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Wall Street reform and how it will impact Blacks

Joseph Wright | 7/28/2010, 5 p.m.

Two years have passed since the collapse of Bear Stearns under the presidential administration of George W. Bush, and a year has passed since the financial crisis reached its deepest abyss.

Trillions of dollars in household income and more than eight million jobs were lost, primarily, because of failures in our financial system during Bush's presidency from 2000 through 2008.

President Barack Obama has stressed financial responsibility from the beginning of his administration. And new financial regulations recently passed by Congress and signed by President Obama will protect consumers from, as Obama characterized them, "the predatory practices of unscrupulous lenders."

The president stressed that the new legislation is a much-needed source of protection for consumers in the United States. "The Wall Street reform bill represents the strongest consumer financial protections in history," the chief executive said. "You have a stake in it if you've ever been treated unfairly by a credit card company, misled by pages and pages of fine print, or ended up paying fees and penalties you've never heard of before."

African Americans stand to benefit from the new legislation that will ensure consumers get the proper information to make informed economic decisions. The law will also create a more equal climate by subjecting all lenders to thorough scrutiny. It will particularly help protect Blacks and other non-Whites from predatory lending; regulate payday loans and other alternative banking products, and help end complex financial paperwork, said Cecilia Rouse, a member of the White House Council of Economical Advisors.

Blacks and other non-Whites were impacted profoundly by the recent financial crisis. In 2005 and 2006, according to a study by ComplianceTech (an insurance research organization) in partnership with Genworth Mortgage Insurance, 53 percent of loans given to Blacks were subprime, and African Americans were three times more likely to receive higher-priced loans than Whites. According to ComplianceTech, 57 percent of the subprime loans granted in 2006 are now in foreclosure or pre-foreclosure. Simultaneously, Black home ownership gains are decreasing.

The African American home ownership rate was 49.4 percent through 2004, but in 2008, decreased to 47.5 percent.

"One of the unique things about this housing bubble and this huge extension of credit is that companies were offering these teaser mortgages to customers, (and) offering credit cards to individuals who in ordinary times, would not have been eligible for this credit," Rouse said.
"So, what really happened is they were going after the most vulnerable consumers, and those vulnerable consumers were the low-income consumers. In that sense, African Americans and other low-income individuals were the ones (who) the companies were making the most money off of and going after them in a way that was irresponsible."

The key areas where African Americans stand to benefit from the financial reform are in more responsible mortgage lending, payday loan regulation, and regulation of check-cashing businesses.

The Federal Reserve found that African Americans (particularly Black women) were two to three time more likely to be persuaded to take costly subprime mortgages, even when they had good credit. When these consumers tried to get out of high-rate loans, they faced balloon payments or expensive pre-payment penalties. Such abuses are being eliminated or reduced by President Obama's financial reform bill.

For example, depending on the type of mortgage, pre-payment penalties will be eliminated or limited and pre-payment penalties cannot last for more than three years. The new law also calls for mortgage fees not to exceed three percent of the loan amount.

President Obama's bill will also create a powerful consumer advocacy agency, called the Consumer Financial Protection Bureau (CFPB), that will write and enforce rules concerning almost all consumer loans, including payday lending.

Studies have shown that high-cost payday lenders are most prevalent in lower income, non-White neighborhoods. These "non-traditional" lenders charge extremely high rates. The Federal Deposit Insurance Corp. recently reported that, although 25 percent of all U.S. households use payday lenders, 53 percent of Black households use these services.

Financial reform will nullify some of the abusive characteristics of payday lenders and bring regulations to this industry.

The law requires that check-cashing companies will also be regulated by the CFPB. One goal of President Obama's bill is to help bring those without checking and savings accounts into the financial mainstream. It will make sure those without bank accounts are not vulnerable to unreasonably high fees or unfair terms, when they use non-traditional financial services and products.