The CFPB Requires Banks To Return To Predatory Lending
/On Friday the New York Times ran a big article on the program currently underway at the Consumer Financial Protection Bureau (CFPB) to require banks to return to the pre-financial crisis practices of predatory lending. The headline is "Biased Lending Evolves, and Blacks Face Trouble Getting Mortgages." The article reports on a recent settlement between the CFPB and New Jersey's largest savings bank, Hudson City Savings Bank, in which Hudson City agreed to pay $33 million (without admitting wrongdoing) for allegedly avoiding the granting of mortgages to black borrowers.
Why, you ask, would the CFPB not only encourage, but require, banks to engage in the awful practice of predatory lending? Of course the answer to that question is that the official terminology has changed. The term "predatory lending" has gone out of fashion; it's so last decade! "Predatory lending" is what happened back before the financial crisis hit, when many financial institutions sought to increase the number of minority group borrowers and so made mortgage loans despite low borrower credit scores and high loan-to-value ratios (sometimes over 100%). Surely the banks knew that many or most of these borrowers would be unable to repay and would get thrown out of their homes in a traumatic and heart-wrenching foreclosure process. What could be more predatory? Use of the charged term "predatory lending" facilitated many lawsuits against financial institutions that made these pre-financial crisis loans.
But that was then. Following the financial crisis, underwriting standards came back. Basically, that means borrower credit score, loan-to-value ratio, and loan-to-income ratio. All of those three on their face are race-neutral. But the percentage of mortgages held by blacks and Hispanics dropped noticeably. According to the Times:
In 2014, black people held 5.2 percent of the nation’s home loans, compared with 8.7 percent in 2006, according to the Federal Reserve Bank. Hispanics have struggled to regain lost ground as well, accounting for 7.9 percent of home loans in 2014, compared with 11.7 percent in 2006.
It's "redlining"! Or to put it another way, the official terminology shifted 180 degrees while you weren't looking. Obviously, if blacks or Hispanics are "losing ground" it must be the fault of the banks. Now, which are they doing: making not enough loans ("redlining") or too many loans ("predatory lending")? It has to be one or the other at all times, because of course banks bear ultimate responsibility for achieving perfect fairness and justice in the world, particularly between and among racial and ethnic groups. As the Times today tells us, failure to make enough loans to members of minority groups can undermine their economic mobility and destabilize their communities:
The effect [of redlining] on minority communities can be profound. Homeownership is a cornerstone of economic mobility, and without a stable group of homeowners, neighborhoods can be left vulnerable to blight and disrepair.
But wait a minute, you ask -- wasn't it just a couple of years ago that "predatory lending" was the thing that was undermining minority economic mobility and destabilizing neighborhoods? Really, you are so behind the times!
I like particularly that the CFPB has chosen for its latest target to pick on Hudson City Savings Bank. This institution is known for multiple branches in New Jersey cities with large minority populations, like Newark, Orange and Jersey City. Even the Times concedes that "predominantly black and Hispanic communities accounted for more than a third of [Hudson City's] market in the region that included North Jersey and parts of New York. . . ." But, they continue:
[T]he bank stationed only 12 of its 162 mortgage brokers in those communities. Last year, blacks accounted for just over 1 percent of Hudson’s mortgage approvals in the market that includes New Jersey and sections of New York and Connecticut; Hispanics accounted for 4 percent.
Could that possibly be because few potential minority-group borrowers met more stringent underwriting standards? I'm sorry, but you are not going to be finding out the answer to that question from the New York Times, nor from the CFPB. Oh, and by the way, the Times article also reports on numerous other CFPB enforcement actions against banks around the country for allegedly discriminatory lending practices -- again in the face of underwriting criteria that are facially race-neutral. But don't worry: when the market once again turns, as it inevitably will, and the eased lending once again leads to large numbers of foreclosures, as it inevitably will, and the lending gets labeled "predatory," as it inevitably will, the CFPB will not be accepting any responsibility. More likely, they will be leading the charge of prosecution.