Publications & Resources
January/February 2008
Focus: Compliance
The Intersection of Equal Credit
Opportunity
and Sub Prime Loans
By James DeFrantz
“Makes me Wanna Holler!” - Marvin Gaye
As the sub-prime housing market continues to melt down, the public outcry will likely put political pressure on lending institutions to allow for a “soft landing” for people who have these loans. It is very likely that federal, state and local intervention will occur that will mitigate some of the losses resultant from the downturn in the market. We have already seen the start of programs designed to help borrowers caught in “sub-prime hell”. For example, as early as April 2007, the U.S. Senate made public pronouncements about federal money being set aside to assist lower income borrowers in danger of foreclosure.[1]
Ohio, one of the states hardest hit by foreclosures, is
planning to sell $100 million worth of taxable bonds to make new, 30-year
fixed-rate loans at 6.75 percent to Ohio homeowners who can't afford their
existing mortgage but have not yet entered foreclosure.[2]
For
There are many other examples of governments and private corporations developing funds to assist sub prime borrowers facing foreclosure. In addition to the government programs, many sub-prime lenders have undertaken the process of re-writing the terms of their loans to ease the pressure of distressed borrowers.
The Aftermath
As always, the outcry will eventually die down and the public will be left with a discussion of “how did this happen?” and “what can we do to keep this from happening again?” There can be little doubt that a great deal of finger pointing and characterizations will continue for some time. Sub-prime lenders continue to be called “predatory” by consumer advocates while many decry the characterization of adults who chose to enter into a legally binding contract as “victims”. Hopefully, there will eventually be some calm analysis of the root causes of the problem coupled with some thoughtful solutions. Unfortunately, many in the banking industry will be associated with sub-prime loans despite the fact that very few banks actually participated in this form of lending.
In the long term, the sub-prime debacle points to a larger fundamental problem; the market for sub prime loans is made up largely of women and minorities.[4] This is the same group of people that ECOA was first designed and enacted to protect. The ECOA was first enacted in 1974 as a means of protecting the credit rights of women. The amendments of 1976 added protections for minorities and several other protected classes. Coupled with the Community Reinvestment Act and the Federal and state Fair Housing Laws, and in 1989, the Home Mortgage Disclosure Act (HMDA) a complete regulatory scheme was developed aimed at opening credit markets for groups of people who were traditionally shut out. While many economists and essayists have argued over the effectiveness of the regulatory scheme, the facts remain that vast numbers of communities still lack access to the credit markets. Over the years, there have been various studies performed that have determined that women and racial minorities have limited access to credit markets. This is especially true in the housing markets.[5]
Equal Credit
Opportunity
Doesn’t Mean Sub-Standard or Sub Prime
Over the years, compliance with Fair Housing and Equal Credit Opportunity laws has come to be associated with substandard or marginal credit. However, this view truly misapprehends the intent of the regulations. The goal of the Fair Housing and Equal Credit opportunity laws was to prod financial institutions to consider markets that had been unfairly or unreasonably overlooked. Within most economically depressed communities exists the opportunity for profitable, solid credit facilities. Unfortunately, many of these potential borrowers get painted with the broad brush of “sub-standard” or “sub-prime” borrowers. The ECOA, CRA and Fair Housing Act by themselves can really do little towards reaching the goal of opening credit markets to the traditionally under banked. It is the spirit of these laws that must be embraced by lenders as we go forward.
Embracing the spirit of the ECOA, CRA and Fair Lending Laws would entail little cost and a moderate amount of time. Developing credit products that truly address the needs of traditionally under banked communities only requires the will to do so.
In summary, without financial institution’s willingness to address the need for credit in the communities sought to be protected by the ECOA, the CRA and Fair lending laws, it is only a matter of time before we are asking all over again… “How could this happen?”
James DeFrantz is senior auditor for Bank Vision Inc. in Hayward, Calif. He can be reached at JDeFrantz@aol.com.
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