Testimony before U.S. Senate Committee on Banking, Housing, and Urban Affairs, on the role of financial companies

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Written Testimony of
Deyanira Del Rio
Co-Executive Director
New Economy Project

Before the U.S. Senate Committee on Banking, Housing, and Urban Affairs
“Fostering Economic Growth: The Role of Financial Companies”

Tuesday, March 28, 2017, 9:30 am
538 Dirksen Senate Office Building

Chairman Crapo, Ranking Member Brown, and members of the committee, thank you for the opportunity to testify at today’s hearing. My name is Deyanira Del Rio and I am the co-director of New Economy Project, an economic justice center based in New York City. For more than 20 years, our organization has worked with an array of community, labor, civil rights and other organizations to press for fair lending and financial inclusion, as a matter of racial justice and equitable neighborhood development. I am pleased to share our experiences and perspective about the vital role that responsible financial institutions play in fostering economic growth and opportunity – as well as the devastating and destabilizing impact of abusive and unregulated lending on communities and the economy.

New Economy Project has led efforts in New York to challenge predatory lending and other discriminatory economic practices, including by pressing for policy change and regulatory accountability at the local, state and federal levels. Our accomplishments include winning strong anti-predatory mortgage lending and foreclosure prevention legislation; keeping payday lending debt traps out of New York, through vigorous defense of New York State’s 25% usury cap and other consumer protections; ending in NYC an insidious form of employment discrimination based on a job applicant’s personal credit history; and settling a groundbreaking class action lawsuit brought against a debt buyer network, resulting in a $59 million monetary award and the imminent vacating of almost $800 million in debt collection default judgments.[1]

My testimony today is additionally informed by my 15 years as a board member (and current board chair) of the Lower East Side People’s Federal Credit Union (LES People’s), a regulated, not-for-profit community development financial institution (CDFI) that serves a majority low-income and immigrant membership in New York City. I previously served on the board of directors of the National Federation of Community Development Credit Unions, which helped to establish the federal CDFI Fund in 1994 and continues to serve CDFI and low-income designated credit unions across the country.

I have two overarching points that frame my testimony today:

First, eliminating barriers to fair banking and credit access is important to ensuring economic inclusion and opportunity for all. Indeed, in communities across New York and around the country, unequal access to credit has long fueled housing segregation, racial disparities in homeownership and small business-ownership, and vast and deepening wealth inequality.

Second, although affordable and appropriate financial services and credit are vital components of a healthy economy, we reject the notion that consumer credit is in itself a solution to structural inequities in our economy. Exploitative credit and debt can worsen these inequities, as we saw with subprime mortgages that led to the foreclosure crisis and wiped out hard-won homeownership gains among families of color; and payday loan debt traps that exploit working poor Americans struggling to make ends meet, and who would benefit from living wage laws and other measures to address root causes of economic insecurity.

It must also be said up-front that efforts by the Trump administration and Congress to dismantle financial reform laws, if successful, will inevitably lead to new crises and further erode Americans’ trust in the financial services industry. On the one hand, we must do everything possible to preserve existing financial reforms and consumer protections, as inadequate as they are – thanks in no small measure to banks’ relentless lobbying to defeat even basic reforms. On the other hand, we need to change our financial services system more fundamentally, if we are to have an equitable system that serves the real economy, rather than a financialized economy that is intrinsically extractive and exploitative of people and communities.

I would like to address three additional points in my testimony:

1. The financial crisis inflicted enormous costs on communities, on our economy, and on responsible financial institutions – with repercussions that continue today. Communities of color, in particular, are still reeling from the crisis.

The financial crisis exacerbated historical inequities in our financial services system and broader economy. Between 2007 and 2010, the median net worth of American families decreased by nearly 40%, driven primarily by a collapse in housing prices.[2] Losses were especially devastating for people of color, whose wealth was overwhelmingly concentrated in the form of homeownership, and whose neighborhoods were targeted by predatory mortgage lenders. Fully half of the collective wealth of black families and 67% of Latino families’ wealth – already far below that of whites – were destroyed during the Great Recession.[3]

The big banks fueled this wave of predatory lending, by facilitating the securitization of high-cost loans and by directly acquiring or financing the worst subprime lenders. The banks further exacerbated the foreclosure crisis through abusive and often illegal mortgage servicing practices—including systematically failing to offer loan modifications equitably in communities of color.[4]

Banks have also fueled the growth of the bottom-feeding debt buyer industry, which purchases charged-off consumer debts from banks and others, for pennies on the dollar, and pursues people through civil lawsuits and other aggressive methods – often violating federal debt collection and consumer protection laws and people’s fundamental due process rights. These companies specialize in amassing court default judgments against consumers, which they use to garnish people’s wages and freeze their bank accounts – another form of wealth extraction that disproportionately harms communities of color.[5] Predatory lending, foreclosures, and abusive debt collection, meanwhile, appear in people’s credit reports and can block their access to housing, jobs, affordable insurance and other vital opportunities.

Responsible lenders and the communities they serve were not spared the effects of the financial collapse and ensuing Great Recession, including loan losses resulting from long-term unemployment; and the ongoing challenges of operating in a depressed interest rate environment. According to the U.S. Treasury Department, the U.S. economy lost 8.8 million jobs and $19.2 trillion in household wealth between 2007 and 2009.[6]

2. Strong prudential regulation and consumer protections – including a robust and independent Consumer Financial Protection Bureau – are crucial to avert future crises and to ensure a fair financial services system that meets the needs of people and communities.

Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, in the wake of undeniable regulatory failure and destructive lending that destabilized neighborhoods, exposed the financial system to broad, systemic risk, and nearly brought down the global economy. Among the Act’s provisions is a requirement that lenders assess borrowers’ ability to repay loans – a basic, common sense tenet of responsible lending that nevertheless has been cited by opponents of the Act as an example of unwarranted regulatory intrusion.

New Economy Project and allies across New York and the country advocated for the creation of the Consumer Financial Protection Bureau (CFPB) – the first federal agency with a core mission of protecting consumers in the financial services marketplace. Our organization has since testified at numerous CFPB field hearings; organized meetings between the CFPB and local groups, to elevate issues and inform the bureau’s rulemaking and enforcement; and pressed the CFPB to promulgate strong federal rules to end predatory payday lending, debt collection, and abusive bank overdrafts.

The CFPB plays an absolutely vital role in identifying and eliminating financial exploitation – a function that was sorely missing in the years leading up to the crash. To date, the Bureau has returned $12 billion to 29 million Americans, while bringing payday lenders, credit reporting agencies, and other powerful industries under meaningful supervision for the first time. The fact that banks are pushing relentlessly to weaken the CFPB is a testament to its effectiveness and its independence.

LES People’s, the credit union whose board I chair, similarly welcomed the establishment of the CFPB and its efforts to level the playing field for responsible community development lenders. We have urged the CFPB to crack down on rampant abusive lending practices, including payday lending and hidden overdraft fees. These two financial products alone siphon billions of dollars from low income people and communities each year. In many markets, these high-cost loans additionally force a “race to the bottom” in which otherwise responsible lenders compete, for example, with payday lenders by mimicking the structure of these harmful loans; or rely on high and hidden overdraft loan fees that drain the accounts of low income bank and credit union customers, to compensate for low interest income and to compete with other financial institutions.

3. Community development financial institutions (CDFIs) have a proven track record of meeting affordable housing, small business and consumer credit needs. The proposed gutting of the federal CDFI Fund puts them at grave risk.

After receiving trillions of dollars in TARP bailout money and no-interest loans from the Fed, banks have failed to meaningfully extend credit to small businesses and other vital sectors of the economy. New York City is 40% foreign-born, yet banks routinely bar immigrant NYC residents from opening accounts, through restrictive identification requirements and other discriminatory barriers. Not a single one of the big banks accepts NYC’s municipal identification card, IDNYC, as a primary form of ID, despite guidance from federal regulators confirming they may do so, and despite pressing need.

As banks continue to consolidate and become further removed from communities and local economies, community development financial institutions (CDFIs) play an increasingly important role in stimulating small business, affordable housing and other development in economically distressed neighborhoods, through fair and transparent loans and investments. CDFI-certified credit unions, including LES People’s, serve more than eight million people across 46 states and, despite serving low income communities, exceed the financial growth and performance of their mainstream peers.[7]

Since 1994, the U.S. Treasury has provided CDFI certification and investments to qualifying institutions, shoring up their net worth and allowing them to grow deposits and loans, as well as attract other investors. (CDFIs must match federal investments dollar for dollar with private sources.) CDFI investments have helped my credit union, LES People’s, for example, to make more than $92 million in business, mortgage and consumer loans since our inception, and to grow in assets from $33 million to $51 million in a few short years. Our members’ deposits are fully loaned out, and among the needs our credit union fulfills is lending to low income, limited-equity housing cooperatives in NYC – one of the few remaining avenues to homeownership that are accessible to low income New Yorkers.

Given the CDFI Fund’s ability to achieve massive impact with relatively small investments, it has consistently garnered broad, bipartisan support. The Trump administration’s recently-proposed FY 2018 budget, however, virtually zeroes out the CDFI Fund, along with other vital community development programs. Federal disinvestment from a sector that is financing true economic growth and jobs would have a devastating impact on communities across the country, and we hope this funding is swiftly and fully restored.

Thank you again for the opportunity to testify today. Unfortunately, we find ourselves in a position in which we must do everything possible to resist attacks on financial reform and consumer protection. I would be happy to respond to any questions you might have about the role of the financial sector in fostering economic growth, including our vision for a just and equitable economy.

1 New York Times, Victims of Debt Collection Scheme in New York Win $59 Million in Settlement; New Economy Project, Sykes v. Mel S. Harris and Associates

2 Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances

3 The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide (Institute on Assets and Social Policy)

4 Troubled Asset Relief Program: More Efforts Needed on Fair Lending Controls and Access for Non-English Speakers in Housing Programs

5 The Debt Collection Racket in New York: How the Industry Violates Due Process and Perpetuates Economic Inequality

6 The Financial Crisis Response In Charts

7 CDFI Certification: A Building Block for Credit Union Growth: Performance, Profiles and Prospects for CDFI Credit Unions