NEW YORK - "Breaking the link" between predatory lenders and the investment banks that finance them is a tough goal to achieve, but U.S. Department of Housing and Urban Development Secretary Andrew Cuomo is open to suggestions on how to accomplish the feat.
In its third of five hearings HUD is holding nationally on issues surrounding predatory lending, Cuomo introduced a panel of speakers to discuss how predatory practices are found within the metropolitan New York City area, but also how to sever the ties of funding sources to lenders who engage in such practices.
He suggested that keeping predatory loans out of the secondary market is the first step in putting an end to the practice. "Someone is buying the mortgages and that someone is the financial companies," he said, adding that "no bona fide company would defend [predatory] practices."
However, Cuomo did note that the explosion of the subprime market has helped more people achieve homeownership, but a "subset of these subprime lenders, who in many cases are not subject to federal regulation," are getting into the practice of offering loans with excessive balloon payments, prepayment penalties and negative amortization.
In a report released at the forum, that issuance of subprime securities has jumped to $83 billion in 1998 from $11 billion in 1994. Only in 1999 was a decrease seen, at around $60 billion.
With homeownership at an all-time high of 66%, Cuomo questioned the need for predatory lenders. "Where are they getting money to start? Who is buying the mortgages?" he said.
His answer: The big banks on Wall Street capitalize on buying the mortgages, and he said they most likely do not really know what they are investing in. He urged investment banks, "Don't invest in a financial company unless you know ... turning back a high rate of return is not enough." HUD announced a zero tolerance stance for anyone in the industry with unscrupulous practices.
"It is a bizarre combining of con-men who wind up being financed by some of the most powerful financial corporations on the planet," Cuomo said. He compared the predatory market to the old street shell-game popular among many con artists. With this game, a man has three shells and a pea, mixing them up, making a player guess under what shell the pea is in. When the shell is lifted, "the pea is not there and the person loses his/her home."
Senate Introduces Lending Bill
U.S. Senator Charles Schumer (D., N.Y.) announced at the forum the introduction of a bill he authored to limit predatory lending practices. Schumer likened predatory lenders to parasites, who "prey on the most vulnerable people in society."
While two laws are currently in place to protect consumers from such practices, the Truth in Lending Act and the Home Ownership Equity and Protection Act, relatively few laws exist regulating predatory lending because it is relatively a new phenomenon, and Cuomo suggested that "it is time these laws get revisited."
Schumer's bill - S2405, The Predatory Lending Deterrence Act - attempts to "go after predators without putting subprime out of business" and "see that the parasitic practice of predatory lending stops."
The bill establishes new definition for high-cost loans, limiting fees to 4% of the loan and interest rates to 8% above the one-year Treasury bond rate. The bill would also prohibit prepayment penalties, lenders' encouraging of borrowers to default, excessive balloon payments, and repeated and unnecessary refinancings. It would also require the borrower to receive impartial credit counseling prior to closing such loans.
Also, Schumer argued that secondary market participants who purchase the loans to pool into mortgage-backed securities "don't have any obligation to look at the type of loan," and this bill would require all lenders to disclose all fee information prior to selling the loans to secondary market participants.
Cuomo hopes that Wall Street will take a more proactive role in determining who the institutions finance. "I'm sure Wall Street would not knowingly support ... this type of practice. It's not going to be enough to say We didn't know. We thought they were a good company.'"