Thank you for the opportunity to testify today.  My name is Saima Akhtar and I am a Staff Attorney for the Empire Justice Center. We are a statewide legal services organization with offices in Albany, Rochester, White Plains and Central Islip (Long Island).  Empire Justice provides support and training to legal services and other community-based organizations, undertakes policy research and analysis, and engages in legislative and administrative advocacy.  We also represent low-income individuals, as well as classes of New Yorkers, in a wide range of poverty law areas including community development and predatory lending.  We would like to thank you all for this opportunity to testify on the issue of purported discriminatory mortgage practices in New York State.  In particular, we would like to thank Banking Committee Chair, Assemblymember Darryl C. Towns for convening this hearing.

Over the past year and a half, state, federal and local governments as well as the media and the general public have spent massive amounts of time identifying ways to help homeowners at risk of foreclosure.  The intensity of focus has been maintained because of the ruinous effect foreclosures have on the financial well-being of families, communities, and our economy.  While the foreclosure crisis will eventually impact all Americans in one way or another, the effect of subprime lending on minority communities has simply been devastating.  Righting the wrongs of the subprime debacle is necessary on many levels, but it is essential to remember that primary among the rationale must be the need to seek justice for those who have been targeted and discriminated against in the lending process. 

My testimony today will highlight what has happened to too many homeowners of color who were encouraged to pursue the American Dream of homeownership, but were not provided with adequate basic protections.  To that end, I will discuss:

• Disparities in home mortgage lending and the Community Reinvestment Act (CRA)
• Subprime lending disproportionately affecting communities of color
• The positive outcomes and ongoing issues with foreclosure prevention initiatives

I. Disparities in Home Mortgage Lending and the Role of the Community Reinvestment Act

For several years, Empire Justice Center and the 30-organization coalition it convenes, the Greater Rochester Community Reinvestment Coalition (GRCRC), have been sharing concerns with banks and regulators about unfair and potentially discriminatory mortgage lending practices. Specifically, since 2000 Empire Justice Center has been analyzing subprime mortgage lending. [1]  Our analyses of subprime lending show that since 1996 communities and people of color receive subprime or higher cost loans much more often than others.

This matters for several reasons. As we already know, subprime loans are much more likely than prime loans to have abusive loan terms that strip equity and contribute to increased chances for default and foreclosure. Since more families in communities of color have these loans, these communities are seeing their wealth erode via higher payments and fees and through foreclosures—their own and/or their neighbors’.

Our April 2009 report “Paying More for the American Dream III: Promoting Responsible Lending in Lower-Income Communities and Communities of Color,” [2] a collaborative analysis of mortgage lending in 2007, shows that lenders made subprime or higher cost loans more often in communities of color than in other communities. In 2007, lenders in Rochester made higher cost loans 2.5 times more often in neighborhoods where 50 percent or more of the residents were people of color than in communities where less than 50 percent of the residents were people of color. The disparity was even larger in New York City. Lenders there made higher cost loans 4 times more often in communities of color than in other communities.

Still, in the seven communities studied, the loans originated in communities of color by lenders with no Community Reinvestment Act (CRA) obligations were higher cost much more often than the loans originated by lenders with CRA obligations in the metro area. [3] For example, in Rochester and New York City communities of color, depositories without CRA obligations made higher cost loans at least twice as often as depositories with CRA obligations. Of the loans made in communities of color by depositories without CRA obligations, 53 percent in Rochester and 35 percent in New York City were higher cost, compared to 28 percent of the loans in Rochester and 15 percent of the loans in New York City by CRA-obligated depositories. Attached to our written testimony are two maps showing the high rates of higher cost lending in Rochester and New York City communities of color, particularly by depositories and independent mortgage companies not obligated by CRA.

Recommendations:

These two facts--that higher cost lending happens more often in communities of color than in other communities and that lenders without CRA obligations make higher cost loans more often than lenders who are obligated by the Community Reinvestment Act—suggest actions that New York State might take to address these disturbing lending patterns.

1. Create a state-level CRA obligation for state-regulated banks and expand it to other financial institutions.

In 1982, Massachusetts passed a state community reinvestment law applying to state-chartered banks and credit unions, and in 2007, Massachusetts expanded CRA provisions to cover lenders originating 50 or more home mortgage loans a year. So, unlike in NY, a much larger proportion of lenders in Massachusetts have CRA obligations—state-chartered banks, state-chartered credit unions, and almost any mortgage lender (i.e. independent mortgage companies).

Boston was one of the cities examined in our April 2009 collaborative report.  Boston had some of the lowest rates of higher cost lending in communities of color among the seven metropolitan statistical areas (MSA) studied. Only three percent of the loans originated in communities of color by CRA-obligated depositories were higher cost compared to rates of 28 and 15 percent found in Rochester and New York City communities of color.

Still, there are disparities in higher cost lending between communities of color and other communities in Boston. This could be because, even in Massachusetts, state CRA obligations, like the federal CRA obligations, apply only to low and moderate income communities, not minority communities, thus, our next recommendation.

2. Address mortgage lending discrimination affecting people and communities of color.

Some of the ways this could happen are through:

• Aggressive enforcement of federal and state fair lending and anti-discrimination laws, which would include:

• The Fair Housing Act, 42 U.S.C. § 3604, 3605 which prohibits discrimination because of race, color, national origin, gender, disability, or other protected class in the sale of properties and covers lenders, sellers, brokers and appraiser, as well as prohibits “reverse redlining” – making loans to borrowers of a protected class that put them at a risk of losing homeownership;  
• The Equal Credit Opportunity Act (ECOA), 15 U.S.C. § 1691 which prohibits discrimination against applicants for credit in “any aspect of a credit transaction”;
• The Federal Civil Rights Statute, 42 U.S.C. §§ 1981 and 1982 which bans discrimination in financial transactions; and
• NYS Human Rights Law (Executive Law, Article 15, § 298-a), which prohibits discrimination in the granting, withholding, extending, or renewing, or in the fixing of the rates, terms, and condition of credit.

• Creation of a state CRA law and extension of CRA obligations to people and communities of color in addition to low and moderate income communities.
• Active support for the expansion of the federal CRA to include all institutions making mortgages and application of the federal CRA to people and communities of color.

II. Subprime Lending Disproportionately Affects Communities of Color

The higher penetration of subprime lending has had an adverse impact on communities of color. The race and ethnicity of mortgagors with subprime loans in foreclosure is not information that is reported or even available.  In 2008, the Empire Justice Center examined the impact that the foreclosure of subprime loans was having on the neighborhoods (zip codes) where minorities had been successful in becoming homeowners in New York State, in areas outside of New York City. [4]  We found that areas with the highest percentage of minority homeownership were highly impacted.  Furthermore, when the issue was viewed by calculating and comparing the percentage of a particular county's minority homeowners who lived in areas impacted by high numbers of subprime foreclosures, the effect was particularly devastating. 

For example:

• In Nassau County, African American homeowners were four times more likely than white homeowners to live in the areas most impacted by subprime foreclosures.  Out of  the 4,881 loans that were in foreclosure (or 30 or more days late) in Nassau County at the end of 2007, 60% (2,916) were in only 10 out of the county's 67 zip codes.  Amazingly, 85% of Nassau County’s African American homeowners lived in these 10 zip codes.  (In contrast, only 20% of all of the white homeowners in the county lived in those same areas).
• In Suffolk County, African American homeowners were three times more likely than white homeowners to live in the areas most impacted by subprime foreclosures.  Of the 8,055 loans in jeopardy (in foreclosure or 30 days or more late) in Suffolk County, 42% of the loans were located in only 10 out of the county's 102 zip codes.  Those zip codes were home to 66% of Suffolk County’s African American homeowners.  (In contrast, only 20% of Suffolk County’s white homeowners lived in those areas).
• Finally, in Erie County, a single zip code on the eastern edge of the city, 14215, is of particular interest.  According to the 2000 census, one-third of all African American homeowners in Erie County (6,053 out of 17,857) lived in that zip code. Looking at earlier census data, we saw that between 1990 and 2000, there had been a huge increase in the population of African Americans there as minorities left the more distressed central city area, perhaps because zip code 14215 offered safer neighborhoods and access to better performing schools.  Not surprisingly, though, that zip code was the hardest hit by subprime foreclosures in Erie County.  As of the end of 2007, according to the dataset cited by the Federal Reserve (NY), that single zip code accounted for 8.4% of all subprime loans made in all of Erie County.  Even worse, of the 454 subprime home purchase loans that had been made there, 155 were already in foreclosure or delinquent by October 2007.  We suspect, but are unable to document, that many of these foreclosures did involve minority homebuyers.  But even if it were true that the subprime foreclosures in this area were not disproportionately those of minority homeowners, the subprime foreclosure crisis in zip code 14215 in any event undercut much of the progress made in asset-building by African American homeowners there since the early 1990s.  Given the huge proportion of Erie County's minority homeowners who lived in that area, even a collateral impact of the subprime foreclosure crisis due to the decreases in housing values of adjacent and nearby properties, took a toll on much of the equity gains that had been made by minority homeowners in Buffalo and Erie County.

Recommendation:

1. Strengthen our state foreclosure law (A.8917-A, S.5931-A).

New York has been a national leader in providing foreclosure prevention assistance, as well as regulating predatory lending practices.  Last year, New York enacted the Foreclosure Prevention and Responsible Lending Act of 2008 which provided for a notice with a list of non-profit counseling agencies to be sent to homeowners ninety days before foreclosure can be initiated, a new mandatory settlement conference for homeowners with subprime and nontraditional home loans, and mandated new servicing regulations.  This same law also created a duty for mortgage brokers and limited predatory practices in subprime lending, among other things.  We have already experienced benefits of this new law, especially through a decrease in the number of homeowners losing their homes to foreclosure thanks to the new mandatory settlement conferences. 

On Monday, June 22, 2009, the Assembly passed A.8917-A which would extend the ninety day notice and mandatory settlement conference to all homeowners facing foreclosure.  The bill also addresses the problem of deteriorating homes left vacant from the foreclosure process by mandating lenders to maintain these properties, and it provides necessary protections to tenants who are losing their housing as the result of a foreclosure.  We thank and applaud the Assembly for passing A.8917-A.  We continue to urge the Senate to pass their “same as” version, S.5931-A, before the end of the session in December.

III. Continued Problems with Foreclosure Prevention Initiatives

While there have been many successes to report since the 2008 Foreclosure Prevention and Subprime Lending Act was signed into law last August, several clear issues with its implementation have emerged.

Mortgage Modification Issues:

In March 2009, President Obama launched a housing plan to assist borrowers in foreclosure.  Between the participation of Fannie Mae, Freddie Mac, and numerous other loan servicers, approximately 75% of all loans qualify to be reviewed for possible modification under the plan.  In the last month, Empire Justice has begun to see a handful of clients who have received such modifications of their mortgages.   However, there are inconsistencies among the staff of the lending institutions.  While some staff are offering modifications per the President’s plan, other staff employed by the same lending institutions are unaware that the lender/servicer is participating in the program and, therefore, advise borrowers that they have no obligation to review the loan under the Obama plan.

This confusion is occurring despite the fact that three months have elapsed since the announcement.  We believe that additional staff and training are needed at the lending institutions.  Currently, advocates have not seen an improvement in the overall handling and processing of the mortgages at risk of foreclosure.  Documentation sent by advocates on behalf of clients is routinely misplaced by the lenders and paperwork that has been sent is not posted into the lender’s internal computer systems despite multiple submissions. This prohibits productive conversation and creates unnecessary delays.  It makes obtaining an affordable mortgage modification nearly impossible.

Foreclosure Settlement Conferences:

Across the state there are inconsistencies in the effectiveness of the settlement conferences created by the 2008 Foreclosure Prevention and Subprime Lending Act.  These inconsistencies are significant amongst the judicial districts and even among the individual judges within a single judicial district.  Some judges and/or districts appear to have discovered effective methods to handle the settlement conferences.  For example in the 8th judicial district, Judge Walker and his clerk have been conducting the conferences in a productive manner by taking an active role in the process.  They require both parties to attend with the necessary information to actively negotiate a loan modification on the spot.  Using this approach, homes are being saved from foreclosure and lenders are losing substantially less money than continuing with the foreclosure would cost them. 

Recommendations:

In order to maximize the number of affordable mortgage loan modifications achieved and prevent unnecessary foreclosures, the Empire Justice Center recommends:

1. Lenders must improve staffing and consider assigning one primary staff person to each homeowner to facilitate a more efficient process for all parties involved. 
2. All parties must be required to attend these conferences with all necessary documentation and information needed to settle a case.  
3. Expansion of the availability of settlement conferences to all homeowners in foreclosure. 
4. Allow funds slated for critical housing counseling and legal services providers to serve all homeowners facing foreclosure. 
5. Ensure that ongoing funding for providing these services is made available in the 2010-11 state budget.

IV. Conclusion

The Empire Justice Center is extremely concerned about seeking justice for minority homeowners unfairly targeted through high cost lending and ensuring that homeowners with the ability to make reasonable payments are able to keep their homes.     New York has already led the nation in addressing the foreclosure crisis through the enactment of Foreclosure Prevention and Responsible Lending Act of 2008.  The state must now take the next step and act comprehensively to eradicate racial and income disparities in the lending community.  To do this, we strongly urge the Assembly to work with the Senate and Governor to strengthen critical protections for New York homeowners by:

1. Creating a state level CRA for state-regulated banks and other financial institutions.
2. Addressing mortgage lending discrimination affecting people of color.
3. Expanding the availability of the settlement conference process to all homeowners in foreclosure.
4. Passing legislation that requires all parities attending a settlement conference to provide all documentation and information needed to settle the case.
5. Making current funding for housing counseling and legal services providers available to serve eligible homeowners with all types of loans. 
6. Maintaining funding for these critical services in next year’s budget.

Once again, we thank you for the opportunity to speak about this critical issue today.  Please feel free to contact me should you have any additional questions.

End Notes:

[1] One of our first reports was of lending by the Rochester metropolitan statistical area’s top 10 HUD-identified subprime lenders in 1996 and 1998. In 2004, federal mortgage lending data started including information on which loans by all Home Mortgage Disclosure Act (HMDA) reporters were above a certain APR threshold (3% for first-lien and 5% for subordinate lien mortgages above the comparable Treasury bill) and thus “higher cost” or “subprime.” Empire Justice Center has been analyzing these higher-cost loans since that time.
[2] This report may be found at: http://www.empirejustice.org/publications/reports/paying-more-for-the-american.html. 
[3] The federal Community Reinvestment Act (CRA) affirmatively obligates banks to serve the communities in which they are located (meaning where they have a deposit-taking branch), particularly low and moderate income communities.  In the report, the category of lenders without CRA obligations was broken down to: a.) depositories with no CRA obligations in the MSA, including banks with no depository branches in the MSA and credit unions, and b.) independent mortgage companies.
[4] This report may be found at: http://www.empirejustice.org/publications/reports/curbing-the-mortgage-meltdown.html.

Supporting Documents:

New York City CRA Map 2009

Rochester CRA Map 2009