Consumer Protection in Financial Services: The Bronx is Heard on Capitol Hill

Guest Opinion from Blogger Gregory Lobo Jost:

Yesterday I had the opportunity to tesify in front of the House Appropriations Subcommittee on Financials Services and General Goverment. Congressman Jose Serrano is the Chair of this Subcommittee and had this to say about the hearing in his newsletter:

"All consumers are at risk of being victimized by financial predators...Each year countless working class parents who are struggling to achieve the American dream tragically have their hopes of upward mobility crushed by the practices of dishonest businesses. While their plight often goes unrecognized, the enduring housing crisis has opened the eyes of many Americans to their struggles, and made us all aware of the devastating effects such exploitation can have on the strength of our economy."

My testimony focused primarily on expanding absence of conventional banks in places like the Bronx (a legacy of redlining), and how this has opened the door to fringe financial institutions. In addition to speaking highly of Senator Dodd's bill (S.2452) to add protections for homebuyers and homeowners, I focused on Refund Anticipation Loans offered by tax preparers throughout low income areas. Here are some excerpts:

Without a doubt there is need for stronger consumer protections in financial services, especially in low- and moderate-income communities of color that in the past were victims of redlining. The Bronx is entirely too familiar with redlining, as this practice led to the borough’s notorious incendiary reputation. While the Community Reinvestment Act has helped immensely to turn around the fortunes of places like the Bronx, the residual effects of redlining have led to abusive lending practices, often referred to as “reverse-redlining.” Traditional banks continue to have a relatively small branch presence in our neighborhoods, opening up the door to fringe financial institutions such as payday lenders and check cashers who often double as mortgage brokers pushing subprime products. ...It is three times as hard to find a bank branch in the Bronx as it is nationally...In fact, our borough’s many Puerto Rican-born residents are much more likely to find a bank branch back on the island than they are in the Bronx.

...this residual effect of redlining has created a vacuum for predatory and irresponsible lending to come into our neighborhoods and make a fortune off the meager incomes of our residents through the guise of rent-to-own stores, tax preparers that offer refund anticipation loans (RALs), and one-stop-shop mortgage agencies pushing their subprime dope.

At UNHP, we have performed outreach, intake and referrals to many struggling Bronx homeowners over the past eight years. In the past two-and-a-half years, many of those calls have come from new homeowners who by no means could afford their homes. Others, many senior citizens, have owned their homes for a long time but can no longer afford their current mortgage thanks to the unsavory terms of a recent refinancing. Our own research has shown that the majority of Bronx homeowners going into foreclosure during the first three quarters of 2007 were not the victims of 2/28 or 3/27 ARMs; almost 65% of the loans going into foreclosure during this period were less than two years old! This exemplifies the extent of atrocious underwriting in recent years, where huge numbers of loans were made without regards to the borrower's ability to repay. The proliferation of the securitized secondary market has made this all possible through its blatant lack of accountability.

Outside of mortgages, one of the main areas that our neighborhoods could use more consumer protection is with tax preparation, specifically with protection against the exorbitant interest rates and fees that come with Refund Anticipation Loans (RALs). Once again, it is the same neighborhoods like the South and West Bronx that are targeted by tax preparation services offering RALS. The financial effects are devastating as tens of millions of dollars meant for low- and moderate-income families struggling to literally pay the rent are being siphoned off through RALs.

To make matters worse, it is one of our nation’s largest anti-poverty programs that is being preyed upon by RALs. It is indeed the very same low-income neighborhoods where households receive and depend upon the Earned Income Tax Credit (EITC) that RALs are targeted and flourish. In effect, the federal government is subsidizing tax preparation companies and their national lender partners by allowing them to take advantage of folks living on the edge who are desperate for cash. Congress can easily change all of this by requiring the IRS to ban RALs on Earned Income Tax Credit dollars.

Congress can also act by ending Federal preemption of state laws that would in effect do away with predatory loan products like RALs. It is no wonder that (at least in New York) only national banks make these loans; State laws and banking regulations prohibit such high interest rates so only banks not subject to these rules can offer such predatory products. This is a loophole that needs to be closed.

While this subcommittee deals specifically with appropriations (funding the federal government's agencies), the hearing will hopefully lead to more protections for consumers from Washington which will in the end benefit places like the Bronx.