LCCR Urges Close Scrutiny of Federal Reserve Nominees, in Light of Subprime Mortgage Crisis

Recipient: Chairman Dodd and Ranking Member Shelby

The Honorable Christopher J. Dodd, Chairman
Committee on Banking, Housing, and Urban Affairs
United States Senate
Washington, DC 20510

The Honorable Richard C. Shelby, Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate
Washington, DC 20510

 

Dear Chairman Dodd and Ranking Member Shelby:

On behalf of the Leadership Conference on Civil Rights and the undersigned organizations, we write to express our concern with respect to the nominations of Ms. Elizabeth A. Duke and Mr. Larry Allan Klane, and the re-nomination of Governor Randall S. Krozner, to the Board of Governors of the Federal Reserve System (the “Fed”). Specifically, we urge the Committee, before moving forward with the confirmation of these three nominees, to secure their commitment to eliminating unfair subprime lending practices that have contributed to the significant nationwide increase in home mortgage foreclosures.

In the last several years of the nationwide housing “boom” that took place in the first half of this decade, many subprime mortgage lenders resorted to the widespread use of reckless and unfair lending practices, including so-called “exploding ARM” loans, “no-doc” loans, and prepayment penalties. As the Committee has learned through numerous recent hearings and consultations, conventional loan underwriting standards were largely abandoned, virtually guaranteeing that many borrowers would be unable to handle their mortgage payments and increasing the likelihood of default.

The consequences of these practices are still unfolding, but one thing is clear: they will be staggering.Home foreclosure rates are now rapidly increasing in many areas of the nation, and according to one estimate, as many as 2.4 million recent subprime borrowers are likely to lose their homes in the near future. This wave of home mortgage foreclosures will have an especially harsh impact on racial and ethnic minority homeowners who, according to several studies, were roughly two to three times more likely to be steered into high-cost loans than white borrowers, with strong disparities persisting even credit factors were taken into account.

While the Fed and other federal banking regulators have recently closed the door on some irresponsible lending practices, the Fed also has the sweeping power – indeed the duty – under the Home Ownership and Equity Protection Act of 1994 (HOEPA) to prohibit, on a basis that would apply to both bank and non-bank lenders alike, mortgages that are “unfair, deceptive,” or “otherwise not in the interest of the borrower.” To date, even though it has been aware of the prevalence of such loans for several years, the Fed has inexcusably failed to invoke this authority in a way that could have protected homeowners from the now-looming epidemic of foreclosures.

Given the Fed’s lack of timely action in this respect, our concerns are heightened with respect to all three nominees to the Board of Governors, but particularly with the re-nomination of Governor Krozner to a full term. Governor Krozner has been a member of the Board of Governors since March 2006. As such, he has already been in a position to encourage the Fed to exercise its authority under HOEPA. We encourage the Committee to explore whether he did so, and if he did not, the Committee ought to determine why.

Even more importantly, before the Committee advances any of these nominations, we respectfully ask that you secure commitments from all three nominees that they will work to have the Fed exercise its broad powers under HOEPA. In particular, the nominees should ensure that the Fed implements the following long-overdue requirements with respect to subprime mortgage lending practices:

 

1)      More careful evaluation of a borrower’s ability to repay the loan, including underwriting practices that account for all anticipated payment increases;

2)      The establishment of a debt-to-income standard that includes property taxes, hazard insurance, and other expenses that are normally expected in the cost of homeownership;

3)      The escrow of funds that borrowers will need to pay property taxes and hazard insurance;

4)      The establishment of lender liability for broker actions;

5)      A prohibition on prepayment penalties;

6)      The elimination of unnecessary “no-doc” and “stated income” loans; and

7)      The prevention of subterfuge occurring with abusive “piggy-back” second mortgages.

 

While many individual lenders have already taken steps to ensure that subprime mortgage loans will be extended in a more responsible fashion in the future, we believe that prompt and uniform regulations under HOEPA are absolutely vital to ensuring that all lenders play by the same sensible rules. 

 

While tighter lending standards will pose challenges to some current homeowners who expected to refinance their mortgages in the near future, allowing current practices to continue will cause even more harm in the long run.  Mortgage servicers can – and should – save many homeowners from losing their homes through loan modifications and similar alternatives.  Strong HOEPA guidelines will also circumvent, in many respects, the need for legislative action.

 

We know that you share our profound concerns with the growing foreclosure crisis and the other emerging consequences of some of the reckless practices that have characterized subprime lending in recent years, and we greatly appreciate your leadership to date.  The Board of Governors ought to exercise similar leadership.  Indeed, such leadership is long overdue.

 

Thank you for your consideration of our views.  If you have any questions, please feel free to contact Rob Randhava, LCCR Counsel, at 202-466-6058.

 

 

Sincerely,

 

Wade Henderson, President and CEO

Nancy Zirkin, Vice President/Director of Public Policy

 

 

 

Additional Signatory Organizations:

 

Association of Community Organizations for Reform Now (ACORN)

Center for Responsible Lending

National Association for the Advancement of Colored People (NAACP)

National Association of Neighborhoods

National Community Reinvestment Coalition

National Council of La Raza

National Fair Housing Alliance