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October 19, 2010
Securities and Exchange Commission Settles with Predatory Lenders
    by Robert Kropp speaks with David Beck of Self-Help Credit Union about the settlement with Countrywide executives, as well as the outlook for community development financial institutions. First in a two-part series.

On Friday, the Securities and Exchange Commission (SEC) announced a settlement with former Countrywide Financial CEO Angelo Mozilo and two other executives of the subprime lender, which following the collapse of the market was sold to Bank of America. In an announcement that was ironic for its timing, Bank of America said yesterday that it would resume foreclosing on properties in 23 states where approval by the courts is required.

In its announcement, the SEC stated that Mozilo will pay a $22.5 million penalty, the largest ever for a senior executive. In addition, Mozilo will settle the SEC's charges against him of insider trading by paying another $45 million. He is also permanently barred from serving as an officer or director of a publicly traded company.

Former chief operating officer David Sambol will pay a penalty totaling more than $5.5 million, and chief financial officer Eric Sieracki agreed to pay a $130,000 penalty.

Following the settlement, Robert Khuzami, Director of the SEC's Division of Enforcement, stated, "Mozilo’s record penalty is the fitting outcome for a corporate executive who deliberately disregarded his duties to investors by concealing what he saw from inside the executive suite — a looming disaster in which Countrywide was buckling under the weight of increasing risky mortgage underwriting, mounting defaults and delinquencies, and a deteriorating business model."

The SEC filed suit against the three executives in June 2009, charging them with "securities fraud for deliberately misleading investors about the significant credit risks being taken in efforts to build and maintain the company's market share," according to the original complaint.

"Mozilo was additionally charged with insider trading," the SEC continued.

Leading up to the financial crisis, predatory lenders such as Countrywide devised loans that in the short term were affordable to low-income borrowers and those with questionable credit. But devices such as "exploding ARMs" (in which a fixed loan rate is replaced by a much higher adjustable rate after a period of time, usually two or three years), when combined with the decline in housing values, made mortgages unaffordable and refinancing impossible. The subsequent collapse of the economy, and the persistent high unemployment that followed, caused record numbers of defaults on such loans.

As many sustainable investors are aware, an alternative to the predatory lending practices of Countrywide and other companies exists. Community development financial institutions (CDFIs) provide credit to underserved, low-income markets, and succeed by developing knowledge of the communities in which they do business and by developing relationships with their customers. CDFIs display a commitment to spending time on individualized service and programs tailored to the needs of underserved markets. spoke with David Beck, the Policy and Media Director at
Center for Community Self-Help, about the settlement as well as the state of home lending prevailing today in those underserved markets. Self-Help operates the Self-Help Credit Union, a CDFI based in North Carolina.

"It was depressing to learn how much Mozilo was saying internally exactly what we were saying externally, that these were toxic loans that were going to fail at huge rates," Beck said, referring to an article on the settlement from the
New York Times. "Obviously, he wasn't telling his investors that, much less his borrowers."

According to the Times, "Mozilo was publicly buoyant about (Countrywide's) ability to ride out the mortgage crisis. Privately, however, he occasionally offered a gloomier assessment of Countrywide's prospects and practices."

Beck told, "It's frustrating to look at how much damage was wreaked by Countrywide. When you think about the borrowers whose lives were absolutely devastated, as well as the people who were affected by the collapse of the economy, you don't get the sense that the punishment fits the crime. The executives are not being sent to the poorhouse."

"The impact on the overall economy of subprime mortgages hurt the whole economy, and the people who get hurt the worst are those in low-income neighborhoods," Beck continued. "The economic catastrophe has had a multiplier effect in those communities."

Asked about how Self-Help and other CDFIs are weathering the recession, Beck said, "We're seeing some increase in defaults, and we've had to redouble our efforts to work with borrowers to modify loans. We're spending a lot more time now on loss mitigation, to see what solutions are available."

"Working with our borrowers is one of the benefits to borrowers of working with a CDFI," Beck continued. "But when our borrowers lose their jobs, it's hard to make mortgage payments. It's an institutional risk that we're willing to accept."

As mortgage lending throughout the economy has contracted, it is not at all surprising to learn that potential borrowers in low-income communities have been affected the most. With high unemployment rates even higher in those communities, lack of income is an impediment, as is a lack of confidence in the market.

"Since mainstream lending has contracted, what we do is more important than ever," Beck said. "It's going to be interesting to find out if there is an opportunity for broader market share for CDFIs, particularly in terms of home loans. Hopefully, when the market reappears, it won't be in the form of Ameriquest or Countrywide. We're hoping for a situation where CDFIs can play a much larger role in providing home loans."

Asked how CDFIs can increase the size of the role they play, Beck said, "Marketing is one thing the CDFI industry hasn't mastered, but perhaps one way of short-circuiting it is to increase our partnerships with conventional home lenders and become more of a referral source for them. In some ways, CDFIs work best in partnership with banks. Now that banks no longer have their own subprime lending divisions, we hope that they make more referrals to CDFIs."

Beck mentioned several sources of information for prospective borrowers.
Opportunity Finance Network (OFN) provides information on mission-driven organizations that meet the needs of borrowers. The National Federation of Community Development Credit Unions is another source of information, as is the CDFI Fund.

For sustainable investors wishing to meet their community investment mission, Beck spoke of the importance of depositing in CDFIs. "One thing that helps CDFIs make an impact is the amount of lending we can do is directly related to the amount of deposits," he said. "It gives us the financial wherewithal to think outside the box."

Referring to the influence of the CDFI experience in helping in the creation of the Consumer Financial Protection Bureau, Beck said, "Hopefully the Bureau will help prevent such a thing from happening again."

Next: speaks with Laura Berry, Executive Director of the Interfaith Center on Corporate Responsibility (ICCR), about the history of shareowner action addressing predatory lending practices.


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