y\\ ' S. Hrg. 103-137 ^ PROBLEMS IN COMMUNITY DEVELOPMENT MORTGAGE LENDING BANKING, DISCRIMINATION, REVERSE REDUNING, AND HOME EQUin LENDING Y 4. B 22/3; S. HRG. 103-137 Problens in Connunity Developnent B. . . ^Q-g BEFORE THE COMMITTEE ON AND URBANAFFAIRS BANKING, HOUSING, UNITED STATES SENATE ONE HUNDRED THIRD CONGRESS FIRST SESSION ON FEBRUARY 1993—COMMUNITY DEVELOPMENT BANKING 3, FEBRUARY 17, 1993—REVERSE REDLINING; PROBLEMS IN HOME EQUITY LENDING FEBRUARY 199a-MORTGAGE AND OTHER LENDING DISCRIMINATION 24, Printed for the use of the Committee on Banking, Housing, and Urban Affairs S. Hrg. 103-137 PROBLEMS IN COMMUNITY DEVELOPMENT MORTGAGE LENDING BANKING, DISCRIMINATION, REVERSE REDUNING, AND HOME EQUITY LENDING HEARINGS BEFORE THE COMMITTEE ON AND URBANAFFAIRS BANKING, HOUSING, UNITED STATES SENATE ONE HUNDRED THIRD CONGRESS FIRST SESSION ON FEBRUARY 1993—COMMUNITY DEVELOPMENT BANKING 3, FEBRUARY 17, 1993—REVERSE REDLINING; PROBLEMS IN HOME EQUITY LENDING FEBRUARY 1993—MORTGAGE AND OTHER LENDING DISCRIMINATION 24, Pi-inted for the use of the Committee on Banking, Housing, and Urban Affairs U.S. GOVERNMENT PRINTING OFFICE 70-832CC WASHINGTON : 1993 ForsalebytheU.S.GovernmentPrintingOffice SuperintendentofDocuments,CongressionalSalesOffice,Washington,DC 20402 ISBN 0-16-041270-6 COMMITTEE ON BANKING. HOUSING, AND URBAN AFFAIRS DONALD W. RIEGLE, JR., Michigan, Chairman PAUL S. SARBANES, Maryland ALFONSE M. D'AMATO, New York CHRISTOPHERJ. DODD. Connecticut PHIL GRAMM. Texas JIM SASSER, Tennessee CHRISTOPHER S. BOND, Missouri RICHARD C. SHELBY, Alabama CONNIE MACK, Florida JOHN F. KERRY, Massachusetts LAUCH FAIRCLOTH, North Carolina RICHARD H. BRYAN, Nevada ROBERT F. BENNETT, Utah BARBARA BOXER, California WILLIAM V. ROTH, JR., Delaware BEN NIGHTHORSE CAMPBELL, Colorado PETE V. DOMENICI, New Mexico CAROL MOSELEY-BRAUN, Illinois PATTY MURRAY, Washington Steven B. Harris, StaffDirectorand ChiefCounsel Howard A. Menell, Republican StaffDirector KONRAD S. Alt, Counsel Kevin G. Chavers, Counsel JEANNINE S. Jacokes, Professional StaffMember Mark Kaufman, Legislative Fellow Amy L. KostaneckJ, Professional StaffMember Matthew D. Roberts, Counsel Michael A. Rotgin, Professional StaffMember Raymond Natter, Republican General Counsel Ira PaulL, Republican Senior Counsel Edward M. Malan, Editor (II) CONTENTS WEDNESDAY, FEBRUARY 3, 1993 Page Openingstatement ofChairman Riegle 1 Opening statements, remarks, or prepared statements of: SenatorMack 3 Senator D'Amato 4 SenatorShelby 5 Senator Bryan 6 Prepared statement 61 SenatorMoseley-Braun 20 Prepared statement 61 SenatorBoxer 20 Senator Bennett 23 SenatorDomenici 30 SenatorMitchell 61 WITNESSES Milton O. Davis, chairman, SouthShore Bank ofChicago 6 Prepared statement 62 I. Renewingcommunityeconomics 62 II. Shorebank Corporation 64 Response to written questionsofSenatorRiegle 193 Lyndon Comstock, chairman, Community Capital Bank 8 Prepared statement 81 Response to written questions ofSenatorRiegle 203 Steven Lopez, president and CEO, Southside Bank, GrandRapids, MI 11 Prepared statement 86 Response to written Questions ofSenatorRiegle 210 EdwardH. McNamara, Wayne Countyexecutive, Detroit, MI 12 Prepared statement 88 I. WhyWayne Countyhas chosen a Development Bank 88 II. Why a Development Bank complements conventional lending 90 III. The role ofGovernment 91 Response to written questions ofSenatorRiegle 214 Pauline Nunez-Morales, executive director, New Mexico Community Develop- ment Loan Fund, Albuquerque, NM; accompaniedbyJeremyNowak, execu- tive director, Delaware Valley Community Reinvestment Fund 42 Prepared statement 92 The work ofthe New Mexico community developmentlQanlund^..,«T.. 92 The Loan Fund industry 93 Strategic Federal support 95 Funding 95 Human capital development 96 Ronald LC.oPrhriellsipposn,apirnegsiFdeednetr.alCopaosltiaclyEcnhtaenrgperisses, Inc., Wiscasset, ME 4957 Prepared statement 97 Introduction 97 Purpose oftestimony 97 The legacyofcommunity development corporations 97 CEI 98 profile Examples ofCEI projects 98 Fillingthecredit gap 99 Example ofgap financing 99 Recommendations 99 (III) IV — Page Ronald L. Phillips, president, Coastal Enterprises, Inc., Wiscasset, ME Con- tinued — Preparedstatement Continued Conclusion 99 Response towrittenquestionsofSenatorRiegle 222 Robert Jackson, treasurer, Quitman County Federal Credit Union, Marks, MS 48 Preparedstatement 109 Community developmentcreditunions 109 The storyofQuitmanCounty 109 Position paper Ill Amendments 112 Response to writtenquestionsofSenatorRiegle 229 Michael Swack, co-diNreHctor. Institute for Cooperative Community Develop- ment, Manchester, 51 Preparedstatement 113 Additionaltestimony 115 Response towrittenquestionsofSenatorRiegle 234 JeremyNowack 59 Additional Material Supplied for the Record Principles ofCommunity Development Lending and Proposals forKey Federal Supoort 119 ACORN, commentsby Deepak Bhargava, director 131 National Association ofHome Builders 136 Woodstock Institute 146 NeighborhoodHousingServices ofNew York City, Inc 170 ConsumerFederationofAmerica 177 FirstNations Development Institute: The Oweesta Program 186 WEDNESDAY, FEBRUARY 17, 1993 OpeningstatementofChairman Riegle 243 Openingstatements, comments, or prepared statements of: SenatorD'Amato 246 SenatorCampbell 248 Preparedstatement 305 Senator Bennett 248 SenatorKerry 249 Senator Domenici 250 Prepared statement 305 SenatorShelby 251 SenatorBoxer 252 SenatorMoseley-Braun 270 Prepared statement 306 SenatorSarbanes 284 WITNESSES ScottHarshbarger, Attorney General, Commonwealth ofMassachusetts 253 Prepared statement 307 I. Introduction— 308 II. Background—Setting forthe problem 308 III. Allegations Apparent scope ofproblem 309 IV. Actions by the task force 309 V. Conclusions andrecommendations 312 Kathleen Keest, National Consumer Law Center, Boston, MA 256 Prepared statement 313 The causes 314 The victims 315 The perpetrators 315 Allocatingresponsibility 316 Recommendations 318 V — Page Kathleen Keest, Nation—al Consumer Law Center, Boston, MA Continued Prepared statement Continued Regulatory reform forpredatoryhome equity lending 320 Alternatives forhome equity loans regulatory approaches 323 Terry Drent, Ann Arbor Community Development Department, Ann Arbor, Ml 258 Prepared statement 329 Problem 329 Background 329 Recommendations 331 Summary 331 John Hamill, president, Fleet Bank ofMassachusetts 261 Prepared statement 332 1. Introduction ofFleetFinancial Group and FleetFinance 332 2. A general overview ofthe consumer finance industry 333 3. The role ofhome equity loans in consumer finance transactions 333 4. Why costs to borrowers for home equity loans are higher than costs forconventional mortgage loans 334 5. Fleet Finance's development ofbusiness 335 6. The Georgia lawsuits 336 7. Recommendations ofFleet Finance 340 Eva Davis, resident, San Francisco, CA 291 Prepared statement 382 Annie Diggs, resident, Augusta, GA 292 Prepared statement 382 John Long, attorney, Dye, Tucker, Everitt, Wheale & Long 294 Prepared statement 392 L High finance charges 393 n. Redlining and reverse redlining 395 in. Issues 397 rV. Recommendations 397 V. Conclusion 398 BruceMarkMsA, executive. Union NeighborhoodAssistance Corporation (UNAC), Boston, 297 Prepared statement 433 Additional Material Supplied for the Record Fleet Financial Group, Inc 436 South Mississippi Legal Services Corp 446 St. Ambrose Legal Services 447 Southern Arizona Legal Aid, Inc 448 State ofNew York, Department ofLaw 451 Legal Aid Foundation ofLos Angeles 457 City ofNew York, Department ofConsumerAffairs 460 Dye, Tucker, Everitt, Wheale & Long 469 WEDNESDAY, FEBRUARY 24, 1993 Opening statement ofChairman Kiegle 473 Opening statement, comments, or prepared statement of: Senator D'Amato 475 SenatorFaircloth 476 SenatorMoseley-Braun 482 Prepared statement 523 Senator Campbell 483 Prepared statement 523 SenatorSarbanes 483 WITNESSES RichardSyron, I'resident, Federal Reserve Bank ofBoston, Boston, MA 478 Prepared statement 524 Response to written questions ofSenatorRiegle 581 VI Page John p. LaWare, Chairman, Federal Financial Institutions Council (FFIEC), Washington, DC 485 Prepared statement 526 Recent developments 526 FFIEC efforts 527 FederalReserve efTorts 529 Compliance examinations 529 Consumercomplaint program 530 Community aflairs program 531 Conclusion 531 Response to written questionsofSenator Riegle 589 Adcfress to the Bank Administration Institute's 1993 Bank Audit, Compli- ance andSecurity Conference 827 James Turner, Acting Assistant Attorney General for Civil Rights, Depart- ment ofJustice, Washington, DC 488 Prepared statement 532 I. The mortgage lendingdiscrimination lawsuit 533 II. Enforcement activities after Decatur 536 Response to written questionsofSenatorRiegle 597 Retha Wilson, board member, Michigan ACORN, Detroit, MI 506 Prepared statement 538 Summary oftestimony 538 Summary ofrecommendations 539 Testimony ofWillard Brown 550 Joint statement of: ACORN, Center for Community Change, Center for the Study of Responsive Law, Consumer Union, First Nations Development Institute, League ofCities, NAACP, National Council ofLa Raza, National Neighborhood Coalition, Public Citizen's Con- Watch 551 gress Response to written questionsofSenatorRiegle 582 John Gamboa, executive director. Latino Issues Forum, San Francisco, CA 509 Prepared statement 554 Allen Fishbein, general counsel. Center for Community Change, Washington, DC 511 ....„ Prepared state—ment 561 Appendix I —A cronologyoffair lendingenforcement 571 Appendix II Wall Street Journal article, February 19, 1993, entitled "Home Equity" 574 Gale Cincotta, executive director. National Training and Information Center, Chicago, IL 515 Prepared statement 575 Discrimination and disinvestment 575 Problems with CRA enforcement 575 Fairlendingviolations are nottranslating into CRA ratings 576 What Congress can do 576 Additional Material Supplied for the Record First Nations Development Institute 646 Response to written Questions ofSenatorRiegle from: Federal Reserve System 650-824 Federal Deposit Insurance Corporation 671 Office ofThria Supervision 692-816 Comptrollerofthe Currency 730-821 Federal Reserve Bank ofBoston, paperentitled "Mortgage Lending in Boston: Interpreting HMDA Data" by Alicia H. Munnell, Lynn E. Browne, James McEneavey, Geoffrey M.B. Tootell 762 COMMUNITY DEVELOPMENT BANKING WEDNESDAY, FEBRUARY 1993 3, U.S. Senate, Committee on Banking, Housing, and Urban Affairs, Washington, DC. The committee met at 10:40 a.m., in room 562 of the Dirksen Senate Office Building, Senator Donald W. Riegle, Jr. (chairman of the committee) presiding. OPENING STATEMENT OF CHAIRMAN DONALD W. RIEGLE, JR. The Chairman. The committee will come to order. Let me wel- come this overflow gathering this morning. We are in a different committee room because the normal committee room is undergoing a regular refurbishing and it is done every few years, and we will be back in that room shortly. I want to also indicate the reason we are starting later than our announced time, which is that after scheduling this hearing for 10 o'clock, some votes were scheduled on the Senate floor which we have just completed. And so that ne- cessitated members being there and delayed the opening of this hearing. I say to our witnesses particularly, I appreciate their pa- tience today. Before we begin this morning's hearing directly, I want to an- nounce for the record that, as members arrive, they will be record- ing their votes on favorably reporting the nomination of Laura Tyson to be Chairperson of the Council of Economic Advisers. We will begin the period for voting now and it will extend until this hearing concludes. If a quorum is established in that time, which I anticipate, the final vote will be announced as we adjourn and the nomination will be reported to the full Senate later today. Let me now move to the subject that brings us here this morn- ing. This is a very important hearing, I think one of the most im- portant that is likely to happen this year with respect to the new direction that the country needs to take and is preparing to take with respect to revitalizing our urban communities particularly. We are here today to talk about community development bank- ing. President Clinton, to his credit, has advocated the creation of a national network of community oriented financial institutions dedicated to the revitalization of distressed urban neighborhoods, and as well, depressed rural economies. Our distressed communities are in need, and really urgent need, of new strategies to address neighborhood disintegration and clear- ly inadequate access to capital. (1) That need was clearly demonstrated by the riots in Los Angeles and it is obvious from tne general condition ofmany ofour commu- nities where homelessness, unemployment, and crime are really at crisis levels. Recent studies, official, national studies show that redlining and discrimination are significant problems, and that many people are denied credit based on the color of their skin rather than on any measure oftheir true creditworthiness. We are going to be examining this issue of mortgage discrimina- tion at a hearing on February 24. But the point today is that more than ever, we need new initiatives for revitalization, particularly in our communities that are in the greatest difficulty today. I believe that any new Federal community lending initiative should be built upon the roles played by all existing lending insti- tutions. Enforcement of the Community Reinvestment Act, I think must be improved and strengthened so that traditional lenders increase the flow ofcredit to low-income and minority communities. However, the Federal Government should also, as recommended by President Clinton, experiment with new and additional models tnat can further increase availability ofcapital and build the capac- ity ofresidents to revitalize their own neighborhoods. Any new initiative must recognize that both efforts are nec- essary, both through the established channels and through new channels, and at the same time ensure that the safety and sound- ness offederally insured depository institutions are not put in jeop- ardy. Our witnesses today will focus on some of the new models for promoting revitalization, including community development banks, and other types ofcommunity lending institutions. Community development banks are organizations the primary mission of which is to revitalize their communities by investing in them. They combine the structure and expertise of an insured de- pository institution with the commitment typical of a community based, nonprofit organization. Currently, there are four such institutions in the Nation. Two of these institutions. South Shore Bank and Community Capital Bank are here with us today and incidentally are located in the home States of members of this committee, Ranking Member D'Amato, who will be here in due course, and Illinois Senator Carol Moseley- Braun. We will also hear from two prospective community development banks who will discuss some of the pitfalls encountered in starting new institutions of this kind. We will also hear from representa- tives of several nonprofit lenders, including a group from Senator Domenici's home State of New Mexico. These community-based lenders include a wide range of organizations that promote revital- ization and will help us get a fuller understanding of the field of community banking as it is happening across the country. I want to welcome all of our witnesses this morning, and I want to extend a special thanks to Steven Lopez, here from my home State of Michigan, and also the County Executive of Wayne, Ed- ward McNamara. I want to say a word more about that in a minute.