In February 2007, eight months before the stock market began its historic crash and nearly a year before the word “bailout” entered the vocabulary of every American household, the Rev. Jesse Jackson stood before the Senate Banking, Housing, and Urban Affairs Committee with a warning that now sounds like a prophecy.
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As the housing bubble nears bursting, the civil rights icon warns Congress that Wall Street’s “un-American” treatment of black and brown borrowers will spark a foreclosure crisis.
Financial giants and regulators ignored him.
Notably, at the time of Mr. Jackson’s prescient words, the housing market was still at a standstill. Housing prices had not yet collapsed. But Reverend Jackson, who recently passed away after decades as a civil rights leader working toward the Rainbow Coalition, saw what most people on The Hill did not: that predatory lending was an epidemic that could not be contained.
“Today’s credit conditions for African American and Latino borrowers and the elderly are un-American,” Jackson told the committee on February 7, 2007. “The cost of black and brown money is not based on equal opportunity, equal access, and equal protection under the law.”
His testimony at a hearing entitled “Preserving the American Dream: Predatory Lending Practices and Home Foreclosures” revealed a statistical reality that would become the nation’s nightmare. Jackson testified that 52 percent of mortgage loans to Black borrowers had high interest rates and 40 percent of loans to Latino borrowers had predatory terms. It turns out that it’s often not due to bad credit, but rather low access to fair lending information (remember the movie The Big Short?).
Remember, the iPhone debuted in June of that year. This meant that many people didn’t have a computer in their home, let alone in their pocket. In contrast, only 19 percent of loans to white borrowers fell into this category. But don’t get me wrong. This remains high, indicating that every time the bubble bursts, it affects a record number of homeowners.
This disparity was no coincidence. It was a business model (again, see The Big Short for a visual).
Warning ignored
Jackson’s appearance before the Senate Banking Committee is not his first foray into championing fair lending. A decade earlier, he had founded the Rainbow/Push Wall Street Project, which aimed to “democratize capital in the financial services industry and break down Wall Street’s barriers to people of color, women, and older people.” But by 2007, the wall had not come down. Instead, they were reinforced by fine print and exploding interest rates.
“Ghetto neighborhoods were established as enclaves or institutions built on race, exclusion, and exploitation,” Jackson testified. “Open housing laws were needed to relieve pressure on overcrowding and create housing options. We are left with areas with high taxes and low services, second-rate schools and first-class prisons, and zip codes that are not protected by law. They are fertile ground for bank-financed predators.”
Jackson’s testimony identified specific predatory practices that have flourished since the 1990s, including prepayment penalties that steer black and brown borrowers into loans that are more expensive than their terms and leave families with mortgages they can’t afford, yield spread premiums that give brokers kickbacks by locking borrowers into expensive loans, and low-documentation loans that don’t require proof of income or ability to repay (again, see the movie “The Big Short”).
Civil rights leaders pointed out that in Chicago alone, foreclosures against black and brown borrowers exceed $598 million annually. In Boston, 70% of loans to middle-class (non-poor) borrowers had high interest rates because it was more profitable for lenders. He noted that Nevada’s foreclosure rate was already the second-highest in the nation.
“The industry is not functioning properly or fairly,” Jackson told senators. “Lenders and brokers have an economic incentive to force borrowers to take out more expensive loans. This puts responsible lenders at a competitive disadvantage against irresponsible lenders and allows unscrupulous and predatory lenders to dominate the market.”
players are played
The predatory lending boom of the late 1990s and early 2000s was not a collection of fraudsters operating in a vacuum. Large financial institutions added fuel to the fire, leading to numerous prosecutions in the years following the crash.
Mr. Jackson specifically mentioned Fannie Mae, a government-backed company whose mission is to expand homeownership opportunities. “Current evidence reveals that Fannie Mae purchases securities containing the very loans that strip working-class people of valuable home equity,” he testified. “Fannie Mae, which purchases these securities and profits from predatory lending, violates its public mission and ability-to-repay standards.”
His criticism turned out to be prophetic. After the crash, Fannie Mae and Freddie Mac would require a $187 billion taxpayer bailout, the largest amount in American history.
The list of financial institutions that would later be prosecuted for predatory lending practices reads like a who’s who of the U.S. banking industry. As Jackson testified, in 2007, Countrywide Financial was producing billions of dollars in subprime loans before going bankrupt. The company was eventually acquired in a fire sale by Bank of America, which ended up paying $16.65 billion in 2014 to settle federal lawsuits related to Countrywide’s toxic mortgage loans.
Wells Fargo, another major subprime lender, will pay a multibillion-dollar settlement for opening fraudulent accounts and inducing minority borrowers into expensive loans. In 2012, the bank agreed to pay $175 million to settle Justice Department charges that it discriminated against black and Hispanic borrowers.
Citigroup plans to pay $7 billion in 2014 to resolve the mortgage-backed securities investigation. JPMorgan Chase will pay $13 billion in 2013 for misleading investors about mortgage securities. Goldman Sachs will pay $5.06 billion in 2016 for its role in the financial crisis.
A different kind of advocate
What sets Reverend Jackson apart from other critics of predatory lending is his nuanced approach to the financial ecosystem in low-income areas. He did not simply demonize all financial providers or call for an end to alternative financial services. Instead, he sought to understand why these services exist and how they could be created to serve the community rather than exploit it.
Columbia Law Professor Ronald J. Mann experienced this complexity firsthand when Mr. Jackson invited him to appear on a television show about payday lending. Mann wrote without fully condemning payday lending, but expected to serve as a devil’s advocate, where he would face chilling questioning from civil rights icons.
“Nothing could be further from the truth,” Mann later wrote in a 2012 article in the Washington & Lee Law Review. “The questions he wanted to talk about were things like, ‘Why are banks no longer serving our community?’” “Why do people hate payday lending so much?” and, finally, “What does the community need to know to use this product safely?”
Mann realized that Jackson’s approach was more pragmatic than ideological. “Ultimately, Jesse Jackson hoped this show would ease the way for payday lenders to thrive in the communities he held so dear,” Mann writes, and I might add in a non-predatory way.
This realism reflected Jackson’s understanding of the vacuum created by mainstream financial institutions. As banks closed branches in low-income neighborhoods (or never opened them at all), check cashers, pawnshops, and payday lenders filled the void. Mr Jackson wanted to ensure that these alternative providers were operated fairly, rather than disappearing entirely.
Reverend Jackson began his career in 1965 at the age of 24 and often rubbed shoulders with the Reverend Martin Luther King Jr. King’s assassination was believed by President Lyndon Johnson to be the catalyst for the Fair Housing Act of 1968, which was passed after years of filibusters and protests.
“The American Creed is committed to equal opportunity, equal access, equal protection under the law, and fair distribution for all. Four decades after the passage of the Civil Rights Act of 1964 and the Voting Rights Act of 1965, we must level the playing field for all citizens and identify incentives for financial institutions to invest rather than exploit and oppress hardworking Americans.”
Over the next two years, more than 5 million American homeowners (at the time, a staggering 1 in 10 people with a mortgage) received foreclosure notices.
In the aftermath of the crash, several reforms were enacted. The Dodd-Frank Wall Street Reform and Consumer Protection Act created the Consumer Financial Protection Bureau, which Mr. Jackson had long advocated for. The CFPB, which has been blocking federal funding for the past year, will eventually introduce rules that require lenders to verify a borrower’s ability to repay and prohibit some of the worst predatory practices.
The death of Reverend Jesse Jackson marks the end of an era of leadership in the American civil rights movement. But his warnings about predatory lending remain urgently relevant. Today, we are not immune to the patterns he identified in 2007: racial disparities in lending, targeting of communities of color for high-cost loans, and regulators’ failure to enforce current laws.
Appropriately, Mr. Jackson told a Senate committee in 2007, “We must break this pattern by drawing green lines in redlining and zip code zones and leveraging government-private partnerships. We must see underserved markets as opportunities for growth and development, not exploitation and profiteering.”
Pastor Jackson, you were a prophet with a microphone. Thank you for using this warning. Please rest well.
One of my favorite childhood memories of Sesame Street is this video with Reverend Jesse Jackson.
Dr. Lee Davenport is an MBA professor and executive business coach. Follow her on YouTube and Instagram or visit her website.
