October 17, Dear Commissioners:

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1 Octber 17, 2008 RE: Written cmments f the Califrnia Reinvestment Calitin and Law Fundatin f Silicn Valley t the Natinal Dear Cmmissiners: The Gnzales family wanted t purchase a hme, and tld their mrtgage brker they culd nly affrd t pay $2,700 per mnth. Their cnversatins with this brker were all in Spanish, yet their lan dcuments were written in English, a language they culd nt read. Althugh they were tld they wuld be paying much less, their first mnthly payment was $4,700 with an interest rate that adjusted up in 6 mnths. When their payments cntinued t increase and they started t cmplain, their brker stpped returning their calls. Their mnthly payment quickly rse t $5,000 per mnth, nearly twice what they culd affrd. If they had refinanced, they wuld have suffered a $16,000 prepayment penalty, which was written int their English lan dcuments and nt explained t them upn signing. Carline Washingtn, an 83-year-ld African American wman living in San Francisc, was induced by her brker t refinance her hme three times in three years. Her $52,000 lan ballned t $240,000, with mnthly payments f ver $1,600, representing nearly all f her fixed incme. When she started t g int freclsure, she received calls and slicitatins frm several cmpanies ffering t help her. She said, I didn t knw wh was trying t help me, and wh was trying t cheat me. Ms. Washingtn lst her hme. Bth the Gnzales family and Ms. Washingtn testified at a Federal Reserve hearing n mrtgage practices June 16, 2006 mre than tw years ag. They represented the very beginning f a freclsure crisis that will last years and claim millins f victims. The federal gvernment failed t respnd in any meaningful way t the discriminatry lending practices that led t this crisis, a failure that must be rectified lest this series f events be repeated in the cming years. The Califrnia Reinvestment Calitin (CRC), based in San Francisc, is a nnprfit membership rganizatin f 250 nnprfit rganizatins and public agencies acrss the state f Califrnia. We wrk with cmmunity-based rganizatins t prmte the ecnmic revitalizatin f Califrnia s lw-incme cmmunities and cmmunities f clr. CRC prmtes increased access t credit fr affrdable husing and cmmunity ecnmic develpment, and t financial services fr these cmmunities. Over the last few years, CRC has fcused increased

2 Written cmments f the Califrnia Reinvestment Calitin and Law Fundatin f Silicn Valley t the Natinal Octber 17, 2008 Page 2 f 6 attentin n fighting predatry financial practices in Califrnia, including high-cst predatry mrtgage lending which has disprprtinately affected peple f clr and has been the catalyst fr the freclsure crisis we are nw experiencing. Public Interest Law Firm (a prgram f the Law Fundatin f Silicn Valley) s missin is t prtect the human rights f individuals and grups in the Silicn Valley area wh are underrepresented in the civil justice system. PILF accmplishes its missin by leveraging the skills and resurces f pr bn attrneys t prvide high quality representatin in class actin and impact litigatin, advcacy in state and lcal gvernment, and litigatin supprt t lcal legal services prgrams. PILF fcuses its effrts n behalf f elders, yuth, individuals with disabilities, thse wh are frequent victims f illegal discriminatin and thse wh are pr. In the past few years, PILF has litigated tw cases in federal curt n behalf f brrwers wh we believe were targeted fr predatry subprime lans based n their actual r perceived lack f fluency in English. We have als advcated fr additinal prtectins fr brrwers at the lcal, state, and natinal level, ften in cllabratin with CRC. Every business day, 1,300 hmes g int freclsure in Califrnia. Many f these hmes are ccupied by wrking families, senirs, immigrants, and peple f clr wh were targeted because f their membership in a prtected class by unscrupulus lenders with unaffrdable mrtgages. The impacts f these freclsures n neighbrhds are devastating: lwer prperty values fr neighbring residents, blight, increased crime, less tax revenue t lcal gvernments, and larger numbers f displaced tenants and freclsed hmewners cmpeting fr limited affrdable husing pprtunities. Much f the current freclsure crisis is rted in the subprime hme lan market, where lenders make mre expensive lans t brrwers wh are deemed credit-impaired r therwise unable t qualify fr a cnventinal, prime lan. In 2006, subprime lending was a $600 billin industry that made its mney trapping brrwers, ften peple f clr, in bad lans. Subprime lending has meant that the mst critical fair lending prblem fr neighbrhds f clr has fundamentally changed frm redlining, where lenders discriminate against neighbrhds f clr by refusing t issue hme lans there, t reverse redlining, where unscrupulus riginatrs target neighbrhds f clr fr mre cstly and mre risky hme lans. It appears that federal enfrcement f the fair husing laws has yet t catch up with this paradigm shift. Study after study has shwn that peple and neighbrhds f clr are much mre likely t be stuck with higher-priced subprime lans than white brrwers. In 2006, ver 45% f all hme lans made t African-American brrwers in Califrnia were higher-priced subprime lans, while nly 19% f hme lans t white brrwers were subprime. Over 43% f hme lans t

3 Written cmments f the Califrnia Reinvestment Calitin and Law Fundatin f Silicn Valley t the Natinal Octber 17, 2008 Page 3 f 6 Latin brrwers were subprime. And as a whle, neighbrhds f clr in Califrnia were 2.7 times as likely t get subprime lans as white neighbrhds. T put that in cntext, the frmer Attrney General fr the state f New Yrk sued Cuntrywide, relying n similar data, but where the lending disparities were smaller than what we see in Califrnia fr the whle industry. The New Yrk A.G. and Cuntrywide entered int a settlement agreement, at which time the A.G. stated that even after reviewing mre detailed infrmatin frm brrwer lan files, Cuntrywide culd nt fully explain why African American and Latin brrwers were mre likely t get cstlier lans. The New Yrk Attrney General actually als sued 4 large natinal banks - Citibank, JP Mrgan Chase, HSBC, and Wells Farg citing similar prpensities t charge peple f clr mre fr hme lans than fr whites, withut apparent legitimate justificatin. In a telling statement, the A.G. was blcked in his effrts t purse these fur banks by their federal bank regulatr, the Office f the Cmptrller f the Currency (OCC), which in essence argued that it was the nly regulatr with the authrity t enfrce the Fair Husing Act s prhibitins against discriminatin with regard t its natinal banks. The OCC has taken n apparent enfrcement actin against any f these banks. This raises the larger pint that ur current regulatry envirnment encurages a race t the bttm, where regulatrs are lathe t enfrce fair husing and cnsumer prtectin law fr fear f banks leaving fr anther regulatr. A regulatry agency that des nt attract enugh banks that wish t be regulated by it runs the risk f lsing the prestige, authrity and fees that may cme with having a large number f licencees. In this envirnment, it is nt surprising that the OCC and the Office f Thrift Supervisin (OTS) have cmpeted t be deemed t have the strngest preemptin authrity. In a similar way, Republic Bank f Kentucky is currently seeking t switch t an OTS charter, reprtedly because its current regulatr, the FDIC, has raised t many cncerns abut Republic s invlvement in high-cst tax Refund Anticipatin Lans and payday lending. Such regulatr-shpping undermines the ability and the incentive fr regulatrs t stand up fr cnsumers and prtected classes. These issues must be addressed in any discussin f refrming ur regulatry structure. As a result f disparate subprime lending enabled by ur flawed regulatry structure, CRC estimates that brrwers f clr in Califrnia (many f whm culd have qualified fr prime lans) paid billins f dllars mre than their white cunterparts ver the last few years. This means billins f dllars f lst equity that families culd have used t start a business, finance an educatin, prepare fr retirement, r pass n wealth t the next generatin.

4 Written cmments f the Califrnia Reinvestment Calitin and Law Fundatin f Silicn Valley t the Natinal Octber 17, 2008 Page 4 f 6 During this time, brkers pushed lans that did nt make sense, and in many cases were fraudulent. Lenders respnded t grwing cmpetitin by lwering underwriting standards and creating incentives fr brkers t sell prblematic ptin-arm and stated-incme lans. This was all dne t feed the appetite f Wall Street securitizers and investrs wh failed t screen ut the financing f predatry lans. Unfrtunately, and despite repeated warnings frm CRC and its allies abut these practices, the federal and state regulatrs charged with verseeing these actrs std by, unmved by the cries f cnsumers. It was nly in the past few mnths, when these txic mrtgages began causing pain t investrs the lenders wh made lans that shuld nt have been made, that the federal gvernment has swung int actin t, irnically, bail ut the very peple wh caused this crisis. The real victims are still left withut recurse. As lending standards plummeted, brrwers like the Gnzales family and Ms. Washingtn began t fall twards freclsure. With mre and mre brrwers defaulting n the lans they culd nt affrd t pay and prbably shuld never have been given, subprime lenders started t g ut f business by the hundreds. But even thugh prblematic lenders went ut business, their risky lans remain in ur neighbrhds, cntinuing t explde int freclsures that harm cmmunities. An analysis by CRC and allies shwed that neighbrhds f clr in seven metrplitan areas thrughut the cuntry were much mre likely t be saturated with lans made by subprime lenders wh went ut f business fr making t many bad lans. In Ls Angeles, the market share f high-risk lenders was 9.5 times higher in neighbrhds f clr than white neighbrhds. Nw, as hundreds f thusands f Califrnia families fall int freclsure, fcus has shifted frm bad lending practices t bad servicing practices, which deny families a fair chance t remain in their hmes. Shckingly, there are virtually n rules, reprting bligatins, r regulatry versight which bind lan servicers in their dealings with brrwers seeking t avid freclsure. As such, it shuld nt be surprising that in three CRC surveys f hme lan cunseling agencies serving ver 10,000 brrwers per mnth, the mst cmmn utcme fr hmewners cited was freclsure. As peple and neighbrhds f clr are disprprtinately impacted by subprime lending n the frnt end, s t are brrwers and their cmmunities disprprtinately impacted by freclsures n the back end, creating a duble victimizatin that threatens t dramatically erde wealth in affected cmmunities. There are ways t alleviate the devastating impacts f freclsures. Plicymakers must act quickly, and pursue slutins that match the magnitude f the prblem we face, including: Impsing a mratrium n all freclsures related t predatry lans.

5 Written cmments f the Califrnia Reinvestment Calitin and Law Fundatin f Silicn Valley t the Natinal Octber 17, 2008 Page 5 f 6 Requiring that servicers ffer lng-term, affrdable lan mdificatins fr brrwers trying t stay in their hmes, including refrm f the Bankruptcy Cde t allw judges t mdify the terms f hmewners mrtgages. Requiring detailed and public reprting by each cmpany abut whether they are truly wrking t keep brrwers in their hmes fr the lng term. Enfrcing cnsumer prtectin, Cmmunity Reinvestment Act, and fair lending laws t ensure that lw-incme neighbrhds and neighbrhds f clr are neither targeted fr high-cst and abusive prducts, nr ignred by mainstream financial institutins. Irnically, we nw face the prspect f a re-redlining f neighbrhds f clr, as these emerging markets f yesterday are labeled the declining markets f tday, deemed t risky by the same crpratins that saturated these cmmunities with subprime and ptin ARM prducts. The regulatrs and all respnsible lenders cannt allw this t ccur t neighbrhds that are nw in dire need f credit in an effrt t stave ff a histric lss f wealth by husehlds f clr. Refrming the bank regulatry structure s that banks cannt chse their regulatr, and s there are n incentives fr agencies t refrain frm regulating. Prhibiting predatry lending practices that will lead t a future crisis if we d nt act respnsibly. A recent CRC survey f 50 cmmunity-based rganizatins prviding services t families at risk f freclsure priritized the fllwing actins: Ban abusive practices like prepayment penalties and Yield Spread Premiums; Prhibit brkers and lenders frm steering brrwers int mre cstly prducts than they qualify fr; Require the translatin f key lan dcuments where lans are negtiated in a nn-english language; Increase penalties fr wayward brkers s they will nt cntinue t perpetrate abuse in cmmunities; and Hld Wall Street firms and investrs liable fr financing predatry lans. In additin t the much-needed legal refrms discussed abve, increased federal enfrcement f fair husing laws in the mrtgage lending cntext is critical given the wide-scale nature f this prblem and the lack f cmprehensive state, lcal, and private enfrcement mechanisms. First, many f the institutins that have issued predatry lans are federally regulated, severely limiting the ability f state regulatrs t plice them. And even as t the lenders and brkers

6 Written cmments f the Califrnia Reinvestment Calitin and Law Fundatin f Silicn Valley t the Natinal Octber 17, 2008 Page 6 f 6 ver which the state has authrity, the agencies charged with versight are chrnically underfunded and understaffed, rendering them f little use. Lcally, while many District Attrneys are making a valiant effrt t prsecute the wrst f the wrst mrtgage brkers, in ur experience they are t ften simply verwhelmed by the vlume f evidence, the cmplexity f issues, and the tactics f aggressive defense cunsel. And even successful criminal cases are fcused n the acts f brkers, nt the lenders wh ultimately bear significant respnsibility fr these practices. Further, neither state nr lcal effrts have fcused n the fair husing implicatins f predatry lending, appraching it frm a criminal r cnsumer law perspective. Finally, private enfrcement is very challenging; private fr-prfit attrneys shy away frm these cmplex, time-cnsuming, and expensive cases, and nn-prfit legal service prviders whse resurces are already stretched thin can nly satisfy a fractin f the cmmunity s need fr legal representatin. HUD and DOJ s Civil Rights Divisin shuld enter the fray t vigrusly investigate and, where apprpriate, prsecute lenders wh have vilated the FHA and ther fair husing and fair lending laws. The Gnzales family and Ms. Washingtn testified that they hped the laws wuld change sn t help hmewners struggling t remain in their hmes. Over 2 years and millins f freclsures later, s d we. Kevin Stein Assciate Directr Califrnia Reinvestment Calitin James F. Zahradka II Senir Attrney Public Interest Law Firm Law Fundatin f Silicn Valley T view a shrt dcumentary abut the freclsure crisis, and fr mre infrmatin, visit