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Banks Bomb on Stress Tests for Minority Lending

New America Media, Commentary, Earl Ofari Hutchinson Posted: May 08, 2009

A buoyant Treasury Secretary Timothy Geithner reassured the public that the big 19 U.S. banks have passed the Treasury-imposed stress test. That wasnt hard to do. Taxpayers greased the skids of those financial houses with more than $50 billion in handouts. And the stress tests were widely seen as softball tests that imposed neither tough nor new government-enforced financial requirements on the banks.

The debate rages on in just how much taxpayer cash the banks will need, how long theyll need it, and whether the money will ensure permanent solvency.

But forgotten in the hubbub over the Geithner report is the painful fact that thousands of black and Latino homeowners are still left holding the financial bag for the subprime mess that taxpayers are forced to bail the banks out of.

Two reports on mortgage lending practices, issued by Fair Finance Watch and the Center for Public Integrity on the eve of the Geithner report, revealed that from 2005 to 2007, the 19 bailed-out banks got into hock to taxpayers for nearly $1 trillion. They ran up the bulk of the debt through toxic subprime loans to mostly minority homebuyers. The banks ran up the debt through holdings in companies, investment houses, financial and real estate subsidiaries and through stock purchases and sales.

The reports also showed that the subprime loans did little to help revitalize grossly underserved minority communities. In fact, Bank of America, which holds out its cup for another $34 billion in taxpayer dollars, had one of the lousiest records in lending to minorities. The loans that it did make were far more costly than loans to whites. But Bank of America was hardly the sole bad actor. The top bank welfare recipients raked in tens of billions in profits and taxpayer handouts while engaging in scrooge-like lending. When they lent, they charged rates that would make loan sharks blush.

Wells Fargo charged African Americans more than twice as much as whites for home loans. JP Morgan charged African Americans and Latinos more than twice that of whites. Citigroup, US Bancorp and Wachovia charged minorities one and a half times more. Blacks and Latinos were more than one and half times more likely than whites to be denied a loan by the top banks that received a taxpayer bail out.

Income had little to do with whom the lenders pitched their subprime loans to. Race and neighborhood were the prime determinants. A study by the U.S. Department of Housing and Urban Development (HUD) found that upper-income blacks were one-and-a-half times as likely to have a subprime loan as persons who lived in low-income white neighborhoods.

Subprime lending at times took on elements of loan racketeering -- a racket that has hurt tens of thousands of black and Latino would-be homeowners. The lenders bait-and-switch tactics, deliberately garbled contracts, deceptive and faulty lending, questionable accounting practices, and hidden fees -- all with the complicity of sleepy-eyed federal regulators -- are well known and documented. Their snake-oil loan peddling wreaked havoc on the lives of mostly poor homeowners.

The recent reports on the lending practices of the top banks, though, make clear that they have continued to rake in big profits from the loans, even while padding their bottom line with taxpayer dollars. The banks and holding companies can suffer huge losses from their subprime loans but still make money, lots of it. HSBC Holding, for instance, reported losses of $10 billion from bad loans in 2007, but it still reported a 5 percent gain in its profits.

Subprime lending, albeit highly profitable for a brief time, was not a crushing risk for the banks when the loans went sour. They offset their losses through tax write offs, increased loan and service fees, lower saving interest rates, and stock sales and swaps.

They have one more trump card to cleanse their toxic debt: the taxpayers pocketbook. And they have played that card magnificently. The great flaw in all of this is that banks are still largely left to police themselves. They determine how much theyll lend, and to whom. They will continue to make loans to minority homebuyers -- they are required to do that under the terms of the much-maligned Community Reinvestment Act -- and many of those borrowers will continue to pay dearly for the loans. Thats a stress test that the banks wont have to take, let alone pass.

Earl Ofari Hutchinson is an author and political analyst. His weekly radio show, The Hutchinson Report can be heard on weekly in Los Angeles on KTYM Radio 1460 AM and nationally on blogtalkradio.com

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