Subprime Lenders Under Fire - Page 2 of 3 - Black Enterprise

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Black Enterprise Magazine January-March 2019 Issue

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of statistical experts.”

Among the defendants, Citigroup has been dismissed from the lawsuit without prejudice. “Citi wants to show us what they have done, and we’re going to give them an opportunity to do that,” says Ciccolo, noting that Citigroup could be brought back into the suit if the NAACP believes further actions are necessary.

Most of the defendants declined to comment on the pending litigation or reasserted their commitment to fair lending. However, William Halldin, a spokesman for First Franklin Financial Corp., a subsidiary of Merrill Lynch Bank & Trust Co., says that it has a proven history of providing credit to minorities and was likely to seek a dismissal. “The complaint contains no factual allegations regarding First Franklin’s actual practices,” he says.

Another defendant, Fremont Investment & Loan, had previously received a cease and desist order from The Federal Deposit Insurance Corp., which asserted that the bank was operating without effective risk-management procedures. Without admitting or denying the allegation, Fremont consented to the order. Fremont has since stopped offering residential mortgages and plans to exit that business.

To fully understand the subprime mess, it’s important to look at how this situation came about. The growth of subprime lending was fueled by deregulation of the banking industry. One of the key drivers came in 1980 when Congress passed the Depository Institutions Deregulation and Monetary Control Act that, under certain circumstances, removed state interest rate caps for home mortgages. Part of the rationale was that allowing lenders to charge higher interest rates would provide them with more appropriate compensation for lending to higher-risk borrowers.

In the early 1990s, Congress enacted the Home Owners Equity Protection Act, which restricts the terms of certain high-cost loans — for instance limiting when a borrower can be charged a penalty for repaying a loan early. But it is widely accepted that this law is grossly inadequate. Such penalty charges are intended to compensate the bank for the loss of interest income. And because subprime borrowers have every incentive to refinance at a better rate, many of their mortgages carry such penalties. The prevalence of such terms is part of why some say there aren’t enough consumer protections. While some states have enacted stronger protections on such penalties, for example, Congress has not yet acted to strengthen the act’s rules on the same topic.

John Taylor, president and CEO of the Washington, D.C.-based National Community Reinvestment Coalition, blames the slack enforcement of existing laws. For instance, it’s illegal to use race as a factor in lending decisions but enforcement depends on loan examiners making referrals to the Justice Department when they spot a discriminatory practice. “Two of the four [federal enforcement] agencies, the Office of the Comptroller of the Currency and the Office of Thrift Supervision, made zero referrals in 2006,” says Taylor. “This is a year that was rich with high-cost, exotic, nontraditional mortgages that have gotten a lot of people into trouble, disproportionately African American.”

The NAACP’s lawsuit is just one of many public actions being taken in response to

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