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aceventura3 · 06-04-2008, 07:17 AM

Quote:

Originally Posted by dc_dux

OK....ace, if you say so

Who am I to point out facts from a study on the CRA and its impact on the mortgage crisis over your opinion.

The comment here tells me that you did not get my point. You can reread the posts if you want, I won't try to restate it.

Also regarding your facts - are you aware that a defined assessment area is different than the full scope of how the Community Reinvestment Act affects a bank or a community? Are you aware that a CRA Bank is just about every bank that has federal deposit insurance? Here is a quote from the study you referenced:

Quote:

This study isolates the 2006 performance of one category of mortgage lenders—banks originating loans in their Community Reinvestment Act (CRA) assessment areas, referred to herein as “CRA Banks.”

http://www.traigerlaw.com/publicatio...udy_1-7-08.pdf

This law has a much broader impact than the study you referenced suggests. And the limited scope of the study may be misleading given the conclusions drawn from it. Here is a summary of why:

Quote:

II. DEFINING THE PROBLEM

A. Direct Involvement by Banks in Predatory Lending

Banks can directly participate in predatory lending by originating or brokering predatory loans. Currently, both origination and brokerage activities may qualify for CRA credit even when they involve predatory lending.

There is a great deal of uncertainty regarding the extent to which banks originate predatory loans. (22) As we discuss infra, banks have significant disincentives to originating subprime, including predatory, loans. (23) Although theoretically the disincentives outweigh the incentives, there is anecdotal evidence that certain regulated depository institutions have originated predatory loans. For example, numerous borrowers have sued the failed subprime lender Superior Bank, (24) alleging that the bank engaged in predatory lending. (25) The plaintiffs have alleged that Superior encouraged them to assume loans they did not need or could not afford, and engaged in various forms of fraud. (26) If Superior was making predatory loans, it could have received CRA credit for these loans under the lending test.

When banks serve as loan brokers, they take borrowers' applications and perform various settlement functions, without assessing the creditworthiness of the applicants. Sometimes broker banks fund subprime loans for a brief period before assigning the loans to the originating lenders. Other times the broker banks do not fund the loans at all. (27) For the purpose of the CRA lending test, banks can ask examiners to take into account the loans that they brokered and briefly funded. Likewise, banks whose brokerage activities are limited to accepting applications and performing settlement functions can include these activities under the CRA service test. Lastly, banks can ask that their mortgage brokerage services be considered part of their community development service. (28)

B. Indirect Involvement by Banks in Predatory Lending

There are numerous ways in which banks can indirectly support predatory lenders. They can purchase predatory loans as investments, either as assignments of loans originated elsewhere or by buying securities backed by predatory loans. (29) If and when banks purchase predatory loans, they may be entitled to CRA credit under the lending test if the loans fall within CRA guidelines. (30) Similarly, when banks purchase securities backed by predatory loans made to LMI borrowers, they may receive credit under the investment test. (31)

Banks also finance non-bank subprime lenders, through warehouse lending facilities and other working capital loans (32) and through loan guarantees in the form of letters of credit. In addition, banks serve as underwriters, trustees, registrars and paying agents for securitizations of subprime loans, some of which may be predatory. (33) These bank activities raise CRA implications because some of the activities receive explicit federal guarantees, while others may benefit more generally from federal subsidies. Explicit subsidies arise, for example, when subprime lenders obtain financing through commercial paper placements guaranteed by letters of credit issued by banks. (34) Conventional letters of credit issued by insured banks qualify for up to $100,000 in federal deposit insurance. (35) Past failed bank resolution methods that protected uninsured creditors in bank insolvencies, send an additional signal that the uninsured balances of bank letters of credit may receive de facto protection as well. (36) Banks can accordingly charge lower fees for those letters of credit. The possibility that banks are receiving CRA credit for indirectly supporting predatory lending, and that federal subsidies may be facilitating predatory lending, requires that we consider utilizing CRA to deter abusive lending practices.

C. Steering of Prime Borrowers to Subprime and Predatory Loans

One of the most troubling conclusions to emerge from the research on the subprime market is that substantial numbers of customers who qualify for prime loans are steered to costlier subprime loans that should be reserved for customers with weak credit ratings. (37) Mortgage brokers have strong incentives to engage in steering due to "yield spread premiums." (38) These are premiums lenders pay mortgage brokers if they persuade borrowers to accept higher interest rates even though the lenders would, if pressed, grant the loan at lower rates. (39) Unsuspecting borrowers typically never know that they are paying these premiums. Under the Truth in Lending Act, (40) for example, lenders do not have to include yield spread premiums in the calculation of finance charges, even though the cost of the premiums is passed on to the borrowers. (41) Similarly, even when loan disclosure documents list yield spread premiums, relatively few borrowers recognize that these premiums will cause them ultimately to pay higher interest rates. (42) Similar problems are posed by overages, which are incentive payments to loan officers in the form of negotiable interest and fees over and above the minimum rates lenders would be willing to accept to close the loans. (43)

In the bank context, there are two ways that lenders can induce prime loan customers to take out subprime loans. First, banks that offer both subprime and prime loans can steer prime-eligible borrowers to inappropriate subprime products. Second, where banks make prime loans directly, but segregate subprime lending in non-bank affiliates or subsidiaries, the subprime entities may refrain from referring prime-qualified applicants to the banks where they could obtain prime loans. (44) Alternatively, banks may discourage some prime-eligible applicants from securing prime loans by, for example, imposing onerous documentation requirements. Ironically, banks can receive CRA credit for making subprime loans to LMI borrowers even when the borrowers are eligible for prime loans.

Steering by non-bank affiliates rarely even appears on the radar screen of federal bank regulators. The activities of affiliates are not subject to CRA scrutiny unless parent companies voluntarily submit to it. Although mortgage lending by non-bank affiliates (like banks themselves) is subject to the reporting requirements of the Home Mortgage Disclosure Act ("HMDA"), (45) until recently HMDA's regulations did not require reporting of annual percentage rate ("APR") data, which made it difficult to identify subprime loans, let alone steering. (46)

CRA examiners do consider steering when there are allegations that lenders have discriminated by charging higher rates to minorities or other protected groups. (47) Such discrimination claims are relatively rare, and are difficult and costly to prove. (48)

Due to heavy press coverage and in-depth studies by the agencies themselves, (49) federal banking regulators are cognizant that steering is a problem. Since December 2000 or so, the Federal Reserve has expected applicants for approval of deposit facilities to represent that they will review their subprime loan applications for prime-eligible applicants and offer those customers prime products. (50)

CRA examinations, however, are a different matter. In contrast to the Fed's new approach to deposit facility applications, federal banking regulators have not provided guidance to CRA examiners on how to curb steering. In two advance notices of proposed rulemaking, one by the Office of Thrift Supervision in April 2000 and the other by federal banking agencies jointly in July 2001, the agencies solicited public comment on how best to respond to this problem. (51)

D. The Paucity of Legitimate Subprime Lending by Banks

Although CRA-covered lenders originate the greatest number of loans in LMI neighborhoods and to LMI borrowers, these lenders focus primarily on prime lending. As a result, LMI borrowers with impaired credit often turn to non-bank lenders--some of whom are predatory lenders--for subprime loans. Between 1993 and 1998, there was a tremendous surge in lending to LMI borrowers. CRA-covered institutions accounted for eighty-three percent of the growth in prime loans to these borrowers. (52) In contrast, CRA-covered institutions were responsible for only fifteen percent of the increase in subprime loans during the same period. (53) Subprime lenders not covered by CRA accounted for two-thirds of the increase in subprime mortgages. (54) The failure of CRA-covered institutions to meet the demand for subprime loans in LMI neighborhoods runs counter to CRA's goal for banks to "serve the credit needs of their entire communities." (55)

As community institutions with valuable reputations to maintain, banks may be disinclined to lend to customers with impaired credit because they risk criticism if they increase their rejection rates, charge higher interest rates, or have to foreclose on people's homes. Similarly, banks may be concerned that CRA and bank examiners will look askance if they...