Barack Obama

Obama Demands Investigation into Subprime Loan Discrimination

Thursday, October 18, 2007

FOR IMMEDIATE RELEASE
CONTACT: Amy Brundage, 202 228 5511

Asks FTC to examine whether minority homeowners are being targeted with high-priced loans

WASHINGTON, D.C. – U.S. Senator Barack Obama (D-IL) today sent the following letter to FTC Commissioner Deborah Platt Majoras, calling on her to investigate the marketing practices of subprime lenders and the brokers of subprime loans to determine whether minority borrowers have been victims of discrimination. According to recent studies, and an editorial in the New York Times, there is increasing evidence that black and Hispanic borrowers were more likely to be steered to high-cost subprime loans than other borrowers. Hundreds of thousands of African American families – many of whom probably should have been eligible for lower cost prime loans instead of riskier subprime loans – could potentially lose their homes in the coming years.

In the letter, Obama requests that the FTC investigate whether there is evidence that lenders or brokers target poor or minority borrowers with higher cost products, whether lenders are engaging in deceptive marketing practices, and whether the lack of lower-cost borrowing options has disproportionately disadvantaged minority borrowers.

The text of the letter is below:

October 18, 2007

The Honorable Deborah Platt Majoras
Federal Trade Commission
600 Pennsylvania Avenue, N.W.,
Washington, D.C. 20580

Dear Commissioner Majoras:

I am writing to bring to your attention the attached editorial from yesterday's New York Times which begins: "Evidence is mounting that during the housing boom, black and Hispanic borrowers were far more likely to be steered into high-cost subprime loans than other borrowers, even after controlling for factors such as income, loan size and property location." ("Subprime in Black and White," The New York Times, October 17, 2007)

In reality, such evidence has been mounting since the 1990s when the Clinton Administration found that subprime loans in 1998 were over four times more prevalent in predominantly black neighborhoods in New York than in predominantly white neighborhoods. More recent studies have found similar examples of potentially discriminatory lending patterns.

Last year, for example, the Center for Responsible Lending found that for most types of subprime home loans, minority borrowers are more likely to pay higher rates than white borrowers even after accounting for differences in credit scores, loan to value ratios, and other underwriting criteria. And just this week another analysis confirmed that even high-income black borrowers are more likely than comparable white borrowers to have risky and costly subprime loans.

Black families are paying more for home loans than similarly situated white families. Effective action to address this disparity is long overdue. I call upon the FTC to investigate the marketing practices of subprime lenders and the brokers of subprime loans to determine if minority borrowers have been the victims of discrimination.

Among other things, the Federal Trade Commission is charged with protecting consumers from unfair or deceptive marketing acts or practices. Many subprime loans include sales practices or loan features that are potentially unfair and deceptive for borrowers. Some practices, such as yield-spread premiums, which encourage mortgage brokers to steer borrowers into the most costly products, or prepayment penalties, which enable lenders to offer mortgages that are unsupported by sound underwriting principles, appear to be the source of significant problems faced by many subprime borrowers.

With an estimated 53% of African American borrowers in 2005 receiving subprime loans, and more than 60% of subprime loans containing prepayment penalties, the risks particularly for African American homeowners are substantial. Indeed, hundreds of thousands of African American families – many of whom probably should have been eligible for lower cost prime loans instead of riskier subprime loans – are expected to face loss of their homes in the coming years.

I request that you begin a thorough investigation within five days and provide a status report to my office within 15 days on the following questions:

1) Whether there is evidence of lenders or brokers specifically targeting poor or minority borrowers with higher cost products than would otherwise be justified based on legitimate underwriting criteria.

2) Whether the marketing of lending products to poor or minority borrowers has been deceptive or unfair. Specifically, whether the disclosure of yield-spread premiums and prepayment penalties has been sufficiently transparent to borrowers and whether such or similar sales and pricing practices have been disproportionately detrimental to minority borrowers.

3) Whether the lack of lower-cost borrowing options, including those regulated by the Federal government, in predominantly minority communities even for higher-income borrowers, has disproportionately disadvantaged minority borrowers in their efforts to realize the dream of affordable home ownership and wealth building.

Thank you for your assistance protecting all consumers from the pernicious affects of predatory and discriminatory lending practices which undermine the American dream.

Sincerely,

Barack Obama
United States Senator