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The introduction provides a guide for readers and sets out the research methodology of the book. Evident is the structural nature of the racism undergirding the predatory lending scams in the 2000s, along with the inertia over a decade later that precludes help for individuals that have been victimized. Institutional policies in private financial institutions and public bodies provide little redress for many individuals victimized by predatory lending, exacerbating the racial wealth gap. The chapter introduces the need for a normative shift in lending practices that embeds accountability. It introduces the plight of mortgagors in three of the cities hardest hit by the subprime crisis, and recounts stories of loss and of the frustration of their legal advocates. We introduce several critically important questions. What are the intergenerational harms caused by the continuing crisis and what mechanisms might be available to change that trajectory? What structurally can be accomplished in an era of deregulatory priority? What are the current implications for middle class and working class Americans of all races with respect to the most recent developments?
Chapter 7 explores other reforms implemented, ostensibly in response to the crisis, suggesting that the federal government’s efforts to protect homeowners were well intentioned but ineffective for millions of borrowers. The post-crisis reforms aimed ostensibly at relieving hardship for home borrowers created a new set of incentives for lenders and brokers to exploit mortgage holders. Ultimately, consumer mortgage borrowers paid dearly - financially, socially, emotionally, and physically for the decision by legislators to bail out banks and other financial institutions rather than direct some of those substantial resources to millions of borrowers whose homes were lost. Regulators allowed the programs to be administered by the very predatory lenders that had created the problems. The statute that was ultimately enacted did not assist families in saving their homes. It encouraged, but did not require, lenders to modify loan terms, and did not require them to reduce any principal owing.
Chapter 10 turns to a normative discussion on how we should approach default for home borrowers. It explores whether there is space for a paradigm shift, a complete reconceptualization of mortgage lending, terms and conditions, responses leading up to and upon default, and prevention of foreclosures. It examines whether the law can be responsive to contemporary developments in mortgage lending, and whether it can be designed to recognize the legacy of racism in its application. It considers the dissonance between the oft-stated public policy goals of U.S. governmental agencies regarding home ownership and the policies and practices they have sanctioned on the ground. The chapter also examines, in the face of a regulatory lacuna, the need for more effective corporate governance of financial institutions and considers whether the investment community that is concerned with environmental, social and governance factors could be enlisted to pressure mortgage originators and servicers to remedy their conduct. Socially responsible investors could meaningfully shift the trajectory of financial markets in respect of mortgage lending by exercising their investment power.
Chapter 9 reveals that there are now new iterations of predatory lending in the form of “nonprime loans,” as well as continued abusive practices in mortgage modifications. These loans are now widely offered in the mortgage market and the market has now extended to nonprime auto loans and nonprime credit cards. While the market boasts in its disclosures that the “illegal activities” on zero-deposit mortgages are no longer prevalent, much of the conduct found during the subprime debacle appears to be continuing today. This chapter connects this new burgeoning nonprime market with some of the structural features of financial markets and the treatment of African Americans, portending the risk of another significant financial crisis for African-American and other borrowers. The other recent development is with respect to mortgage modifications themselves. The U.S. government ended its modification programs in 2016 and handed authority for modification back to the private sector.
Chapter 8 examines legal actions brought against predatory subprime lenders and servicers. It briefly summarizes the results of allegations of fraud and violation of various federal and state securities and financial services law. This chapter also provides contextual analysis relating to claims brought against lenders under anti-discrimination law. The chapter commences with a brief overview of the types of settlements negotiated, and then turns to the specific financial firms that issued or serviced predatory mortgages and residential mortgage-backed securities. It unpacks, to the extent that public disclosures have allowed us to research, how the money, intended in part for consumers, is actually used. The chapter analyzes how the money from the settlements could have been more equitably distributed, and could have offered different signals to the mortgage industry going forward in such a way as to prevent the most recent forms of predatory lending. For the most part, investors in these banks, brokerage and servicing firms appear to have recouped a sizable amount of their losses. Consumer borrowers are not as fortunate.
Chapter 2 introduces the topic of foreclosure, and includes discussion of the theoretical frameworks and principles that can inform deeper consideration of the foreclosure issues of the past decade and going forward. The chapter examines the differential impact of race among U.S. consumers. It offers interviews with individuals who are currently fighting foreclosure and their lawyers. Our investigation traces the specificity of the discriminatory targeting of black Americans for predatory schemes. The chapter also includes a framing discussion with respect to the mortgage-backed securities market, market practice and regulatory oversight at the commencement of the global financial crisis. We examine the huge gap between what regulators believed was occurring and the practice of mortgage lending on the ground. We explore the deeper connection between market design and its consequent incentives for self-dealing as primary drivers of continuing harmful conduct in financial markets. Our objective in this chapter is to give readers that may have only passing familiarity with critical race theory or financial market theory a solid context in which to read the rest of the book.
Chapter 3 examines the predatory and subprime lending that occurred in the years leading up to the collapse of the subprime mortgage market, during which mortgage lenders developed a number of new products with opaque and predatory terms. At the time of the subprime market collapse, 20 percent of homes in the U.S. mortgage market were purchased with subprime loans. A “dual mortgage market” emerged, in which borrowers of colour were served primarily by subprime lenders, while higher-income and white borrowers were served primarily by conventional lending institutions. Even after controlling for differences in borrower and neighbourhood risk characteristics, African-American and Latinx borrowers were more likely to receive subprime loans and/or loans with other risky product features than similarly situated white borrowers. This chapter examines the various mechanisms used in predatory mortgages, including inappropriate and sometimes fraudulent conduct. Many borrowers mistakenly believed the mortgage brokers acted in borrowers’ best interests. These practices and many others created a pernicious downward cycle for African Americans in terms of loss of wealth and of homes.
Chapter 4 examines state, federal and other studies that have documented how African Americans were particularly targeted for predatory and subprime lending, even when they qualified for traditional mortgages. It examines the historical links between racism and limited access to traditional mortgage lenders, and how this historical treatment fostered the subprime market. This chapter also explores the critically important question of why African Americans were targeted. No other community was targeted as aggressively as were black Americans. The chapter concludes with a discussion of continued victimization, and why African Americans harmed by predatory lending are not getting the help they need to begin to recover from the wealth drain that has damaged individuals, families, and entire communities.
Chapter 5 examines the subprime market collapse and the impact it had on consumer borrowers. It is important to understand the impact the collapse had on consumer borrowers who had these predatory subprime mortgages. Massive bailouts for the financial sector juxtaposed with ineffective government efforts to assist African Americans facing foreclosure, illustrate the antithesis of fairness principles discussed in chapter 2. The system that responded immediately to the crises in large financial institutions was not responsive to the plight of millions of mortgage borrowers at risk. The disadvantage and unfairness were exacerbated because African Americans had little or no access to traditional banking services to secure bridge financing to survive the financial crisis. All these initiatives were aimed at protecting financial institutions and their investors. The system that responded immediately to the crises in the large financial institutions was not so responsive to the plight of millions of mortgage borrowers at risk. For these individuals, the lack of financial relief from their mortgage obligations meant millions of foreclosures.
Chapter 6 discusses how lobbying by lenders in the U.S. Senate resulted in a vitally important missed opportunity to give a life-line to millions facing foreclosure through bankruptcy reform. Bankruptcy forgiveness could have been an immediate and highly effective strategy to deal with the millions of home foreclosures. It has become increasingly evident that, paraphrasing the words of Audre Lord, the “master’s mortgage tools,” the mortgage products and financial services that precipitated the crisis, many of which continue today, and the abusive conduct underpinning subprime lending, is a story of racism. The predatory lending resulted in massive destruction of the African-American dream of home ownership that will take decades to recover from. Yet both financial and policy responses to the crisis continue to use the same financial structures, the same market tools, and the same market players. As long as reform only tackles regulatory change that “tinkers”+L9 at the edges of the structural problems, there is unlikely to be systematic relief from inappropriate exercise of power and unlikely to be any meaningful justice for the millions of individuals harmed by predatory lending.
Since the Great Recession of 2008, the racial wealth gap between black and white Americans has continued to widen. In Predatory Lending and the Destruction of the African-American Dream, Janis Sarra and Cheryl Wade detail the reasons for this failure by analyzing the economic exploitation of African Americans, with a focus on predatory practices in the home mortgage context. They also examine the failure of reform and litigation efforts ostensibly aimed at addressing this form of racial discrimination. This research, augmented by first-hand narratives, provides invaluable insight into the racial wealth gap by vividly illustrating the predation that targets African-American consumers and examining the intentionally obfuscating settlement terms of cases brought by the U.S. Department of Justice, states attorneys, and municipalities. The authors conclude by offering structural, systemic changes to address predatory practices. This important work should be read by anyone seeking to understand racial inequality in the United States.
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