Slate on Predatory Lending

Slate has a nice, if a bit too easy, piece focusing on the predatory lending that played a huge role in causing the housing crisis.

The author points out the Countrywide/Bank of America settlement that got far less attention than it should have:

In early October, Bank of America quietly entered into the largest settlement in history to make amends for predatory lending, putting up more than $8 billion to rescue borrowers with faulty loans from Countrywide Financial, a notorious subprime lender recently purchased by the bank.

The people who were put into subprime loans even though they qualified for prime ones are the broadest evidence of criminality (or what should be a crime) in the mortgage industry:

When the study assessed borrowers of similar incomes, 30 percent of African-American borrowers received subprime loans, compared with 18 percent of whites and 26 percent of Latinos. These discrepancies aren’t absolute proof, but they suggest that discriminatory steering took place in which otherwise qualified borrowers of color were directed to subprime, and substandard, loans. Federal law makes it illegal to discriminate based on race in the terms and conditions of a home mortgage loan. It would appear that this is exactly what happened…

This discrimination is at the core of a number of lawsuits advocates have filed across the country over the last year. Several of the cases focus on a particularly devious practice: Without borrower knowledge, many mortgage brokers received a commission from the lender for persuading a borrower to accept a higher loan interest rate than what the bank was otherwise willing to offer. The lawsuits claim that such commissions were paid more often in loans to African-Americans and Latinos than in loans to whites, revealing, again, that lenders often charged borrowers of color more than their white counterparts. As these suits progress, and the groups suing gain access to lenders’ and brokers’ records—e-mails, internal memoranda, training materials, and other documents—we are likely to learn more about the practices of the lenders who are the defendants and about the industry in general.

These have long been some of the most glaring problems in the whole housing story, but it’s always good to see the spotlight shine on them, however fleetingly. I’m not sure how it can’t be a crime to incentivize brokers to give homebuyers worse loans. If it isn’t, it should be.

But Slate is too simplistic in saying going after the fraud will solve our problems:

The Department of Justice, the state attorney general, legal-services attorneys, volunteer lawyers, and law students should all be poring over California loan documents to smoke out the brokers who violated their legally mandated duties to their clients. If a significant number of loans in California alone could be altered, consistent with the borrowers’ abilities to pay, either through litigation or its threat, the federal government wouldn’t have to pay as much for a national bailout…

Going after the lawbreakers helps to address these concerns. It would not only lower the cost of the rescue plan by reducing the number of borrowers needing help, it would also direct assistance only to those people who were victims of illegal conduct and insulate the loan modifications from litigation by investors looking to preserve their investments. Investors won’t challenge loan restructuring when the underlying loans were made on illegal terms.

This horse has left the barn. The banking system is in such rotten shape that any more pressure on it can only hurt us all—badly. That’s why good regulation is so critical: To prevent these things from happening before it’s too late. I hate to say it, but it just doesn’t seem feasible for the banks to take more writeoffs of bad loans. Somebody’s got to pay for it.

That doesn’t mean these brokers and CEOs shouldn’t be perp-walked and turned upside down and shaken till their ill-gotten silver is recovered —bring it on!. And clearly, people who were fraudulently put into mortgages ought to be first in line to get bailed out of them.

But this mess, unfortunately, is more complex than Slate’s piece would have it appear.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.