(
)
With studies showing home foreclosures hitting blacks and Latinos hardest, the Obama administration’s answer is baffling as well as destructive — to lend them more money, repeating the cycle of easy credit that led to the housing boom and bust.
A new AARP report finds that even elderly minorities are facing serious mortgage delinquencies. Fifty-and-over African-Americans, for example, are almost twice as likely to lose their home as older whites.
“This crisis is far from over,” AARP policy chief Debra Whitman said. “We need to think about more creative solutions.”
President Obama’s solutions, however, look a lot like the original problems that landed minorities in the financial mess they’re in today.
For starters, his new consumer credit watchdog agency has quietly adopted weaker, minority-friendly mortgage underwriting guidelines first published in a landmark 1994 policy statement released by the little-known Interagency Task Force on Fair Lending.
The 20-page “Policy Statement on Discrimination in Lending” — signed by the heads of 10 federal agencies, including then-Attorney General Janet Reno — warned banks that “the agencies will not tolerate lending discrimination in any form.”
It was a noble goal — undercut by the fact that the statement also set lower standards by which banks could qualify low-income minorities with spotty credit.
“Applying different lending standards or offering different levels of assistance to applicants who are members of a protected (minority) class is permissible in some circumstances,” it said. “Providing different treatment to applicants to address past discrimination would be permissible if done in response to a court order.”
The policy planted the seeds of the mortgage crisis, as lenders abandoned prudent underwriting standards altogether. Yet the 1-year-old Consumer Financial Protection Bureau, which was created by the Dodd-Frank financial overhaul, has dusted off the Clinton-era regulation.
“The CFPB, which did not exist at that time, concurs with the policy statement,” the bureau said in a recent bulletin outlining its policy on battling against “lending discrimination.”
Separately, CFPB chief Richard Cordray announced last week that the agency will, for the first time, regulate the credit-reporting bureaus that provide the credit scores lenders use to assess the default risk of loan applicants.
The CFPB has been soliciting complaints from minorities with damaged credit who claim the reports are inaccurate and racially biased. The agency assumes as few as 60% of consumer credit profiles are accurate.
But a recent comprehensive review by the non-profit, non-partisan think tank Policy and Economic Research Council found that 99.5% are free of material errors.
The Federal Reserve, moreover, found no bias in credit scoring in a 2007 national sample of more than 300,000 credit bureau records. In fact, it found scores typically underestimate the risk posed by African-American borrowers, who on average “show consistently higher incidences of bad (loan) performance than would be predicted” by their scores.
That isn’t stopping the administration from trying to correct perceived injustices.
Cordray says CFPB will rewrite the rules for how the private credit bureaus collect, maintain and analyze such data. He is working on “reforming” the system with the liberal Center for Responsible Lending and other housing activists who believe it denies minorities the credit they deserve.
The federal government also isn’t shy about fining and suing banks to get its way.
CFPB also has been working closely with the Justice Department to enhance fair lending enforcement. Justice has pressured banks to relax their mortgage underwriting standards and approve loans for minorities with poor credit as part of a new crackdown on alleged discrimination, court documents show.
Attorney General Eric Holder, who served as Reno’s deputy, has filed a record number of fair-lending enforcement actions against lenders. More than 60 investigations are active or said to be in the pipeline, and dozens of banks have already settled, including giants Wells Fargo and Bank of America.
Prosecutions have already generated more than $550 million in rebates, loan set-asides and other subsidies from banks that have settled out of court rather than battle the federal government and risk being branded racist by the media.
Leading the charge is Holder’s top civil-rights cop, Thomas Perez, another Clinton retread. Perez has compared bankers to Klansmen, arguing that while bankers may discriminate “with a smile” and “fine print,” it’s “every bit as destructive as the cross burned in a neighborhood.”
He says predatory lenders must now “repair some of the damage done to (minority) communities.”
Settlements include requirements to lend to blacks and Hispanics at below-market rates — regardless of their creditworthiness — and to open bank branches in minority neighborhoods blighted by the recession — regardless of their economic feasibility.
For example, the government has ordered Midwest BankCentre to set aside millions of dollars in “special financing” for residents living in predominantly black areas of St. Louis. The program includes originating conventional home loans at fixed prime rates for African-American borrowers “who would ordinarily not qualify for such rates for reasons including the lack of required credit quality, income or down payment.”
The same federal order, signed last year, praises Midwest for adopting “less stringent underwriting criteria” while under investigation.
In the case against Citizens Bank of Detroit, also settled last year, the US decrees that “the bank may choose to apply more flexible underwriting standards in connection with the programs under this order.”
In several cases, including this month’s $175 million Wells Fargo settlement, the government has ordered bank defendants to “prominently display” in all their branches and marketing materials a notice informing minority customers that they cannot be turned down for loans because they receive public aid — such as unemployment benefits, welfare payments or food stamps.
“It is illegal to discriminate in any credit transaction,” the court-mandated poster says, “because income is from public assistance.”
Among other remedies: down-payment assistance for low-income minority borrowers and massive marketing and advertising campaigns in minority media to publicize that such assistance is available.
Wells Fargo, for instance, must “provide targeted marketing regarding Borrower Assistance Grants” of up to $15,000 per borrower in predominantly African-American and Hispanic communities, according to federal court documents filed by the Justice Department.
Wells must spend at least $50 million directly on down-payment assistance, closing-cost assistance and/or home renovation financing in connection with the purchase of a home. The subsidies are separate from the $125 million in compensation Wells is ordered to pay alleged victims of loan pricing discrimination, who have yet to be identified by the government.
Like Bank of America and other defendants, Wells must also turn over any unclaimed funds to community organizing groups approved by the government.
Already, millions of dollars have gone into escrow. Clones of the activist group ACORN, which pressure banks to ease underwriting rules, stand to benefit from the government-imposed funding.
Justice spokeswoman Xochitl Hinojosa said the anti-discrimination notice “does not compel the banks to make loans to people who do not qualify.”
But critics say the policies do exactly that — and that government is recreating the easy credit environment that led up to the mortgage crisis.
“It’s absolutely outrageous after what we’ve just gone through,” said former Rep. Ernest Istook, a Heritage Foundation fellow.
The Independent Community Bankers of America calls it “extortion.” The group’s president, Camden Fine, has fired off a letter to Holder complaining he “does not have the authority to dictate that banks make a certain number of loans in minority areas where the banks are not located.”
He and other industry officials say Holder is trying to boost minority homeownership rather than just enforce civil-rights law.
Holder also appears to be acting as a bank regulator.
In the Wells Fargo case, for example, his prosecutors ordered the bank to, among other things: rewrite its loan pricing policies; fire mortgage brokers; put managers and loan officers through “equal credit opportunity training”; and create minority homebuyer assistance programs.
Holder appears to be dusting off the playbook he used to prosecute banks as deputy attorney general under the Clinton administration.
In a landmark case, he accused Chevy Chase Bank of discriminating against blacks in the Washington area. He not only ordered it to open branches in poor neighborhoods, but actually “target” blacks for home loans through black radio and newspapers.
The high-profile case sent a chill throughout the industry. The American Bankers Association tried to inoculate members from similar charges by distributing a “fair lending toolbox” with new underwriting guidelines tailored to the needs of minorities.
Warriors from that era find Holder’s new crusade even more aggressive.
“It is well beyond anything we saw during the Clinton administration,” said Washington lawyer Andrew Sandler, who advises banks on fair-lending compliance.
Despite the settlements, the industry insists Holder has not produced evidence of lending discrimination and is conducting a “witch hunt” against banks.
The Wells Fargo case is emblematic. After a three-year investigation, Holder accused Wells of charging blacks and Latinos a “racial surtax” for subprime mortgages — or charging them higher fees and rates based on the color of their skin without regard for credit risk.
But in the 29-page consent decree, Wells insists its borrower data proves that its subprime borrowers had “significantly weaker credit characteristics” than its prime borrowers.
In other words, black, white or brown, the alleged “victims” would not have qualified for traditional mortgages.
The bank also asserted that its loan files would show no evidence of racial discrimination if prosecutors had conducted “an appropriate analysis” of them.
As in other cases, prosecutors drew their conclusions from statistical analysis showing “disparities” in loan pricing. However, the computer models — which were developed by a former top Center for Responsible Lending official — do not control for all credit risk variables. The former community organizer, Eric Halperin, was hired by Perez as the department’s first-ever special counsel for fair lending.
Wells says it settled “solely for the purpose of avoiding contested litigation with the Department of Justice.” So far, Holder has not had to prove any of his allegations of bank discrimination in court.
Also, his findings are at odds with recent reports by career bank regulators.
Almost all the defendants have strong records serving minority residential areas under the Community Reinvestment Act, an anti-redlining law that monitors the volume of bank lending in minority areas. Wells Fargo, for one, scored an “outstanding” grade in its last CRA exam.
The CFPB doesn’t like the ethnic makeup of bank regulators, either. It seeks to diversify the entire federal regulatory workforce, including the Federal Reserve.
In fact, it recently hired a director for its Office of Minority and Women Inclusion, which will focus on promoting diversity at all the federal agencies regulating banks as well as private contractors and the financial firms it polices.
The CFPB has the power under Dodd-Frank to set hiring standards — critics call them racial quotas — for the bank regulatory bodies. Democratic Rep. Maxine Waters, a member of the Congressional Black Caucus and the House banking committee that wrote Dodd-Frank, authored the controversial requirement. She says the diversity offices will help change the face of what she calls a white-male dominated Wall Street.
Home loans may only be the first step.
Dodd-Frank also has given CFPB the authority to collect from banks small-business lending data by race. Community organizers hope the data will provide as great a stimulus for minority small business lending as mortgage data has provided for minority homeownership.
All of these steps are being taken in the name of diversity or anti-discrimination. But they’re really an assault on capitalism. The government is telling banks they must lend money to people whether they can repay the money or not.
In the end, it will be the minorities Obama and Holder are trying to help who will be hurt most.
If a family is given a loan they wouldn’t otherwise qualify for, what happens when they can’t pay? They’re driven into debt, they lose their home. If the Democrats are in power, the banks will be blamed again, and the credit score cleaned up by a kindly government agent.
But it doesn’t change the underlying problem.
Minority Americans, like all Americans, need jobs to get a loan they can afford, and the opportunities to improve their own credit score.
They don’t need a handout that later turns into a slap in the face.
Paul Sperry is a Hoover Institution media fellow and author of “The Great American Bank Robbery: The Unauthorized Report About What Really Caused the Great Recession” (Thomas Nelson).