May 29, 2007
Before the State of New York Assembly Standing Committee on Banking Assembly Standing Committee on Judiciary Assembly Standing Committee on Consumer Affairs and Protection Assembly Standing Committee on Housing Assembly Standing Committee on Oversight, Analysis and Investigation
On Sub-Prime Lending Practices
First and foremost, thank you for inviting me here today to testify before the Standing Committees on Banking, the Judiciary, Consumer Affairs and Protection, Housing, and Oversight, Analysis and Investigation of the State of New York Assembly. Let me begin by saying that my natural background would suggest that I am not a likely partner with, nor a natural advocate for the mainstream banking sector in America.
You see, I was raised in South Central Los Angeles, and later Compton, California, by two enterprising and brilliant African-American parents, with a commitment both to each other as well as their children. They truly loved each other, but my parents also divorced when I was about 8 years old. The number one cause for divorce in America today is money.
When I was very, very young, my mom and dad managed to acquire a home of our own, an 8-unit apartment building, a nursery, a gas station, and my dad’s cement contracting business. An amazing achievement, for any family, yet alone two African-Americans from poor black families from the South who did not complete high school because they felt they had to work and help feed their large families.
Yes, my mom and dad were brilliant, and enterprising, and yes we acquired assets that any family would dream to have -- but we also lost everything too.
My family lost all of our shared family assets not because we were not bright enough, nor intelligent enough, nor because we lacked common sense. Truth be told, my parents were and remain today two of the smartest people I have ever met in my life. You have to be smart to survive poor in America.
My family lost what we owned because my dad was brilliant yes, but financially illiterate too, and he was our head of household. A reality shared by approximately 80% of all Americans today, of all races, who live today from paycheck to paycheck.
In short, my dad could make money but we could not keep it. We didn’t understand money. My dad knew how to make money, but no one taught him how to keep it. No one gave my dad a financial literacy lesson growing up. What my dad knew he taught himself.
It is for this reason that I could not be prouder of my dad today, irrespective of his financial net worth; “he had done so much, for so long, with so little, he could almost do anything with nothing.” But ultimately, the fact that he didn’t understand money, and how it worked, caught up with even him. I thank my dad, and my mom, for giving me spiritual wealth; a fundamental belief in myself.
Making matters worse, in my community there weren’t many banks to speak of. As a result, we had what one might call the perfect financial storm; individuals with the least financial savvy, the least financial knowledge, and the least financial resources, matched up with alternative lenders and financial service providers (i.e. unscrupulous check cashers, payday lenders, etc) interested only in a short-term financial transaction, not a long-term business relationship, and they also had the least to offer in the form of choice. Frankly, there simply was no competition in my community.
Growing up, I remember the pride I had, every week on Friday nights, watching my father make a payroll from the front door of our home. That was powerful for a son to see. But then, after a while, the workers I knew so well would leave our home, and a smooth talking mortgage broker, someone I didn’t know at all, would soon show up; finally convincing my otherwise brilliant father that he could somehow “have more,” while somehow “paying less.”
The result: my dad was left almost defenseless in making essentially the most significant financial and wealth building decision of his adult life and our family life. A decision that ultimately negatively impacted and had ripple effects on my brother, sister, my mother and me. You see, my dad ultimately asked this person the wrong question, asking “what’s the payment,” when in reality he should have been asking, “what’s the interest rate?” No one should ever ask what the payment is when there is an interest rate attached. We lost our home because my dad asked the wrong question and then signed documents he didn’t understand.
My mother’s story, oddly enough, ended in a completely different way. You see, my mom, who worked a regular 40-hour job, was financially literate, and she was the one who pushed for the financial separation from my father, whom again she dearly loved. She felt she had to do this, to save herself, and our family.
My mother worked more than 35 years at McDonald Douglas Aircraft, now Boeing Aircraft, in Long Beach, California, and realized early on that “it was not necessarily about making more money, but making better decisions with the money you make.”
My mother bought and sold 5 homes over time, and today she is retired and financially independent, living in Houston, Texas. In contrast, my dad is today financially dependent, living in a new 4-unit apartment building built for him, by my wife and I; on the very street I grew up on in South Los Angeles. Not all children, or even most children, are financially able to build and pay for a home for their father. Nor should they have too.
This is why I am so passionate about financial literacy and economic empowerment today. It is personal to me.
This is why I have dedicated my life to pursuing a global “silver rights” movement focused on, quoting my hero and our global spokesman Ambassador Andrew Young, “making capitalism and the free enterprise system relevant to the poor; making capitalism and free enterprise finally work for the poor.” I remember Andrew Young telling me one day, “Communism failed because it could not create a middle class, and capitalism succeeded precisely because it did. But capitalism and the free enterprise system have not yet proven relevant to the poor.” Wiser words were never said, and this is my mandate and mission for Operation HOPE in the 21st century.
This is the last piece of unfinished business in America, and around the world today. To make capitalism and free enterprise relevant to the poor, and ultimately to make it work for the poor. It is for this reason that I refer to Operation HOPE today as “a radical movement of common sense.” And this is precisely what Andrew Young and Dr. Martin Luther King, Jr. were focused on in April, 1968, when they launched Dr. King’s boldest and most ambitious campaign of his young life, called “The Poor People’s Campaign.”
It was Dr. King that said in 1968, “you cannot legislate goodness, and you cannot pass a law to force someone to respect you.” King continued, “…the only way to achieve social justice in a capitalist society is through economic parity.” I interpret Dr. King’s words today to mean ownership. Once again, Dr. King was ahead of his time.
This said, unethical sub-prime lending and immoral and potentially illegal predatory lending are precisely the opposite of this enlighte ned, make-sense objective pursued by Dr. King and Andrew Young.
Capitalism gone wrong and capitalism focused only on the short-term transaction versus the long-term relationship, as we are now beginning to see with this unfolding sub-prime mortgage lending crisis, only eats away at the very fabric and hope of America.
When every American, irrespective of race, creed, color of socio-economic background, desires to become an owner and stakeholder in America, everyone wins, and transposed against this hope, the short-term “get what I can, as fast I can, however I can” approach of sub-prime mortgage predators erodes confidence in this universal American dream and aspiration.
I recognize that you have gathered here today to actually consider new potential legislation, to help guard against the sort of abuses discussed here in this session. I appreciate you doing this. Thank you. That said, as important as effective legislation is in our America, the reality is that unfortunately, you could not have passed a law to protect my dad from himself; from the decisions that he made on his own. Decisions, that I have spoken about here today.
Respectfully, I would propose that this State legislative body refocus the robust attention and resources it would otherwise place into new legislation, and instead invest it into a massive statewide campaign of practical (consumer) financial education. A massive focus on financial literacy -- starting with our children, the next generation of consumers, workers, borrowers, owners.
In a first-ever meeting with a sitting U.S. President on the topic of financial literacy education in America, and scheduled at the request of Operation HOPE, on April 25th, 2007, President George W. Bush held a meeting with key members of his Cabinet in the Roosevelt Room of the White House, focused on financial literacy as a national agenda and priority. The President charged Treasury Secretary Paulson (of New York) with chairing a Cabinet-level working group and with bringing back key recommendations to the President, around a federal action plan within 2-months time.
What I proposed to the President and his Cabinet, I respectfully also propose to you today. To act on across the board financial literacy education and integration, into the whole of life here in New York state, on behalf of your fellow New York citizens. To launch a massive effort, statewide, to teach youth and adults financial literacy, with the significant help of volunteers from New York’s private sector leadership. Tie-in financial literacy education and the federal Earned Income Tax Credit (EITC), including State EITC initiatives. If someone has not filed for EITC in three years, they make no more than $32,000 annually, and they have two children or more, they might be eligible for an EITC refund of as much as $12,000; enough to possibly cure a mortgage default or otherwise help to head off a foreclosure crisis.
Bring the best of the private sector, government and community together in an innovative private-public partnership designed to make the residents of New York, the financial capital-center of America, financially literate too. When you know better, you tend to do better.
This public sector vision is part of what motivated the Chairman of the State of California Assembly Banking Committee Ted Lieu, a friend in HOPE, as he leads a statewide effort to incorporate financial literacy education and empowerment into the daily lives of all Californians. I was also honored to testify recently before Chairman Lieu’s committee on the state of financial literacy education in California for California. Operation HOPE, America’s first non-profit social investment banking organization, was founded by me following the Rodney King riots of 1992 in Los Angeles, with a $61,000 budget, one employee and a vision to change the world and to eradicate poverty.
Today Operation HOPE (HOPE) is a global organization, having raised more than $400 million for the poor, with offices in 30 U.S. cities and as of June, 2007, three South African cities. To date HOPE has educated more than 220,000 low-wealth youth through its award winning Banking on Our Future financial literacy program, with 6,000 HOPE Corps volunteers in more than 700 schools, has created more than 700 low-wealth homeowners and 300 small business owners through our HOPE Center network, and right here in New York we have educated more 23,000 low-wealth youth, with more than 500 HOPE Corps volunteers in 92 NYC schools and community based organizations, with 22 private sector partners.
Most recently we made a special commitment to Harlem featuring a comprehensive $3.5 million Harlem HOPE Center, in partnership with E Trade Financial, JP Morgan Chase, Carver Federal Savings Bank, former President Bill Clinton and the William Clinton Foundation, amongst others. And so, I am here… I am here first and foremost because of a relationship I trust. It was the New York Bankers Association (NYBA), and specifically Michael P. Smith, its president, Roberta Kotkin, Esq, its general counsel, and my friend later Karen Jannetty, a vice president there, that encouraged me and endorsed HOPE Coalition America, our new emergency economic disaster response initiative launched immediately following 9/11, and as we sought to help the victims and their families of 9/11 with the economic crisis that followed their physical and emotional crisis. Within two years HOPE Coalition America (HCA) had signed a national memorandum of agreement with the U.S. Department of Homeland Security and FEMA, establishing itself as America’s emergency economic disaster preparedness, response and recovery organization for victims of Presidentially declared emergencies. We have since also signed a national agreement with the American Red Cross too, but none of this would have been possible without the early and strong support of the NYBA. Later, it was HCA that responded to Hurricane Katrina, helping more than 78,000 victims; individuals with car loans and no cars anymore, home loans and no homes anymore, and small business loans and no small business anymore. And it was this same infrastructure, created to respond to natural disasters, that was recently called upon by the City of Los Angeles and City Council President Eric Garcetti to help with the sub-prime mortgage lending crisis in Southern California, and individuals who have found themselves with commitments they didn’t fully understand, and loan payments they can no longer make. HCA and our Mortgage HOPE Crisis Hotline (888-388-HOPE) responded to 2,000 calls from individuals in foreclosure or mortgage loan default within 24 hours of our public announcement of the hotline in Los Angeles alone. Within 48 hours we had processed more than 3,000 calls. To put this into context, in the busiest month in the aftermath of Hurricane Katrina HCA responded to approximately 3,000 calls – for the entire month. In short, our mortgage hotline received more calls, in Los Angeles alone, in less than 48 hours, than our busiest month for our national call center for Hurricane Katrina victims. Respectfully, this should give the Committees a sense of the depth and magnitude of the challenges to be faced with the current sub-prime lending crisis in weeks and months to come. But again, this response (to the sub-prime mortgage crisis in Los Angeles) would not have been possible today, had it not been for the efforts of NYBA in 2001. And so, HCA and Operation HOPE are proud once again to return to New York, and in partnership with our friends at NYBA, to provide whatever help we can for the good people of New York who are working through issues with sub-prime (adjustable rate) loans. In my opinion, this (sub-prime) crisis will not just impact the poor, but the middle class as well. Households where middle-class Americans sought to purchase “too much home,” effectively asking the wrong question; “what’s the payment,” vs. “what’s the interest rate.” Additionally, the issue is more nuanced that portrayed by the media. On balance, there is nothing wrong, and a lot right with sub-prime lending. Frankly, the availability of sub-prime financing in the marketplace over the past 5-years has significantly assisted low-wealth Americans seeking an opportunity for homeownership. In summary, the issue, tied directly to financial literacy in our nation, has been caused principally by (1) unsophisticated applicants taking up increasingly sophisticated, exotic, adjustable rate sub-prime lending products by mainstream and alternative lenders alike, (2) mostly unregulated or lightly regulated mortgage brokers and mortgage lenders providing clearly predatory loan products, to applicants wholly unsuited for the financial offerings provided, and (3) finally, speculators (investors purchasing properties for the purpose of “flipping them” for a quick profit) in the residential homeownership marketplace. Here in both of the cases where individuals are purchasing homes for the purpose of providing shelter and hoped for wealth creation for their families and themselves, financial literacy would have given applicants, now borrowers, the tools and capabilities to push back on overly aggressive marketers seeking to meet next quarter’s (profit) expectations from Wall Street, and financial manipulators alike. Frankly, this is precisely how my family lost our home when I was a child, and one of the main reasons why I am so passionate about financial literacy education today. Again, I would respectfully yet strongly recommend to the Committee Chairs and the New York Assembly to take the energy and resources you might place into new legislation, and redirect it instead into a massive, statewide campaign of (consumer) financial education. When you know better you tend to do better.
In 1968, on the heels of Dr. King initiating his “Poor People’s Campaign,” the boldest and most ambitious campaign for social justice envisaged or pursued in the course of his life, and right before his untimely death, Dr. King said “you cannot legislate goodness, and you cannot pass a law to force someone to respect you. That the only way to achieve true social justice in a capitalist country was economic parity.” I would translate Dr. King’s mandate as a call for ownership. Or as we have articulated with and through our call for a new “silver rights” movement in America, quoting our global spokesman and my personal hero Ambassador Andrew Young, “…to make capitalism and the free enterprise system relevant to the poor; to make capitalism and free enterprise finally work for the poor.” This dream will only be possible with and through a massive campaign for, and investment in, practical financial literacy education. Thank you.