In 1998, James Walker* walked into the Durham, N.C. offices of Self-Help, one of the largest community development financial institutions in the U.S., seeking assistance with his home loan. According to Self-Help founder and CEO Martin Eakes, Mr. Walker's story was one he could scarcely believe. Today, sadly, that story is all too common.
Mr. Walker wanted to refinance his existing mortgage but his lender was refusing to work with him. Wanting to help, Martin asked to see Mr. Walker's original mortgage documents and was stunned to discover that in approving a $29,000 loan in 1988, the loan company had saddled Mr. Walker with an interest rate of 14 percent and tacked on $15,000 in fees. At closing, when Mr. Walker--who couldn't read or write--signed his "X," he owed $44,000. Ten years later, in 1998, Mr. Walker's loan balance was $43,500.
As Martin prepared to call the company to discuss the terms of the loan, Mr. Walker, a stocky, middle-aged, African-American father of one, began to cry. "Sir," he said. "The reason I can't lose this house is not because I built it with my own hands, which I did. It's because I lost my wife and my daughter lost her mother, and this house is the only connection to her that she has."
At that moment, Martin knew that Self-Help's mission had to be expanded: helping families build wealth isn't enough, it's just as important to help them keep it.
Long before Mr. Walker met Martin, Self-Help, a not-for-profit organization, was working to make responsible home loans in North Carolina. Self-Help focused on people and communities overlooked by mainstream banking institutions: for example, women, African Americans, rural residents and Latinos. Many had less than stellar credit or no credit at all, yet Self-Help's work was so successful that its loans had a default rate of less than one percent.
But Mr. Walker's situation demonstrated that the very gains Self-Help was helping to achieve--strengthening minority communities, launching small businesses, building wealth and increasing homeownership among low- and moderate-income women and families--were being eroded by inequitable policies and predatory lending practices.
As a result, Self-Help launched the North Carolina Coalition for Responsible Lending, a precursor to the Center for Responsible Lending, which now operates nation-wide. Within a year, we successfully corralled credit unions, civil rights organizations and economic justice groups to bring sweeping change to lending practices in the state. In 1999, Gov. Jim Hunt signed into law the nation's strongest anti-predatory lending legislation.
But what a difference a decade makes.
Ten years after North Carolina implemented the first state-level protections for borrowers of high-cost loans, the nation is in the midst of the worst housing crisis since the Great Depression--a phenomenon which has in turn caused the worst recession since the aftermath of World War II.
Although the 1999 law protected North Carolinians from the types of predatory practices that affected Mr. Walker--now commonly referred to as "first-wave" abuses, such as prepayment penalties, excessive fees and balloon payments--the legislation could not foresee the "second-wave" abuses that became widespread in the 2000s: adjustable-rate mortgages, no-documentation lending and the absence of underwriting.
Along with Ohio, Maine and Minnesota, North Carolina was one of the first states to address the current foreclosure crisis and its roots in irresponsible subprime lending, passing legislation in 2007 that worked to correct these very problems.
As families, children, neighborhoods and communities pick up the pieces of their shattered dreams, America debates how to best help others in the midst of the crisis and how to prevent the next crisis before it happens.
In recent years, subprime lenders aggressively marketed unsustainable mortgages to vulnerable families who trusted their mortgage brokers. Women, particularly women of color, were among the most vulnerable to the misleading tactics of unscrupulous brokers and the risky products of under-regulated lenders. The statistics bear this out: in 2006, one of the boom years of subprime lending, nearly fifty percent of all subprime borrowers were African-American women. African-American and Latina women across the income spectrum are still the most likely to get a subprime loan.
Subprime and high-cost loans are at the heart of the foreclosure crisis and our larger economic meltdown. While some financial institutions were making responsible subprime loans for years, during the industry's boom, subprime lending became synonymous with irresponsible lending: making risky loans to people who couldn't afford to repay them or to people who could have qualified for a less expensive loan. The result was a shaky housing market, bank failures and a credit crisis of epic proportions.
And it is women who have borne the disproportionate brunt of the subprime mortgage and foreclosure storms. U.S. women, who make on average $.80 of every dollar that men earn, tend to have lower wages and are more likely to be single heads of households. As such they have been easy targets for risky loans that don't require a down payment. But women at both ends of the income scale have suffered: on mortgages used to purchase a home (rather than to refinance or pay for home improvements), high-earning women were 46% more likely to receive a subprime loan than men with similar incomes. And regardless of income, women have slightly higher credit scores than men, yet they were 32% more likely than men to receive subprime loans during the mid-2000s when subprime loans reached their popularity peak.
Fortunately, there are solutions that can help current homeowners in trouble and prevent another crisis from occurring.
Foreclosure Prevention: Perhaps most notably, in 2009, the U.S. federal government launched Making Home Affordable, a program that aims to modify loans for 3-4 million borrowers and refinance loans for another 4-5 million people. In October, federal officials announced that they had modified about 500,000 loans so far.
Additionally, cities and states across the country (including New York, Philadelphia, Connecticut, Cleveland and Florida) have implemented legislation and programs that push lenders and servicers to modify home loans, and add additional protections for borrowers in danger of losing their houses.
Consumer Protections: To counter the culture that made predatory lending and the subprime mortgage boom possible, the single-most important decision we can make is to charge a single government agency with ensuring the safety and soundness of financial products for consumers, such as mortgages and credit cards. The proposed Consumer Financial Protection Agency would accomplish this goal.
Consumer protection is critical because the American economy doesn't run on bank profits. It doesn't run on stockholder earnings, and it doesn't run on mere good intentions. It runs on American workers. Their wages and wallets account for 70% of the country's gross domestic product. To put the nation and our economy back on track, we must put them back on track too, protecting them from abusive financial practices and re-earning their trust.
That trust will be critical to our economic future, and for the women on whom much of it rests. Borrowers of color, lower-wage families and women all stood to gain much from homeownership at the right time. Many of them are now victims of homeownership at the wrong time.
We must learn an important lesson from this crisis, which has, in one way or another, affected all of us. The policies we implement must not only protect all consumers, but all consumers in all circumstances, all the time.
*Name has been changed.
To learn more about the Center for Responsible Lending, visit their Web site at www.responsiblelending.org.