There has been a glaring spotlight in recent months on the practices of unscrupulous lenders that prey on unsophisticated borrowers. This has been both good and bad for the industry.
It has been constructive in that the truly dirty players will be driven out of the market if exposed to unwavering scrutiny. Regrettably, a byproduct has been the creation of the fiction that mortgage lending itself is predatory and therefore must be severely limited. The reality is that the vast majority of lenders do not engage in predatory practices, yet the response of some consumer activists and others has been to paint us all with the same broad brush.
In response and at a tremendously quick pace, new legislation and regulations have been proposed at the federal, state, and local levels to combat what are perceived to be evil lending practices. Again, the fiction is that these measures will stop predatory lending. The reality is that the proposed legislation and regulations will instead effectively curtail legitimate lending practices, increase the cost of borrowing, and make it more difficult for many Americans to realize their dream of homeownership.
When we opened our doors in 1969, the primary barriers to low- and moderate-income homebuyers were the costs of obtaining a home loan and overly stringent lending criteria that made the goal of buying a home very difficult to reach. In the past thirty years, our mission has been to increase access to affordable housing by developing flexible but sound underwriting practices.
Although the proponents of these bills are well intentioned, they are, in effect, reversing the progress we have thus far achieved in increasing home finance opportunities for all segments of society. As a result of the more draconian of these predatory rules, it may no longer make economic sense for lenders to fund subprime loans in some communities. Consequently, these provisions will create a shortage of liquidity in the mortgage market, and the very people who need assistance in owning homes may be the ones who ultimately suffer at the end of the day.
As an industry, we must support the identification and swift punishment of unscrupulous players so that they cannot further prey upon the borrowing public. Many laws are already on the books to accomplish this goal. Unchecked violations of these laws, however, have compelled consumer activists to seek redress at the federal, state, and local levels by proposing new laws. We must ask, however, are these new measures really doing something to benefit citizens?
For instance, last week the Philadelphia City Council passed an ordinance aimed at curbing predatory practices. If this ordinance becomes law, however, every borrower that obtains a mortgage in Philadelphia will have important personal information about their loan transaction made part of the public record.
In an era of heightened privacy awareness, Philadelphia will nonetheless require borrowers to disclose information about their loan rate and terms in the city's land records. These records will also include information indicating that the borrower is, in fact, a subprime borrower. Though we, as a company, may in most instances be barred by federal and state laws from buying such information from other companies, it will now be available for all to see in the public records, including to the predatory actors most likely to use it detrimentally.
The Philadelphia ordinance also p[enalizes] the financing of points and fees [exceeding 4% of the loan amount], including title and appraisal fees paid to third parties. This low number will likely catch a substantial number of prime loans in its net. Similarly, North Carolina's "high-cost" provisions prohibit lenders from financing any costs or fees in the loan.
In both instances, this means refinancing borrowers accustomed to including their costs in the new loan amount will be required to bring cash to closing. This ultimately means many borrowers cannot take advantage of declining interest rates, since excess cash is often not available for such a transaction.
The Philadelphia ordinance further requires that every "high-cost" borrower must obtain credit counseling before getting a loan. At Countrywide, we are strong proponents of consumer education. We not only have our own counseling center, but we also support community-based counseling agencies throughout the country.
It is one thing to offer counseling to borrowers. In our experience, it is a completely different thing to mandate such counseling. Many borrowers are insulted or may even feel discriminated against when told they cannot apply for a loan unless they get counseling. Also, credit counseling is often irrelevant when the reason the loan falls into the "high-cost" definition is not the consumer's credit history (e.g., a self-employed borrower who has difficulty meeting standard income documentation requirements or who does not want to have to submit such documentation). Yet now to get a loan in Philadelphia, many borrowers will have no choice but to delay their loan closing in order to obtain the necessary counseling certification.
Predatory lending laws have become a cause celebre. Their unintended consequences, however, have been to unnecessarily increase the cost of borrowing, reduce the availability of credit, and limit product offerings as lenders find it uneconomical to offer their full range of products or, more dramatically, must decide to withdraw from certain markets.
Unfortunately, by driving the economics out of the subprime mortgage transaction, proponents of these measures are only ensuring that there will be fewer and fewer participants in the marketplace, which inevitably ends up harming the very people they are trying to protect: the subprime borrowers.
We must work with legislators and regulators to forge a consensus on a solution that will end predatory practices while preserving credit availability at reasonable prices for deserving borrowers. We hope that in the future, city and state legislators will seek input from the many reputable mortgage lenders when formulating these policies. Together, we can work to preserve the availability of a broad array of mortgage product offerings at reasonable prices and ensure that all Americans receive fair treatment in their mortgage transactions.
Angelo R. Mozilo
Chairman and CEO
Countrywide Credit Industries