In many low-income and minority communities, half or more of all home loans are subprime and increasingly predatory. This is partly the result of Wall Street's infusion of more than $300 billion of financial muscle without exercising a banker's due diligence or the "power to influence" standard set by the 11th Circuit Court of Appeals in U.S. v. Fleet Factor Corporation.
Most knowledgeable minority and inner-city church and community leaders recognize the need for subprime loans. They hope the present predatory lending scandal does not lead to an overreaction that might unnecessarily restrict access to credit through the creation of rigid definitions of predatory lending.
The distinction between subprime and predatory lending is not always clear. As former U.S. Supreme Court Justice Potter Stewart wrote in an opinion on a pornography case: I can't define it, but I know it when I see it.
Inner-city leaders also know it when they see it, but apparently Wall Street is unable to make such "fine" distinctions.
An example of this lack of Wall Street acuity, one that could jeopardize all subprime lending, is First Alliance of Irvine, Calif. The brilliant and ordinarily savvy and astute Richard Fuld, CEO of Lehman Brothers, encouraged and rewarded the development of eight financial deals that enabled First Alliance, despite a public and inglorious history of homeowner fraud, to become a major predatory lender. First Alliance charged as much as 25 points in origination fees and 50% above prime in annual interest rates, a recipe for instant foreclosure that should have been evident even to a rookie Wall Street salesman.
While becoming Wall Street's largest financier of subprime lending (with an 18% share of the $75 billion market in 1999), Lehman, with others, helped First Alliance CEO Brian Chisick insulate $135 million from the bankruptcy court where the victims are seeking redress.
The honorable response, one any inner-city church member would commend, would be for Lehman Brothers and other investment houses to directly compensate victims of their predatory lending packages without lengthy, costly, and possibly fruitless legal proceedings.
Since up to 50% of subprime loans, according to Fannie Mae, might qualify as prime, Lehman's CEO could embellish the good name of his firm and protect us from a congressional overreaction by announcing a Lehman pro-victim remedy. A five-point "Lehman plan" could include:
o Selecting, with community input, an independent auditor to determine the scope of First Alliance's predatory loans.
o Creating a victim compensation fund equal to 25% of total executive bonuses awarded in 1998 and 1999, including the more than $100 million paid to its seven top executives in bonuses and performance-based stock options.
o Granting the auditor the right to compensate victims, where appropriate, with the difference between prime costs (if eligible) and what was paid (which often exceeded $25,000 per victim).
o Encouraging Fannie Mae and Freddie Mac to use their "subprime to prime" criteria to convert the predator's victims into prime borrowers.
o Giving additional financial aid to victims of foreclosures, including interest-free down payments for the purchase of another home.
Unless the major financial institutions involved in subprime lending initiate creative pro-victim remedies, bold regulatory, congressional, and local actions may be necessary, even if they sometimes appear to be overreactions. The lack of effective federal regulatory action has encouraged a growing number of cities to consider, in effect, preempting the Federal Reserve and passing Chicago-type plans.
Chicago's "don't do business with predators" plan would bar any city agency from doing business with a financial institution or business that directly or indirectly charges more than four points in origination fees or five points above the Treasury rate (or above 11%) in annual interest rates.
As a result of a recent church-sponsored conference on predatory lending in south-central Los Angeles - attended by the four primary federal regulators, 14 insurance companies, investment houses and banks, and California regulators - community groups intend to recommend a comprehensive solution. It would let honest subprime lenders continue to democratize credit for the poor. These six community recommendations are:
o Adoption of the Chicago plan.
o Carrying out the "Lehman plan" to provide deep pockets for victims when a bank fails to exercise due diligence, consistent with the U.S. v. Fleet Factor Corp. decision.
o Development of a subprime corporate code of responsibility that elevates ethical and moral responsibilities of financial institutions to the level preached in virtually all churches.
o Adoption by all financial institutions of the Fannie Mae and Freddie Mac policy of converting, where possible, subprime into prime loans, which could affect almost half of all subprime borrowers.
o Development, with Federal Reserve support, of subprime best practices such as Fannie Mae and Freddie Mac have recently announced.
o Barring home foreclosures from proceeding until 30 days after state attorneys general receive notice, in order to permit states to develop "pattern and practice" cases and coordinate with regulators.
Most important, perhaps Lehman's Mr. Fuld should lead the way in developing a $300 billion Wall Street inner-city reinvestment plan to counter the $300 billion predatory lending disinvestment program initiated by Wall Street five years ago.
There is a role model for this: Hugh McColl, CEO of Bank of America Corp., when facing community protests of the planned NationsBank/ Bank of America merger, boldly committed the company to $350 billion of community reinvestment-type lending over 10 years and has exceeded his goal for 1999.
Mr. Corona is executive director of Hermandad Mexicana Nacional, a Latino immigrant organization based in North Hollywood, Calif. Mr. Whitlock is pastor of First AME Church in south-central Los Angeles. Both are members of the Greenlining Institute.