regulatory or fair lending enforcement agency. In addition, the CFPA should have a mandate to refer potential FHA violations to HUD. Currently, financial regulatory agencies have this obligation under the ECOA.
     
   • HUD should be given access to the CFPA’s reports of examinations, to facilitate its enforcement of the FHA.
   
   
5. CFPA rules should be enforceable by individuals and those who violate CFPA rules must be accountable to the individuals they harm. More specifically, the bill should include a private right of action by consumers.
   
6. The CFPA must have clear authority to impose mandates/sanctions on institutions found to be out of compliance with fair lending statutes. It is imperative that financial regulators not be able to circumvent fair lending requirements, laws, or rules, even when taking emergency measures. Indeed, the CFPA should be given sign-off authority to certify compliance with applicable fair lending and other related laws, before any regulator can approve a merger, acquisition, branch opening or closing, or prior to granting emergency funds or approving emergency measures.
   
7. The CFPA Consumer Advisory Council should include individuals with fair lending and civil rights expertise. LCCR’s Fair Housing Task Force is currently in the process of finalizing proposed language that would incorporate these recommendations into H.R. 3126. We look forward to following up with your staff on our suggestions.

Before I conclude, I want to briefly point out one key difference between President Obama’s CFPA proposal and H.R. 3126. President Obama’s legislation would transfer jurisdiction over the Community Reinvestment Act of 1977 (CRA) to the CFPA, while H.R. 3126 would not. I know that there have been discussions with a number of stakeholders over whether such a move would be practical. Regardless of where jurisdiction over the CRA is ultimately placed, LCCR believes that strengthening the law is absolutely vital to ensuring that our communities have access to fair, responsible sources of credit. For this reason, we support H.R. 1479, the “Community Reinvestment Modernization Act of 2009,” and we look forward to working with you toward its enactment.

Again, thank you for inviting me to testify today. I would be happy to answer any questions you may have.

1. See, e.g. Debbie Gruenstein Bocian, Keith S. Ernst, and Wei Li, Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages (pdf), at 19, May 2006; National Community Reinvestment Coalition, Income is No Shield Against Racial Differences in Lending: A Comparison of High-Cost Lending in America’s Metropolitan Areas (pdf), July 10, 2007; Rich Brooks and Ruth Simon, “Subprime Debacle Traps Even Very Credit-Worthy,” Wall Street Journal, December 3, 2007 at A1.

2. Federal regulatory agencies were equally dismissive of the warnings of individual federal and state regulators. See, e.g., Edmund L. Andrews, “Fed Shrugged as Subprime Crisis Spread,” “ew York Times, Dec. 18, 2007 (“Edward M. Gramlich, a Federal Reserve governor . . . warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford. But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman.”); Atty. Gen. Lisa Madigan (IL), Hearing on “Federal and State Enforcement of Financial Consumer and Investor Protection Laws,” House Committee on Financial Services, Mar. 20, 2009 “(I remember meeting with my consumer fraud lawyers and being told that this terrible wave of foreclosures was coming – years before it made the headlines. I also recall attending a meeting with federal regulators two years ago at which I voiced my concerns about the oncoming crisis. At that time, however, Wall Street was still making money on mortgage-backed securities. The federal regulators did not share my concerns.”).

3. The Home Ownership and Equity Protection Act of 1994 (HOEPA) states that the Federal Reserve “shall prohibit” mortgage loans that are “unfair, deceptive or designed to evade the provisions” of HOEPA, or that “are associated with abusive lending practices, or that are otherwise not in the interest of the borrower.” 15 U.S.C. §1639(l)(2).

4. Center for Responsible Lending, “Neglect and Inaction: An Analysis of Federal Banking Regulators’ Failure to Enforce Consumer Protections,” July 13, 2009, at 4 (attached).

5. Information on OCC’s enforcement actions is contained in annual reports that the U.S. Attorney General provides to Congress. See U.S. Attorney General, Annual Report to Congress Pursuant to the Equal Credit Opportunity Act.

6. See United States of America v. Mid America Bank, fsb.

7. Cuomo v. Clearing House Ass’n, L.L.C., 2009 U.S. LEXIS 4944 (2009).

8. Capital One Bank (USA), “.A. v. McGraw, 563 F. Supp. 2d 613 (S.D. W.Va. 2008). While ruling in favor of Capital One, the court noted that West Virginia’s investigation was “hijacked” by the conversion and added that “it is questionable whether the OCC will be as motivated or as effective in protecting the consumers of West Virginia as is the West Virginia Attorney General. Nevertheless, it is my duty to apply the law as it is, not as I would have it be.” Id. at 622-3.

9. Office of Inspector General, Audit Report: “Safety and Soundness: Material Loss Review of IndyMac Bank, FSB,” U.S. Dept. of Treasury, Feb. 26, 2009, at 3.

10. Travis Plunkett, Consumer Federation of America, Hearing: “Creating a Consumer Financial Protection Agency: A Cornerstone of America’s New Economic Foundation,” Senate Committee on Banking, Housing, and Urban Affairs, July 14, 2009