Who Really Gets Home Loans - Housing Rights



Who Really Gets Home Loans? Year Ten

Mortgage Lending to African-American and Latino Borrowers in 5 California Communities in 2002

November 2003

California Reinvestment Committee

474 Valencia Street, Suite 110

San Francisco, California 94103

(415) 864-3980



Kevin Stein conducted the analysis and drafting of this report

Rita Laila Johal assisted with the research

CRC is a nonprofit membership organization of more than two hundred (200) nonprofit organizations and public agencies across the state of California. We work with community-based organizations to promote the economic revitalization of California’s low-income communities and communities of color. CRC promotes increased access to credit for affordable housing and community economic development, and to financial services for these communities. CRC promotes community reinvestment through negotiation with and regular monitoring of major California financial institutions, as well as through the provision of technical assistance to local communities in California.

EXECUTIVE SUMMARY

Who Really Gets Home Loans? Year Ten investigates whether California’s largest banks and mortgage companies are fairly meeting the credit needs of traditionally underserved homebuyers and homeowners in the state. This report looks at home purchase lending by banks in California, and explores the relationship between race and the cost of credit. In analyzing home lending patterns for the state’s top lenders, the California Reinvestment Committee (“CRC”) finds that four key trends emerge:

1. There is Unequal Access to Home Purchase Loans. African American and Latino households are not receiving their fair share of home purchase loans;

2. People of Color Pay More for Home Loans. African American and Latino borrowers are more likely than white borrowers to have an expensive home loan.

3. A Two-Tier System of Credit Exists Within Large Financial Corporations. Companies that own both a bank and a higher cost subprime lender are not lending equally to borrowers of color.

4. The Cost to Borrowers of Subprime Lending is High. Subprime borrowers may have loans with extremely high interest rates and excessive fees. In 2002, some subprime home loans carried Annual Percentage Rates (APR) over 20%, while most bank customers received loans with APRs at 7% or lower.

Key Findings

CRC analyzed 2002 Home Mortgage Disclosure Act (HMDA) data for thirteen of the largest California banks and bank-affiliated mortgage lenders, looking at lending patterns in Fresno, Los Angeles, Oakland, Sacramento, and San Diego.

1. Unequal Access to Home Purchase Loans

Lender performance was reviewed based on CRC’s Equality Benchmark, which compares home loan activity to the proportion of African American and Latino households in each of the five cities analyzed. Lenders earned Equality Benchmark points for taking applications from, or originating home purchase loans to, African American and Latino households in proportion to the representation of these groups in each city.

Analysis of home lending patterns in the year 2002 shows that major bank lenders are failing to serve African American and Latino households in California:

• No Bank Met the Needs of African American and Latino Home Loan Applicants. The “best” lender, National City, had only six Equality Benchmark points out of a possible twenty points for a 30% success rate.

• Two Banks Were Especially Noteworthy for Their Poor Performance. Washington Mutual and Countrywide, two of the largest lenders in the state, received no Equality Benchmark points, meaning they failed to take in applications and lend proportionally to African Americans and Latinos in every instance.

• Five Banks Did Worse Than Last Year. Bank of America, Chase Manhattan, U.S. Bank, Washington Mutual and World Savings each scored fewer Equality Benchmark points than last year.

• Los Angeles Saw the Greatest Inequities. Banks in Los Angeles met the Equality Benchmark less than 6% of the time. San Diego fared only slightly better, with lenders achieving the Equality Benchmark under 8% of the time.

• Banks Ignore African Americans. Lenders consistently failed to serve African Americans. In all five cities combined, the thirteen banks met the Equality Benchmark a mere 2.3% of the time. No lender met the Equality Benchmark for outreach or lending to African Americans in Oakland or San Diego.

2. African American and Latino Borrowers Pay More for Home Loans

A new dimension has been added to the battle for equal access to credit in California. For years, communities of color struggled to access loans to buy homes. Now, traditionally underserved communities are being flooded with loan opportunities, but it is for high cost, subprime credit that they can ill afford and often do not deserve. Subprime loans can come with Annual Percentage Rates (APR) of 20%, or higher.

Prime lending refers to lending for borrowers with good credit profiles. Subprime lending refers to lending that is targeted to credit-impaired borrowers and which often includes higher interest rates, up front loan costs, and fees. California has witnessed an explosion in subprime lending, from an estimated $18 billion in 1998, to over $62 billion in 2002.

As subprime lending disproportionately impacts borrowers and communities of color, CRC views this as a civil rights, fair lending, and economic justice issue. The amount you pay for a loan should not vary depending on where you live or what you look like.

CRC compared the home lending patterns of thirteen bank lenders to that of the largest thirteen subprime lenders in the state. Subprime lenders were much more likely than bank lenders to accept home loan applications from, and make home loans to, African Americans and Latinos. These large disparities suggest that banks are far less successful in reaching out and lending to underserved households.

• African Americans Not Served. Higher cost subprime lenders did more of their business with African American households than did conventional bank lenders in all 5 survey cities. In Oakland, the thirteen subprime lenders took in 44% of their home loan applications from African Americans, compared to 23.2% of home loan applications of the thirteen bank lenders coming from African Americans.

• Latinos Not Served. Subprime lenders took a greater percentage of applications from, and made a greater percentage of loans to, Latino borrowers than did their prime counterparts in each of the five survey cities. In San Diego, 22.1% of subprime loan applications came from Latino households, compared to 11.9% for bank and bank-affiliated prime lenders.

3. A Two-Tier System of Credit Exists Within Financial Corporations

CRC examined the lending records of 6 large financial corporations that own BOTH a low cost prime lender AND a high cost subprime lender: Citibank, Countrywide, H&R Block, HSBC, National City, and Washington Mutual.

In analyzing the lending patterns of these companies, CRC found a two-tier system of credit exists within large financial services corporations, with subprime mortgage companies focusing more on African Americans and Latinos than their bank affiliates.

• Subprime For African Americans. In each city, subprime applications were twice as likely to come from African American loan seekers as prime applications were. In Los Angeles, 14% of all subprime applications came from African American loan seekers, compared to 5.2% for their bank affiliates.

• Subprime For Latinos. Subprime lenders also received a greater percentage of applications from Latino borrowers than did their prime affiliates in all five cities. In San Diego, 24.9% of subprime applications were from Latinos, compared to 12% for prime affiliates.

• At Countrywide and Washington Mutual, Race Disparities. Countrywide and Washington Mutual both did less outreach and lending to African Americans and Latinos, as a percentage of their business, than their subprime lenders did, in each of the 5 survey cities.

4. The Cost of Subprime Lending is High

The cost difference between a prime and subprime loan can be substantial. In 2002, the average interest rate on a 30-year fixed mortgage was 6.54% and average points paid by the consumer were .6%, according to Freddie Mac, one of the Government Sponsored Enterprises (GSEs).

• In contrast, in 2002, several subprime lenders originated loans in California with Annual Percentage Rates (APRs) that exceeded 15%, including: Citifinancial Services, Option One Mortgage, Household Finance, Beneficial, Washington Mutual Finance, and Wells Fargo Financial.

• Citicorp Trust Bank, FSB originated mortgage loans in California with APRs exceeding 20% in 2001, the last year for which data is available

Recommendations

In light of these disturbing findings, CRC recommends the following:

• Meet the Equality Benchmark. Financial institutions must set serious lending goals to ensure that lending performance mirrors the racial and income demographics of this diverse state. Lenders should comply with CRC’s Fair Lending Principles (see Appendix VII).

• Expand branch presence. Meaningful access to low cost products depends on branch access and presence. HSBC has six branches serving upper income clients in California, while at the same time it has 177 subprime Household Finance and Beneficial branches that will offer higher cost products to California’s diverse population. No bank should have fewer bank branches in California than its subprime affiliate.

• Offer best loan products. Financial institutions must make their best and lowest cost loan products available to all qualified applicants through all lending channels, including the bank, prime lending unit, or subprime affiliate. Many applicants for subprime loans can qualify for lower cost prime loans. Banks must ensure that these borrowers receive the prime loans they deserve. Given the overrepresentation of people of color in the subprime market, the failure to offer the best and lowest cost products to all home loan applicants has fair lending implications.

• Community Reinvestment Act (CRA) beyond bank branches. Financial institutions should not be allowed to circumvent the CRA, taking profits, but making no investment, in California communities. Countrywide Bank and Chase Manhattan both propose to provide banking services out of retail branch outlets in California, but have no reinvestment plans for the state. CRA-covered lenders are more likely to make credit available in underserved communities, and to help revitalize these neighborhoods.

• Protective Legislation. The cities of Oakland and Los Angeles have passed anti predatory lending ordinances designed to protect residents from unscrupulous lending practices in the subprime market. Each also contains a requirement that borrowers have access to home loan counseling services before signing complex home loan documents. These efforts help to ensure that borrowers have access to credit that can help them build and preserve wealth, not strip it. Industry inspired initiatives by Congress, bank regulators, and credit rating agencies threaten to undermine these local efforts to preserve homeownership and promote fair lending.

HOME PURCHASE LENDING: THE EQUALITY BENCHMARK

The Importance of Home Purchase Lending

Homeownership comes with numerous benefits for both household and community, including: stability of place that allows families to grow and prosper; pride of ownership that leads to community involvement and neighborhoods with a strong quality of life; and tax savings and fixed housing costs which can provide immediate financial benefit. Decent and affordable housing is a critical element of any vibrant neighborhood.

Yet perhaps the greatest benefit of all is the ability of home ownership to create accumulated assets and equity, which can then be translated into funds for education, starting a small business, retirement savings, or even a downpayment for housing and wealth-building for the next generation. Home ownership remains the primary source of wealth for most Americans and as such its importance cannot be understated.

Equality Benchmark Methodology: Who Really Gets Home Loans?

To assess lender performance in providing equal access to credit to all communities, the California Reinvestment Committee has developed the “Equality Benchmark.” The benchmark is designed to compare an institution’s record of lending against the estimated household demand for such loans in the communities in which the bank does business.

Lenders should make credit available to African American and Latino households in proportion to their presence in California communities. This report looks exclusively at African American and Latino home loan applicants as they have historically been the most underserved by mainstream financial institutions.

The percentage of African American and Latino households in each city is compared to the percentage of applications taken from, and originations made to, these groups by each of the thirteen lenders analyzed. One (1) point was given to a lender each time the lender met or exceeded the Equality Benchmark. For more on the Equality Benchmark, see the methodology section of this report, beginning on p. 26, after the Recommendations section.

Appendix I contains charts that reveal the performance of the thirteen bank lenders compared to the Equality Benchmark for outreach and lending to African Americans and Latinos in five (5) California cities.

Key Findings

California’s bank lenders failed to serve African American and Latino households in the state. This is shown in low outreach efforts and origination rates, as measured against CRC’s Equality Benchmark. The findings are disturbing:

|EQUALITY BENCHMARK SCORING |

|BANK LENDERS |

|Lender |Score |Total Points Achievable | |

|National City |6 |20 | |

|World Savings |4 |20 | |

|Bank of America |4 |20 | |

|Wells Fargo |4 |20 | |

|California Bank & Trust |3 |20 | |

|Indymac Bank, FSB |3 |20 | |

|US Bank |2 |20 | |

|Bank of the West |2 |20 | |

|Citibank |2 |20 | |

|Chase Manhattan |1 |20 | |

|Union Bank of California |1 |20 | |

|Countrywide Bank and Home Lns |0 |20 | |

|Washington Mutual |0 |20 | |

• Each of the bank lenders analyzed failed the Equality Benchmark for outreach and lending to African American and Latino homebuyers. National City led all lenders, but with only six (6) Equality Benchmark points out of a possible twenty (20) points available to each lender, or a 30% success rate. Each bank lender would have received an “F” grade under the Equality Benchmark analysis.

• Two banks were noteworthy for their poor performance. Countrywide and Washington Mutual, two of the largest lenders in the state and nation, received no (0) points. Countrywide and Washington Mutual failed to conduct outreach and to lend proportionally in every instance to those wishing to purchase homes.

• Five banks performed worse in 2002 than in 2001, taking a step backward in efforts to provide equal access to credit:

o Bank of America earned 2 fewer points this year than last;

o Chase Manhattan earned 1 less point;

o U.S. Bank, the strongest performer last year, earned 8 fewer points;

o Washington Mutual earned 1 fewer point in 2002 than in 2001; and

o World Savings earned 2 fewer points than last year.

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• African American and Latinos fared worst in Los Angeles and San Diego.

o Lenders in L.A. earned only 3 points out of a possible fifty-two (52) points available in each city, a success rate of 6%.

o Lenders in San Diego did only slightly better, earning a total of four (4) points, for a success rate of 8%.

• African American home purchase loan applicants were the most underserved and continued to have the greatest difficulty accessing credit.

o In all five cities combined, the thirteen bank lenders scored a mere 6 points out of a possible one hundred thirty (130), a success rate of 5%.

o No lender met the Equality Benchmark for outreach or lending to African Americans in Oakland or San Diego.

• Overall, bank lenders performed miserably in providing credit to home buyers.

o All thirteen lenders combined, hit the Equality Benchmark a total of 32 times, out of a possible two hundred sixty (260), a success rate of 12%. This is worse than the 14.6% Equality Benchmark success rate in 2001.

o Only 6 points were earned for outreach or lending to African American households; the remaining 26 points were for efforts to reach Latinos.

Outreach and Lending To African American Households

• 5 lenders met the Equality Benchmark for home purchase applications from African Americans:

o Bank of the West, Chase Manhattan and U.S. Bank met the Equality Benchmark for home purchase applications from African Americans in Fresno;

o California Bank & Trust met the Benchmark in this category in Los Angeles;

o Citibank met the Benchmark in Sacramento;

o None of these 5 lenders met the Benchmark in more than one city.

• None of the other six (6) lenders was able to achieve a proportional amount of home purchase loan applications from African Americans in any city.

• Only Bank of the West, with its low volume, was able to lend proportionally to African Americans in any city, making 2 out of its 16 loans in Fresno to African American households.

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Outreach and Lending To Latino Households

• National City earned all six of its Equality Benchmark points for outreach and lending to Latinos. Bank of America, Wells Fargo, and World Savings each earned four (4) Equality Benchmark points for outreach and lending to Latinos.

• National City demonstrated strong lending to Latinos in Los Angeles, originating 49.4% of its home purchase loans to Latino borrowers there.

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PEOPLE OF COLOR PAY MORE: PRIME V. SUBPRIME LENDING

Access to High Cost Credit

These days, almost anyone can get a loan. But at what cost? For years, communities of color and low income neighborhoods struggled to access loans to buy homes, access home equity, and build wealth for future generations. Yet, a new dimension has been added to the battle for equal access to credit. Now, traditionally underserved communities in California are also being flooded with loan opportunities, but it is high cost, subprime credit that they can ill afford.

Subprime lending generally refers to higher cost lending that is targeted to borrowers with impaired credit who might not otherwise qualify for a loan. The last few years have seen an explosion in subprime lending. Subprime lending volume increased from over $18 billion dollars in California in 1998, to over $62 billion dollars in 2002. The chart below depicts subprime lending volume in California, in dollars, for the last 5 years. One can see the large increase in the past 2 years.

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Legitimate subprime lending can enable credit-impaired households to purchase a house or access home equity. Yet subprime lending is also ripe for abuse. Subprime lenders generally charge borrowers more money in the form of higher interest rates, higher up front points and fees, or all of the above. Subprime loans are also more likely to include additional terms, such as prepayment penalty provisions or credit insurance products, which are not in the borrower’s interest.

A major problem arises when subprime lending goes beyond fairly compensating the lender for taking on the added risk of lending to a person with a poor credit history. CRC and others have estimated that up to half of all subprime borrowers could qualify for a lower cost prime loan. Even for borrowers with impaired credit, it is unclear that their credit risk warrants the often much higher rates and fees that they pay. For example, loans with APRs over 20% are hard to justify in a very low interest rate environment, where prime rates are at 6%. Subprime borrowers often pay more than their credit profiles necessitate.

This is all the more troubling, as African American and Latino borrowers are over-represented in the subprime market. As subprime lending seems to disproportionately impact borrowers and communities of color, the California Reinvestment Committee views this as a civil rights, fair lending, and economic justice issue. How much you pay for a loan should not depend on where you live or what you look like.

Subprime Methodology

As subprime lending occurs most often, though not exclusively, in the refinance and home improvement markets where homeowners have accumulated wealth that unscrupulous lenders can steal, this analysis considers all home purchase, home improvement and refinance loans originated in the five survey cities of Fresno, Los Angeles, Oakland, Sacramento, and San Diego. For the purposes of this analysis, all loans sought and originated from lenders on HUD’s Subprime and Manufactured Home Lender List are considered subprime.

The lending records of the thirteen banks and bank affiliated prime lenders were analyzed. These results were compared against that for the thirteen most active subprime lenders in the state. Again, this analysis focuses on outreach and lending to African American and Latino home loan applicants, as these groups historically have been the most discriminated against and underserved by mainstream financial institutions.

Outreach Efforts: Applications From African American and Latino Households

• Subprime lender outreach to African American households was much more successful than prime lender outreach in all five of the survey cities.

➢ In the city of Oakland, the thirteen subprime lenders took in 44% of their home loan applications from African Americans, compared to 23.2% of home loan applications of the thirteen prime lenders coming from African Americans.

➢ Similar ratios existed in the other cities: Fresno (8.2% v. 3.4%), Los Angeles (15% v. 5.6%), Sacramento (20.2% v. 8.5%), and San Diego (7.1% v. 2.7%).

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• Subprime lenders took a greater percentage of applications from Latino borrowers than did their prime counterparts in each of the five survey cities.

➢ In San Diego, 22.1% of subprime applications came from Latino households, as compared to 11.9% for bank and bank-affiliated prime lenders.

➢ Similar ratios existed in other cities: Fresno (34.9% v. 24.6%), Los Angeles (30.1% v. 21.7%), Oakland (18% v. 15%), and Sacramento (19.9% v. 15.7%).

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Originations Rates: Loans to African American and Latino Households

• Disparities were evident when looking at originations to African American applicants, as well. Again, subprime lenders made a significantly greater percentage of loans to African American applicants than did the thirteen prime lenders, in each of the five cities.

➢ In the city of Sacramento, the thirteen subprime lenders made 18.7% of their home loans to African Americans, compared to 7.5% for the thirteen prime lenders.

➢ Similar ratios existed in the other cities: Oakland (42% v. 22.7%), Los Angeles (12.8% v. 4.9%), San Diego (6.6% v. 2.4%), and Fresno (7.3% v. 2.9%).

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• Subprime lenders made a greater percentage of loans to Latino borrowers than did their prime counterparts in all five-survey cities, as well.

➢ In Fresno, 36.8% of loans made by the thirteen subprime lenders went to Latinos, compared to 20.5% of prime loans.

➢ In Sacramento subprime lenders saw 25.4% of their loans go to Latino borrowers compared to 16.2% for the top prime lenders.

➢ Subprime lenders likewise originated a larger percentage of loans to Latino households in Oakland, (20.6% v. 14%), Los Angeles (30.8% v. 20.7%), and San Diego (22.1% v. 11.2%).

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FINANCIAL CORPORATIONS WITH PRIME AND SUBPRIME ARMS: TWO-TIER LENDING

CRC compared the lending patterns of six financial corporations that currently own both prime and subprime lenders. Below are the banks and mortgage companies analyzed, along with their subprime lending affiliates. “Affiliates” here refers to those subprime lenders that are owned by a corporation that also owns a bank or prime lender.

• Citibank is affiliated with subprime lenders Citifinancial and Citicorp Trust Bank, FSB;

• Countrywide Bank and Countrywide Home Loans are affiliated with subprime lender Full Spectrum Lending;

• HSBC is affiliated with subprime lenders Household Financial, Beneficial and Decision One;

• National City is affiliated with subprime First Franklin Financial;

• H&R Block is affiliated with subprime Option One Mortgage; and

• Washington Mutual is affiliated with subprime Long Beach Mortgage.

Comparing the lending patterns of prime and subprime affiliated lenders suggests that financial institutions have established a dual system of credit for minority borrowers within their own larger corporate structure. Subprime loan applicants and borrowers are much more likely than prime loan applicants and borrowers to be people of color. This dynamic is troubling, as many subprime borrowers qualify for lower cost prime loans. The six (6) corporations listed above should guarantee that all of their customers get the best loan product for which they qualify, whether at the subprime lender or the bank lender.

Again, disparities in lending to African American and Latino applicants were evident. In looking at the lending of the six prime lenders and their higher cost subprime affiliates, CRC found the same patterns to repeat themselves:

Outreach Efforts: Applications From African American and Latino Households

• Subprime affiliate applicants were more likely to be African American than prime affiliate applicants in all five survey cities. In each city, the disparities were large.

➢ In Los Angeles, 14% of all subprime affiliate applications came from African American loan seekers, compared to 5.2% for their bank affiliates.

➢ The patterns were similar in Oakland (43.8% v. 20.3%), Fresno (7.1% v. 3.7%), Sacramento (21% v. 8%), and San Diego (8.4% v. 2.5%).

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• Subprime lenders also received a greater percentage of applications from Latino borrowers than did their prime affiliates in all five cities.

➢ In San Diego, subprime affiliates took in 24.9% of applications from Latinos, compared to 12% for prime affiliates.

➢ The patterns were similar in Oakland (22.9% v. 11.8%), Fresno (34.9% v. 23.8%), Los Angeles (34.6% v. 21.3%) and Sacramento (25.4% v. 16.1%).

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Originations Rates: Loans to African American and Latino Households

• Inequities are evident when looking at originations to African American applicants. Here, subprime lenders made a greater percentage of loans to African American applicants than did their prime affiliated lenders, in each of the five cities.

➢ Disparities were greatest in Los Angeles (where 13% of loans made by the six subprime went to African Americans, versus 3% for their prime affiliates);

➢ In Oakland the figures were 41.1% v. 16.8%;

➢ In San Diego the figures were 7.3% v. 2%;

➢ In Fresno, loans to African Americans accounted for 5.9% of all loans from the six subprime lenders, versus 2.9% for their bank counterparts; and

➢ The numbers in Sacramento were 19.3% and 7.4%, respectively, for subprime and bank affiliates.

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• Latinos also had relative difficulty securing a prime loan from one of the six prime lenders.

➢ Disparities were greatest in Oakland (27.1% of subprime loans v. 9.7% of prime loans went to Latinos).

➢ The breakdown in the other cities was as follows: Fresno (37.5% v. 19%), Los Angeles (36.6% v. 20.7%), Sacramento (36.5% v. 17.2%), and San Diego (23.5% v. 11%) for subprime and bank affiliates.

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THE COST OF CREDIT: AT WHAT PRICE SUBPRIME?

The difference between a prime and subprime loan can be substantial, according to data from the state Department of Corporations for consumer loans originated in California.

• Prime Rates in 2002. Freddie Mac reports in 2002 that the average interest rate on a 30 year fixed rate home loan was 6.54%, and the average points paid on such a loan was .6%.

• Subprime Rates. In 2002, several subprime lenders charged more than 15% Annual Percentage Rate (APR) on California loans over $10,000.

• Citigroup Subprime Lenders

➢ Citifinancial Services originated 5,704 loans in amounts over $10,000. 5,337 of these loans were secured by real estate. For all loans in amounts over $10,000, Citifinancial Services originated:

o 1,630 loans with APRs from 15% to 19.99%;

o 935 loans with APRs from 20% to 24.99%; and

o 148 loans with APRs from 25% to 29.99%.

➢ In 2001, the most recent year for which data is available, Citicorp Trust Bank, FSB (formerly known as Travelers Bank and Trust, FSB) originated

o 160 loans with APRs from 15% to 19.99%, and

o 28 loans with 20% to 024.99% APR.

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• Option One Mortgage originated:

o 7 loans with APRs from 15% to 19.99%; and

o 5875 loans with variable rates based on an Index.

• HSBC/Household

o Household Finance originated 18,689 loans in amounts over $10,000. Of these, 13,012 loans were secured by real estate. Of the loans in amounts over $10,000, Household Finance originated:

• 5012 loans with APRs from 15% to 19.99%;

• 2089 loans with APRs from 20% to 24.99%;

• 1589 loans with APRs from 25% to 29.99%; and

• 40 loans with APRs from 30% to 34.99%.

o Beneficial originated 18,626 loans in amounts over $10,000, of which 14,784 were secured by real estate. For loans over $10,000, Beneficial originated:

• 5675 loans with APRs from 15% to 19.99%,

• 1444 loans with APRs from 20% to 24.99%, and

• 3045 loans with APRs from 25% to 29.99%.

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• Washington Mutual Finance originated 5571 loans over $10,000, 5504 of which are secured by real estate. For loans over $10,000, WaMu Finance originated:

o 37 loans with APRs from 15% to 19.99%;

o 22 loans with APRs from 20% to 24.99%; and

o 5,506 loans with variable rates based on an Index.

• Wells Fargo Financial originated 3433 loans with APRs from between 15% and 19.99%. All of these loans were secured by real estate.

CONCLUSIONS

No Equal Access to Prime Home Purchase Loans. California’s bank lenders performed poorly in relation to CRC’s Equality Benchmark. National City outperformed other lenders, yet earned a mere six (6) points out of a possible twenty (20) points for proportional outreach and lending. Countrywide and Washington Mutual earned no points.

Financial institutions are continuing to fail in their efforts to outreach to California’s African American and Latino households, with African Americans continuing to fare the worst. The Equality Benchmark was met twenty-six (26) times with respect to outreach and lending to Latino households, and only six (6) times with respect to African American households. CRC supports recent bank efforts to target low cost, prime products to the Latino community. At the same time, banks and thrifts must not forget the banking needs of the African American community.

African Americans and Latino Borrowers Pay More. Unfortunately, the race and neighborhood of home loan applicants remains a factor in how much they will pay for their loan. African American and Latino households are over-represented in the subprime market. The thirteen subprime lenders originated a greater percentage of their loans to African American and Latino borrowers than did the thirteen bank lenders in all five survey cities. With no way to determine from HMDA data that subprime sales practices and loan terms are fair and that loan pricing accurately reflects credit risk, these racial disparities are distressing.

A Dual System of Credit Within Institutions. Financial corporations that have both prime and subprime lending arms are profiting by charging subprime rates to prime customers. Citigroup, to its credit, has developed programs to move qualified subprime loan applicants and existing subprime customers into prime loans, and has agreed to publicly report on its progress in achieving these goals. Yet only 1% of those subprime customers that Citi deems potentially qualified for a prime loan are able to get one. Other institutions that offer both prime and subprime loans are in varying stages of acknowledging the problem and working to address it. Yet no bank is able guarantee that subprime home loan applicants are as well served as bank customers, and no institution can justify charging 20% APR on a home loan when interest rates are at 6%. Those who lose in this equation are more likely to be from groups traditionally underrepresented in the financial mainstream. The failure to effectively originate the best loan product or seamlessly “refer up” qualified applicants for prime loans is a fair lending issue that must be addressed by the financial institutions involved, their regulators, and policy makers.

Subprime Can Be Costly. The difference between prime and subprime loans can be the difference between wealth creation and wealth stripping. State data reinforces this concern, revealing that real estate secured loans in California originated by subprime lenders can carry Annual Percentage Rates in excess of 20%, even at a time when interest rates hovered below 6%. The cost of credit should never be so high that it jeopardizes homeownership and wealth creation.

RECOMMENDATIONS

In light of this study’s findings and conclusions, CRC recommends the following:

• Meet the Equality Benchmark. Financial institutions must set serious lending goals to ensure that lending performance mirrors the racial and income demographics of this diverse state. Specifically, applications from, and loans to, African American and Latino households should match the proportion of these households in California’s communities. The Government Sponsored Enterprises Fannie Mae and Freddie Mac, which have considerable influence over lending behavior, should increase their affordable housing goals, develop better products and provide more funding to aid lenders in serving very low-income and traditionally underserved communities.

• Strengthen outreach and marketing. Banks and prime lending mortgage companies must focus outreach and marketing efforts on low-income and minority people and neighborhoods. Bank lenders need to do a better job of competing with subprime lenders by making their low cost prime products accessible to underserved communities. Regulators must examine the marketing efforts of prime lenders and their subprime affiliates to make sure that communities of color are not targeted for higher cost products. Heightened regulatory scrutiny is especially needed with corporations that hide their substantial subprime lending activities by reporting these loans together with their prime loans, so the public cannot distinguish one from the other.

• Expand branch presence. Meaningful access to low cost products depends on branch access and presence. Financial institutions must open full service branches in underserved neighborhoods if they are serious about expanding their market share in emerging communities. HSBC has 6 branches serving upper income clients in California, while at the same time its subprime business operates out of 177 Household Finance and Beneficial branches that will offer higher cost products to California’s diverse population. No bank should have fewer bank branches in California than its subprime affiliate. Banks can best reach new markets and communities by being part of them.

• Offer best loan products. Financial institutions must make their best and lowest cost loan products available to all qualified applicants through all lending channels, including the bank, prime lending unit, or subprime affiliate. Up to half of all subprime loan applicants could qualify for a prime loan. These borrowers should receive a prime loan, regardless of whether they first approach a subprime retail office in their neighborhood, or talk to a subprime broker doing business in their community. Given the overrepresentation of people of color in the subprime market, the failure to offer the best and lowest cost products to all home loan applicants has fair lending implications. An applicant’s race or neighborhood should not determine how much she must pay for her loan.

• Community Reinvestment Act (CRA) beyond bank branches. Financial institutions should not be allowed to circumvent the CRA by making profits nationally but investing minimally in local communities. Countrywide Home Loans is one of the largest lenders nationally, yet has no CRA responsibilities. Its affiliate, Countrywide Bank, has opened 15 retail offices that provide banking services in California, yet even the Bank has no public CRA plan for the state at this time. Countrywide maintains that its branches, complete with “Countrywide Bank” signs, bank staff, assistance in opening bank accounts, and a “lock box” where deposits are left and picked up by non employees, are not branches and therefore Countrywide has no CRA responsibility in California.

Additionally, Chase Manhattan is seeking to establish a federally chartered thrift under the Office of Thrift Supervision for its 55 retail outlets in California, but maintains it has no CRA responsibility for the communities in which its branches are located. This legal restructuring by Chase has the potential to result in circumvention of not only the CRA, but also consumer protection and anti predatory lending laws from which federally chartered thrifts argue they are exempt.

These legal maneuvers by banks, with the blessing of their bank regulators, harm local communities. Regulators should give meaning and effect to the promises of the Community Reinvestment Act, and banks should accept responsibility to reinvest in the very same communities from which they receive deposits, do business and profit. Expanding CRA scrutiny to more lenders will result in more lending and investment in underserved communities.

• Protective Legislation. If federal and state consumer protection, anti predatory, and fair lending laws remain inadequate, as currently, then local ordinances should and will be developed to protect local residents. The cities of Oakland and Los Angeles have passed anti predatory lending ordinances designed to protect residents from unscrupulous lending practices in the subprime market. Each also contains a requirement that borrowers have access to home loan counseling services before signing complex home loan documents. These efforts help to ensure that borrowers have access to credit that can help them build and preserve wealth, not strip it.

Yet the banking industry has been aggressively lobbying Congress, bank regulators, and credit rating agencies (such as Fitch, Moody’s, and S&P) to undermine these local efforts to preserve homeownership and promote fair lending. The California Supreme Court is expected to soon rule on the final challenge to Oakland’s anti predatory lending ordinance. If, as expected, Oakland and Los Angeles are free to implement their ordinances, the result will be two large California cities where the public can have confidence in the legitimacy of the subprime market, and unscrupulous lenders will be deterred from, or punished for, abusive lending practices.

METHODOLOGY

The California Reinvestment Committee’s (CRC) tenth annual home mortgage lending report, Who Really Gets Home Loans? Year Ten, reviews home-purchase lending by thirteen of California’s largest bank lenders. The report also explores the relationship between prime lending, subprime lending, and race, focusing on lending to African American and Latino households. The report analyzes Home Mortgage Disclosure Act (HMDA) data for 2002, the most recent year for which data is publicly available.

Geography.

This report looks at lending patterns in five California cities: Fresno, Los Angeles, Oakland, Sacramento, and San Diego. These cities were selected for their diverse populations and geographic location, as well as for their size, which was meant to ensure sufficient market presence by survey lenders. Fresno was selected to highlight the special needs of California’s rural communities.

Data. The analysis relies on Home Mortgage Disclosure Act (HMDA) data that are collected by the Federal Financial Institutions Examination Council. In order to compare lender performance to the number of households in each survey city, 2000 Census Data is used. Additionally, HUD’s Subprime and Manufactured Home Lenders List is used to characterize and identify lenders as either prime or subprime. Finally, loan price data reported to the California State Department of Corporations by certain mortgage and finance lenders is evaluated.

Lenders. Banks were selected based on their branch and lending presence in the state. These thirteen lenders range from the largest statewide mortgage lenders Countrywide Home Loans, Washington Mutual, and Wells Fargo, to lenders such as California Bank & Trust and Bank of the West, which have smaller, though important, market share. See Appendix II for a list of institutions analyzed.

Data for some institutions are combined with affiliated prime lenders that also showed mortgage activity in California in 2002. The following describes the treatment for various financial institutions:

• Data for Citibank combines data for three lenders: Citibank FSB, Citibank West, FSB, and CitiMortgage Inc.

• National City combines data for National City Mortgage and National City Bank.

• U.S. Bank includes data for both U.S. Bank NA and U.S. Bank North Dakota.

• Wells Fargo includes data only for its largest lender in the state, Wells Fargo Home Mortgage. WFHM is treated in this report as a prime lender, even though a large number of its mortgage loans are believed to be subprime, and accordingly WFHM might be one of the state’s biggest subprime lenders.

Home Purchase Analysis. The report begins with an analysis of home-purchase lending by the thirteen largest banks and their prime lending affiliates in California. Home-purchase lending is highlighted, as home-ownership is the main source of wealth for most American families.

The Home Purchase analysis is based on the number of home-purchase loan applications taken from, as well as those originated to, African American and Latino households by the thirteen institutions. Applications are highlighted as they represent a measure of a lender’s outreach efforts. This outreach effort is important, as it paints a picture of how effectively financial institutions market their products to African American and Latino households. Loans originated represent the actual flow of credit that is critical to asset creation and neighborhood revitalization.

Equality Benchmark. The Equality Benchmark measures lender performance in making credit equally accessible to all borrowers. Specifically, CRC compares each financial institution’s outreach effort, represented by the percentage of its total applications that are taken from different households, to the proportion of such households in each of the five survey cities, relying on 2000 Census data. Similarly, each financial institution’s loan performance, as represented by the percentage of its total loan originations to each race group, is compared to the proportion of such households in each city.

Specifically, African American households represent 12.6%, 36.9%, 14.1%, 7.3%, and 8.4% of households in the cities of Los Angeles, Oakland, Sacramento, San Diego, and Fresno, respectively. Latino households represent 33% 13.7%, 15.9%, 17.4% and 31.4% of all households in these same cities, respectively.

As noted above, this report looks at the percentages of total applications and originations allocated to each race group. HMDA data include race categories of “Other” and “Information not provided.” CRC has removed from this analysis the large percent of loans with no race information. Thus, in this report, an institution’s Equality Benchmark score is determined by analyzing only those loans for which there is race data. A bank’s record of serving Latino applicants, for example, is determined by looking at bank applications from Latinos and bank loans to Latinos, as a percentage of all loans for which the bank collects and reports the applicant’s race. Whether this approach has the effect of overstating or understating the percent of loans to underserved borrowers depends on the actual and unknown racial composition of the borrowers whose loans are here excluded.

A lender had to report at least ten applications with applicant race data, or originate at least ten loans containing applicant race data, in order to receive any consideration under the Equality Benchmark analysis for each city. If a financial institution was unable to report race data for ten applications or ten loans in any of the California cities analyzed, that institution would be ineligible to receive a point under CRC’s Equality Benchmark, and would receive a “n/a” code. In this way, CRC has attempted to balance the desire to look primarily at racial equity in a lender’s portfolio, versus the reality that such small lending volumes do not provide meaningful insight into a lender’s efforts to provide equal access to credit.

If a lender came within 1% of the Equality Benchmark, that lender was awarded the Equality Benchmark point.

Subprime Lending. Next, the lending patterns of the top thirteen subprime lenders in the state, based on 2001 market share data, was analyzed for each of the five study cities. This analysis expands upon the home purchase analysis by also including home improvement and refinance loans, which allow borrowers to enhance their home’s value, and to access accumulated home wealth. Subprime lending patterns were compared to the home purchase, home improvement and refinance lending patterns of the thirteen prime lenders analyzed above.

Finally, the home lending patterns of six bank, prime lenders and their subprime affiliates were compared. The term “affiliate” is used here to signify different lending companies that are owned by the same corporation. The following describes the prime and subprime pairings that were used in this analysis:

• Citibank, Citibank (West) and CitiMortgage Inc. were compared to Citigroup subprime subsidiaries CitiFinancial Services, Inc., CitiFinancial Mortgage Company, and Citicorp Trust Bank, FSB;

• Countrywide Home Loans was compared to its subprime affiliate Full Spectrum Lending, which are both affiliated with Treasury Bank;

• H&R Block Mortgage was compared to its subprime affiliate Option One Mortgage. Option One last year applied to establish a savings and loan;

• HSBC Mortgage and HSBC Bank are compared to subprime lenders Beneficial, Household Financial, and Decision One, subsidiaries of Household International, recently purchased by HSBC Holdings;

• National City Mortgage and National City Bank are compared to subprime lender First Franklin Financial Corporation; and

• Washington Mutual, FA is compared to its subprime subsidiary Long Beach Mortgage;

Loan Pricing. Finally, some data are provided regarding loan prices for certain subprime loans in California, in order to suggest the impact of disparities between prime and subprime lending. Loan pricing data is not publicly unavailable, though Home Mortgage Disclosure Act (HMDA) data will soon begin to reveal pricing data as a result of regulatory changes made last year by the Federal Reserve Board. Loan pricing data is available in individual borrower loan files, though this data is hard to retrieve and analyze to any significant degree. Lenders and associations of lenders of course have large databases containing loan pricing, but this information is often shielded from public scrutiny.

The California Department of Corporations provides one of the few sources of public loan pricing data, even though this data has limitations. Finance company lenders required to obtain licenses under the state Consumer Finance Law must file annual reports with the Department. Such data include the number of consumer loans made in the state by the licensee, the number of consumer loans that are secured by real estate, and the Annual Percentage Rate (APR) ranges of consumer loans made.

Limitations. This study is subject to the limitations of publicly available data, specifically the Home Mortgage Disclosure Act (HMDA) data, state Department of Corporations data, and the HUD Subprime Lender list, a list compiled by staff at the Department of Housing and Urban Development, which identifies those lenders that are primarily engaged in subprime or manufactured home lending. One difficulty is in characterizing loans as prime or subprime. All reported loans from lenders not on HUD’s subprime lender list are treated here as prime loans. This approach, while perhaps unavoidable, underestimates the extent of subprime lending in the state.

For example, in California, Wells Fargo Home Mortgage (WFHM), Chase Manhattan, and Indymac Bank are three of the largest lenders in the state, and they are considered prime lenders. Yet each lender also originates a significant percentage of subprime loans. Given the large volume of lending by these institutions, each could very well be one of the largest prime AND subprime lenders in the state. Since the above lenders fail to report their subprime lending data separately, the public is unable to know whether their lending to borrowers of color is low cost prime lending or high cost subprime lending. See appendix VI for a list of the top subprime lenders nationally. The list includes some of the companies listed above, and includes six banks, and one would-be bank (H&R Block/Option One applied last year to establish a federally chartered thrift).

Of course, subprime lenders listed on HUD’s Subprime Lender List may also originate prime loans, but the relatively small volume of lending by subprime lenders and anecdotal evidence of their small prime operations, suggests this problem may not significantly impact this analysis.

HMDA data is further limited in that certain elements of conventional underwriting – such as credit scores, loan to value ratios, and debt to income ratios – are not available. While CRC and other community groups continue to call for HMDA reporting requirements to be strengthened, the industry continues to fight adamantly against any and all expansions of HMDA. CRC looks forward to future HMDA data filings, which will include important loan pricing data, as well as additional race, gender, and income data as lenders are now required to seek this data from telephone loan applicants.

Loan pricing data are limited by imperfect data reporting requirements. The California Department of Corporations collects data from each of its finance company licensees which demonstrate the number of consumer loans made in the state, the number that are secured by real estate, the number of loans by loan size within certain categories (the number of loans in amounts over $10,000, for example), and the Annual Percentage Rates of loan within certain categories (APRs up to 15%, from 15% to 19.99%, etc., for example). Though limited, this data contains more information about loan pricing than existing federal reporting requirements.

Appendix I

|LOS ANGELES |

|Outreach and Lending to African American Households |

|Lender |% Apps |% Loans |Benchmark |# Apps |# Loans |Score |

|LOS ANGELES |

|Outreach and Lending to Latino Households |

|Lender |

|Outreach and Loans to African American Households |

|Lender |% Apps |% Loans |Benchmark |# Apps |# Loans |Score |

| | | | | | | |

|OAKLAND |

|Outreach and Loans to Latino Households |

|Lender |

|Outreach and Lending to African American Households |

|Lender |% Apps |% Loans |Benchmark |# Apps |# Loans |Score |

| | | | | | | |

|SACRAMENTO |

|Outreach and Lending to Latino Households |

|Lender |

|Outreach and Loans to African American Households |

|Lender |% Apps |% Loans |Benchmark |# Apps |# Loans |Score |

| | | | | | | |

|SAN DIEGO |

|Outreach and Loans to Latino Households |

Lender |% Apps |% Loans |Benchmark |# Apps |# Loans |Score | |Bank of America |9 |8.7 |17.4 |153 |118 |0 | |Bank of the West |20 |0 |17.4 |1 |0 |n/a | |California Bank & Trust |46.9 |29.4 |17.4 |15 |5 |2 | |Chase Manhattan |14.9 |13.5 |17.4 |78 |52 |0 | |Citibank |4.6 |1.4 |17.4 |5 |1 |0 | |Countrywide Bank and Home Lns |15.2 |15.1 |17.4 |411 |340 |0 | |Indymac Bank, FSB |12.8 |12.2 |17.4 |40 |25 |0 | |National City |9.2 |8.8 |17.4 |93 |67 |0 | |Union Bank of California |12.1 |11.8 |17.4 |35 |27 |0 | |US Bank |12.7 |8.3 |17.4 |8 |3 |0 | |Washington Mutual |12.2 |11.2 |17.4 |401 |249 |0 | |Wells Fargo |12.7 |12 |17.4 |301 |210 |0 | |World Savings |19.3 |19 |17.4 |264 |163 |2 | |

Appendix II – 13 Bank and Affiliated Home Purchase Lenders

• Bank of America, N.A.

• Bank of the West

• California Bank & Trust

• Chase Manhattan Mortgage Corp.

• Citibank, F.S.B./Citibank (West)/Citimortgage Inc.

• Countrywide Home Loans/Treasury Bank

• Indymac Bank, FSB

• National City Bank/National City Mortgage

• Union Bank of California, N.A.

• U.S. Bank North Dakota/U.S. Bank N.A.

• Washington Mutual Bank, FA

• Wells Fargo Home Mortgage

• World Savings Bank

Appendix III – 13 Subprime Lenders

• Accredited Home Lenders, Inc.

• Aegis Mortgage Corporation

• Ameriquest Mortgage Company

• Beneficial Corporation/Household Finance Corp

• BNC Mortgage, Inc.

• First Franklin Financial Corp.

• Fremont Investment and Loan

• Full Spectrum Lending, Inc.

• Greenpoint Mortgage Funding, I

• Long Beach Mortgage Co.

• New Century Mortgage Corp.

• Option One Mortgage Corp.

• Citicorp Trust Bank, FSB

Appendix IV – 6 Prime Lending Affiliates

• Citibank: Citibank, F.S.B./Citibank (West)/Citimortgage

• Countrywide: Countrywide Home Loans/Treasury Bank

• H&R Block: H&R Block Mortgage Corp.

• HSBC: HSBC Bank/HSBC Mortgage Corporation

• National City: National City Bank/National City Mortgage Company

• Washington Mutual: Washington Mutual Bank, FA

Appendix V – 6 Subprime Affiliates

• Citibank: Citifinancial Mortgage Company/Citicorp Trust Bank, FSB

• Countrywide: Full Spectrum Lending, Inc.

• H&R Block: Option One Mortgage Corp.

• HSBC: Beneficial Corporation/Decision One Mortgage Company/Household Finance Corp.

• National City: First Franklin Financial Corp.

• Washington Mutual: Long Beach Mortgage Co.

Appendix VI – Top Subprime Lenders Nationally

Source: National Mortgage News Daily Briefing- Weekend Edition, October 10-15, 2003

Rank Lender Retail Volume Q2 03

(Millions)

1. Citifinancial $3,648

2. Ameriquest Mortgage Corp. $2,900

3. Household Financial Services $2,900

4. Wells Fargo Home Mortgage $2,707

5. Countrywide Financial Corp. $1,385

6. Chase Home Finance $852

7. New Century Financial Corp. $700

8. Aegis Mortgage Corp. $700

9. Centex Home Equity Company $416

10. CIT Group Consumer Finance $415

11. Aames Financial Corporation $400

12. H&R Block Mortgage $302

13. Equity One, Inc. $260

14. Saxon Mortgage $224

15. Accredited Home Lenders $216

16. E-Loan $198

17. IndyMac Bancorp, Inc. $155

18. Delta Funding Corp. $154

19. First Franklin Financial $153

20. Finance America Corporation $142

Appendix VII

California Reinvestment Committee

FAIR LENDING PRINCIPLES FOR BANKS, THRIFTS, AND SUBPRIME LENDERS

1. Stop targeting minorities, low-income, and the elderly for sub-prime lending.

• Provide separate HMDA data on subprime lending to the public, whether subprime lending occurs through bank, thrift, subprime subsidiary or affiliate.

• Adapt marketing and retail location of parent bank and subsidiaries/affiliates to balance targeting to minorities.

• Support credit and mortgage counseling programs.

• Conduct periodic review of applications taken, originations, and denials by neighborhood and borrower race and income to ensure credit is being made available in a balanced fashion.

2. Offer borrowers the best product for which they qualify.

• Agree to offer a full-spectrum of loan products, including A-paper loans.

• Develop a referral system to match the consumer to the most appropriate product.

• Compensate loan personnel and management on a basis that furthers the above goals.

• Ensure adequate representation of wholesale staff and retail facilities to make prime credit available to underserved communities.

• Establish a rescue fund to compensate victims of predatory lending.

3. Stop onerous prepayment penalties:

• Offer every borrower the option of a loan without prepayment penalty. Prepayment penalties provisions must result in a bona fide benefit to the borrower, such as a truly lower interest rate.

• Limit prepayment penalties to the first 3 years of the loan

• Prohibit prepayment penalties after a change in the initial interest rate of the loan

• Charge no more in prepayment penalties than the following: 3% of the loan amount if paid within the first year of the loan; 2% of the loan amount within the first two years of the loan; and 1% of the loan amount within the first three years of the loan.

• Lenders refinancing a note they hold should not assess a prepayment penalty.

4. End flipping.

• Stop refinancing loans when not in the “best interest of the borrower,” considering lower monthly payments, lower blended interest rates, assistance in avoiding foreclosure, and cash out to the borrower.

• Do not encourage borrowers to refinance unsecured debt into the new loan as a means of increasing the loan size and related points, fees, and commissions.

• Develop a second mortgage product for owners with special low or no cost mortgages that wish to access the wealth in their homes without losing the benefit of their first mortgage.

5. End the sale of single premium credit insurance products as part of the home loan.

• Offer insurance product only if payments are made monthly and if sale of product occurs at least one week after a home loan closing

6. End mandatory arbitration provisions.

7. Ensure borrowers are able to repay the loan.

• Underwriting should screen out borrower with 50% or greater debt to income ratios, unless lender can document why lender reasonably believes borrower will be in a better position to afford the loan in the future.

8. End excessive points and fees

• Points and fees should not exceed 3% of the loan amount

9. Stop predatory practices of brokers

• Commit to testing and loan reviews of brokers that consider customer complaints.

• Compensate loan personnel and management on a basis that does not reward predatory practices and places penalties on those that do.

• Place a cap on fees to brokers.

• Require fair lending training of all brokers.

• Mandate a broker code of conduct agreement.

• End yield spread premium payments or other compensation that rewards brokers for steering borrowers to higher cost products and larger loans.

10. Agree not to purchase or invest in predatory loans

• Develop due diligence to ensure no predatory loans are purchased or invested in as part of a mortgage backed security. Ensure all affiliated institutions, including securities firms, are not underwriting, securitizing, or otherwise facilitating the financing of lending that violates these principles.

• Make borrowers whole when presented with evidence that these principles have been violated.

California Reinvestment Committee

474 Valencia St., Ste. 110, San Francisco, California 94103

(415) 864-3980 **** fax (415) 864-3981

web site:

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