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BEFORE OUR VERY EYES
There were government reports, too. The Department of Housing and Urban De-
velopment and the Treasury Department issued a joint report on predatory lending
in June that made a number of recommendations for reducing the risks to bor-
rowers. In December , the Federal Reserve Board used the HOEPA law to
amend some regulations; among the changes were new rules aimed at limiting high-
interest lending and preventing multiple refinancings over a short period of time, if
they were not in the borrower’s best interest. As it would turn out, those rules cov-
ered only of subprime loans. FDIC Chairman Sheila C. Bair, then an assistant
treasury secretary in the administration of President George W. Bush, characterized
the action to the FCIC as addressing only a “narrow range of predatory lending is-
sues.” In , Gramlich noted again the “increasing reports of abusive, unethical
and in some cases, illegal, lending practices.”
Bair told the Commission that this was when “really poorly underwritten loans,
the payment shock loans” were beginning to proliferate, placing “pressure” on tradi-
tional banks to follow suit. She said that she and Gramlich considered seeking rules
to rein in the growth of these kinds of loans, but Gramlich told her that he thought
the Fed, despite its broad powers in this area, would not support the effort. Instead,
they sought voluntary rules for lenders, but that effort fell by the wayside as well.
In an environment of minimal government restrictions, the number of nontradi-
tional loans surged and lending standards declined. The companies issuing these
loans made profits that attracted envious eyes. New lenders entered the field. In-
vestors clamored for mortgage-related securities and borrowers wanted mortgages.
The volume of subprime and nontraditional lending rose sharply. In , the top
nonprime lenders originated billion in loans. Their volume rose to billion
in , and then billion in .
California, with its high housing costs, was a particular hotbed for this kind of
lending. In , nearly billion, or of all nontraditional loans nationwide,
were made in that state; California’s share rose to by , with these kinds of
loans growing to billion or by in California in just two years. In those
years, “subprime and option ARM loans saturated California communities,” Kevin
Stein, the associate director of the California Reinvestment Coalition, testified to the
Commission. “We estimated at that time that the average subprime borrower in Cali-
fornia was paying over more per month on their mortgage payment as a result
of having received the subprime loan.”
Gail Burks, president and CEO of Nevada Fair Housing, Inc., a Las Vegas–based
housing clinic, told the Commission she and other groups took their concerns di-
rectly to Greenspan at this time, describing to him in person what she called the
“metamorphosis” in the lending industry. She told him that besides predatory lend-
ing practices such as flipping loans or misinforming seniors about reverse mortgages,
she also witnessed examples of growing sloppiness in paperwork: not crediting pay-
ments appropriately or miscalculating accounts.
Lisa Madigan, the attorney general in Illinois, also spotted the emergence of a
troubling trend. She joined state attorneys general from Minnesota, California,
Washington, Arizona, Florida, New York, and Massachusetts in pursuing allegations
