Rep. Darrell Issa (R-Calif.) (Louie Palu/ZUMA Press)

In April, the multibillion-dollar hedge fund Paulson & Co. was cited in a blockbuster Securities and Exchange Commission civil fraud suit against Wall Street investment bank Goldman Sachs. The SEC complaint alleged that Paulson helped build investment vehicles predicated on rising real-estate prices — and then bet against them, making more than $1 billion on the collapse of the subprime market and the nationwide housing market decline.

[Congress1] Now, Rep. Darrell Issa (R-Calif.), the ranking Republican on the House Oversight Committee, has opened an investigation into whether Paulson did much the same — blowing up the subprime bubble while standing to reap hundreds of millions when it burst — via a large donation to a nonprofit group.

In a May 26 letter to John Paulson, the head of Paulson & Co., Issa asks for documents relating to the firm’s $15 million July 2007 donation to the Center for Responsible Lending, an advocacy group that runs community banks to provide loans to low-income Americans, lobbies for stronger consumer protections on Capitol Hill and offers legal aid to victims of predatory lending, among other activities. The Issa letter implies that Paulson donated to the CRL to stoke the housing bubble and thereby increase its returns. (Ben White first posted the letter at Politico.)

The allegations in the Issa letter stem not from a congressional investigation or think tank report — but from Americans for Prosperity, the Koch family-funded conservative advocacy group famed for supporting the Tea Parties and rallying against health care and financial regulatory reform. CRL contends that AFP’s investigation misconstrues the way its lending programs work, and Paulson pushes back against the idea that it used charitable donations for business ends.

“According to reports,” the Issa letter reads, “CRL was involved in a strategy to ‘shake down and harass banks into making bad loans to unqualified borrowers.’ Central to CRL’s strategy were loans made under the Community Reinvestment Act, legislation designed to encourage banks to make loans to low-income borrowers using loosened underwriting standards.”

But the “reports” cited by Issa come from Americans for Prosperity. The quotation comes not from any independent study, but from a FoxNews.com op-ed by Phil Kerpen, the head of AFP. And the Issa letter is a product of AFP’s months-long grassroots campaign to convince Washington lawmakers to investigate the ties between Paulson, CRL and the Obama administration, alleging that Paulson used the CRL to stoke and then pop the property bubble and criticizing the “revolving door” between CRL and the administration.

AFP faults the CRL and other community lenders that do not require high down payments or take on borrowers with bad credit for blowing up the housing bubble. It also alleges that the CRL “harasses” big banks into making bad loans, by accusing them of redlining when they do not penetrate low-income or minority communities, for instance.

It makes sense, Kerpen told TWI, that Paulson would donate to CRL to help it fund bad loans or to convince it to make more of them — and then collect a profit once the bubble collapsed. In his op-ed, he argues that the CRL donation and the Goldman Sachs deal were two sides of the same coin.

“Paulson paid Goldman Sachs … $15 million to design collateralized-debt obligations comprised of specific subprime mortgages that he selected,” he wrote. “This bucket of investments may have included loans that he knew were unsound and were made only because banks were strong-armed by the CRL. Until there is a full investigation, we won’t know for sure, but it appears Paulson’s $30 million — split between the CRL and Goldman Sachs — financed a scheme that netted his fund a cool $1 billion dollars.”

Of course, Paulson & Co.’s true motivations are opaque. But the firm hit back against allegations that the donation had any business motivation whatsoever, saying the funds helped create an institute to provide legal assistance to homeowners, not to originate subprime loans.

“Paulson & Co’s donation was used exclusively to provide legal assistance to people facing foreclosure to help them stay in their homes,” the company’s spokesperson, Armel Leslie, wrote in an email. “The program has provided legal assistance to thousands of people facing foreclosure. It has distributed $10 million to 34 legal service organizations in 30 states through multi-year grants. [And the] CRL estimates that the program has saved more than 1,300 homes.”

Paulson himself has argued the same. In 2008, the hedge fund manager told the House Oversight Committee that he made the donation in the hope of slowing the foreclosure crisis, not stoking it. “As we saw the difficulty homeowners were having in making mortgage payments, in July 2007, prior to the initiation of any government support programs, Paulson & Co. made a $15 million charitable contribution,” Paulson said in November 2008. “The institute supports local groups across the country providing legal representation to families facing foreclosure.”

Michael Waldorf, a vice president at Paulson, has also defended the donation. “We decided to make a positive contribution in addressing a serious economic problem. People are being thrown out of their homes,” Waldorf told BusinessWeek’s Eamon Javers. “And if they don’t have enough money to pay their mortgages, then they don’t have enough money to pay a lawyer.”

(A person familiar with the hedge fund’s business also noted that the donation to CRL came at the end of Paulson’s property-bubble strategy, not the beginning or middle. The subprime bubble had already burst, with lenders declaring bankruptcy and foreclosures spiking, by the summer of 2007. Paulson’s millions had for the most part already been made.)

The CRL says that Paulson’s donation did not go to capitalize its community banking arm, and therefore never funded subprime loans. CRL spokesperson Kathleen Day says that while the CRL does originate subprime mortgages, it provides vanilla 30-year mortgages. The organization expects higher-than-average default rates because of its low-income lending mission. Additionally, she notes that the CRL itself takes on losses from loans it repackages or originates.

“Every bit of that money went to help people facing foreclosure try to save their homes,” she says. “I’ll say it over and over and over again. It led to fewer foreclosures. If anything, it would have cost Paulson money by easing [the foreclosure crisis]. And the CRL, since 1999, has been arguing for changes to the regulatory and bankruptcy laws to prevent the foreclosure crisis.”

Still, Kerpen and the Issa letter fault the CRL for stoking the housing bubble through low-income mortgage lending. And Kerpen wants a broader investigation into the CRL and its lending, advocacy and lobbying practices. He wrote in his opinion piece that the CRL has “[escaped] the spotlight of investigation, but under [Sen. Chris Dodd's (D-Conn.) financial regulatory reform bill] the CRL is poised to accomplish most of its longtime goals and achieve sweeping new powers.” (The Dodd bill does not give consumer advocates new powers beyond creating, in the form of a new Consumer Financial Protection Agency, a new rule-making entity to consider their concerns.)

And on Friday, Kerpen reiterated the broad concern behind his argument about the Paulson donation to CRL. “We think that the financial crisis is being used as a pretext for vast new regulations that have nothing to do with what went wrong,” he told TWI. “We’re particularly concerned that the Consumer Financial Protection Act was attached to the Dodd bill, and CRL was the advocacy group that was responsible for making that happen.”

The CRL argues that it advocates only for the interests of those afflicted by predatory lending and underserved low-income and minority communities — and that its political mission is sound. “These are all the same charges that have been dredged up for the past two and a half years by organizations that are against reform,” said Day. “It’s the payday lenders and financial services industry groups and others getting fronts to oppose us and bringing up bogus charges. [This is part of] an effort to try to torpedo legislation that will benefit consumers.”

On Friday, Kerpen said that he does not know Paulson’s motivations, but is happy that the government is finally investigating. “It is possible it was a coincidence. And it is possible that [Paulson made the donation] to assuage his guilt about the Goldman deal,” Kerpen says. “But it is also possible that [Paulson and the CRL] were sharing information.”

Tomorrow, the subcommittee will release more than 500 documents on Washington Mutual, the $300 billion bank that helped fuel the subprime bubble and then collapsed in the biggest bank failure in U.S. history. It will also hold a hearing with WaMu executives, including Kerry Killinger, the former chairman and chief executive officer. Then, on Friday, the subcommittee — headed by Sen. Carl Levin (D-Mich.) — will release an investigative report, the fruit of 18 months of labor, into how the Main Street bank took on and eventually died due to Wall Street practices.

Details about the report started to emerge today. The company decided in 2003 to move aggressively into subprime lending to bolster earnings, ultimately producing $77 billion in mortgage-backed securities. The company changed pay practices to prize quantity over quality. And it “built a conveyor belt to dump toxic mortgage assets into the financial system like a polluter dumping toxic substances into the river,” Levin told reporters. Expect ugly revelations all week.

Flickr: Stallio

As a credit squeeze continues, calls to beef up financial literacy among America’s consumers are taking on a new urgency.

In Massachusetts, Democratic Senate candidate Stephen Pagliuca is pushing for a national financial literacy campaign, saying it would help avoid a repeat of the financial system collapse last fall. In Miami, which recently introduced citywide financial literacy programs, a top official called financial literacy “the new civil-rights problem of our century.” In the blogosphere, basketball superstar Magic Johnson is under fire for doing national commercials for Rent-A-Center, a leading firm in the costly rent to own business, and Jackson Hewitt, which offers high-rate tax refund anticipation loans. Critics contend Johnson is endorsing products that exploit a lack of financial sophistication among some low-income consumers.

[Economy1]Those consumers have much greater need these days for financial literacy, given that credit is becoming harder and more expensive to get. The Wall Street Journal last month declared the end of the “democratization of credit” that occurred over the last decade, detailing the woes of a low-income 28-year-old woman drowning in $36,000 worth of credit card and student loan debt, with little access to the easy credit she once tapped in recent years.

But despite that obvious need, most of the nation’s financial literacy efforts aren’t exactly up to the job. As credit expanded in past years, corporations threw money at financial literacy programs even as they continued marketing higher-rate credit cards and loans. Consumer credit and debt counseling agencies expanded into a $7 billion industry that now includes everything from legitimate organizations that help a consumer fix his finances to flim-flam outfits that charge high frees and leave a borrower in worse shape than before. Subprime lenders created “consumer advocacy” organizations and offered financial literacy advice.

The situation has become so troubled that some credit experts no longer believe many financial literacy efforts are even effective. Between complicated credit card agreements that trip up even law students to payday lenders providing financial education, they say, most of the attempts to educate consumers on their finances are either hopelessly tainted or simply don’t make a difference.

“If you’re a consumer in financial distress, there’s really no trustworthy guide for pointing you to the right solution – almost everyone has a stake in the game,” said Adam Levitin, a Georgetown University law school professor who specializes in bankruptcy and credit. “The problem goes deeper, though, as all sorts of consumer credit counseling organizations are funded indirectly by various credit industry players. I’m frankly more comfortable with openly for-profit debt settlement agencies (they negotiate debt reductions in exchange for taking a percentage for themselves) than with the faux not-for-profit players.”

Irene Leech, former president of the Consumer Federation of America and a Virginia Tech University professor who focuses on consumer issues, agreed.

“All education offered by the businesses that sell the product they’re educating on is subject to bias,” she said. “These companies don’t dare hit the points that need to be hit hard enough – or they’d lose business – so their efforts are at best disingenuous and at worst, fraud.”

As TWI has reported, the nation’s leading financial literacy effort, the JumpStart Coalition for Personal Financial Literacy, includes as one of its corporate partners CompuCredit, a subprime lender that offers high-rate credit cards and payday loans. Last year, CompuCredit reached a $114 million settlement with the Federal Deposit Insurance Corporation and the Federal Trade Commission, which had charged CompuCredit and two partner banks with deceiving hundreds of thousands of customers by failing to properly disclose upfront fees and credit limits on their cards.

In addition, JumpStart’s Southeast Regional Director, William Cheeks, a paid consultant, also does consulting work for CompuCredit.

JumpStart Executive Director Laura Levine told TWI that no one had previously brought these issues to JumpStart’s attention, and that the organization’s staff would investigate them. Last week, Levine said the organization plans to introduce a conflict of interest policy for staff and for consultants, in the wake of the story. The coalition’s governance committee also “is going to look further into CompuCredit in particular,” she said, and “we’re going to continue to deal with issues regarding the suitability of partners on a case by case basis.”

Like CompuCredit, other subprime lenders also aligned themselves in recent years with financial literacy efforts, or moved to portray themselves as good corporate citizens, by donating to local minority groups or sponsoring events in minority communities. In a campaign that particularly irked Leech, payday lenders ran an advertising campaign on Washington metro system, touting payday loans as a sound financial alternative.

Other high-rate lenders also are using similar tactics.
Ray Forgue, a retired University of Kentucky professor who taught personal finance, and who has written personal finance books and a textbook, now lives in South Carolina. Car title lenders “are everywhere,” he said, featuring advertisements that show consumers being allegedly financially savvy by taking out car title loans to pay for dental care. Car title lenders make loans using a borrower’s car as collateral, with interest rates that can approach 400 percent. Borrowers who can’t keep up with the high payments lose their cars, and then, in many cases, their jobs as well.

These kinds of tactics present a huge challenge for financial literacy efforts, Forgue said. Any financial literacy program has to both battle the saturation of subprime products that have made their way into the mainstream, and help consumers understand newer and more complex financial issues, from insurance to retirement planning.

“The products are far more complicated, both on the consumer credit and the investment side,” Forgue said. “Financial literacy definitely is much more important than it ever has been before.”

Leech, for her part, said the problem with financial literacy in recent years has been that funding for unbiased, professional counselors has been replaced by corporate dollars. One fix might be for the government to reinvest in the nation’s Cooperative Extension System, a national educational network supported by the U.S. Department of Agriculture that provides consumers with experts and research on many topics, including financial literacy. The cooperative system was created by Congress in 1914, and uses the resources of land grant colleges and universities to offer its non-formal, non-credit programs to the public. The system has offices in every state and a website with financial research and information, from budgeting during lean times to an “ask an expert” feature, with questions like how much allowance a child should get at a certain age.

Leech also supports the America Saves campaign, a nationwide effort run by the Consumer Federation of America to encourage low and moderate income households to change their financial behaviors, build up savings, and pay down debt. The campaign, the nation’s largest savings initiative, also sponsors an annual “America Saves Week” that encourages people to review their finances and improve their savings habits.

And the human resources departments of corporations and businesses are increasingly getting involved in financial literacy efforts, Leech added, since employees with financial troubles can be distracted or forced to miss work due to legal battles over debts.

But any financial literacy attempt faces an uphill fight. The attorneys general of 40 states recently asked the Federal Trade Commission to tighten regulation of companies offering debt relief services to consumers, saying the firms require customers to pay thousands of dollars in upfront fees, and then fail to renegotiate payments with creditors. The FTC will hear testimony this week on proposals for reform, as the battle over consumers and their money decisions continues, and the credit squeeze tightens further.

Flickr: Stallio

The payday lending industry, stung by losses in states that either refused to authorize their high-rate, short-term loans or moved to limit finance charges, isn’t giving up without a fight.

Payday lenders are out in full force in Wisconsin, where a legislative battle is underway over efforts to impose a 36 percent rate cap on payday loans, a move the industry claims will put it out of business. The next big battleground state will be Colorado, where payday lenders already are making financial contributions to minority groups to win favor, in anticipation of an upcoming legislative fight over payday reform. And in Washington, D.C., payday lenders have sharply increased their Capitol Hill spending and profile at a time when other types of political fundraising is on the decline, hoping to dissuade Congress from imposing any additional federal limits on the industry. Payday lenders also wary of a new Consumer Financial Protection Agency, which would have oversight of mortgages and other financial instruments, even though proposals don’t specifically single out payday lending.

Illustration by: Matt Mahurin

“Obviously, the industry has gotten its hat handed to it at the state level, and it appears to be spending a lot of time and money trying to win friends and influence people on the Hill,” said Jean Ann Fox, director of consumer protection for the Consumer Federation of America.

Not a single state has authorized payday lending since Michigan did so in 2005, Fox said. The last payday lender shut down and left Arkansas in August, not long after a crackdown by the state Attorney General. Voters in Arizona and Ohio last year approved rate caps on payday loans, despite aggressive opposition from the industry. In 2007, the District of Columbia approved a 36 percent rate cap, after a heated fight. The decisions have shifted the momentum in the payday lending battle, given that prior to the financial crisis, the industry regularly won victories at the state level to authorize their lending with no limits.

But payday lenders are gearing up for an alternative strategy. The industry believes it has found new support in arguing that payday loans, with annual interest rates that can reach 400 percent, are a cheaper alternative to overdraft charges. The industry is citing a recent USA Today analysis based on data from Moebs Services, an economic research firm. According to the analysis, consumers pay an overdraft fee of $26.68 every time they overdraw their account. So if consumers overdraw by $100, they’d pay an annual percentage rate (APR) of 696%, if the credit is paid back in two weeks – compared with an APR of 450% on a $100 payday loan with an average fee of $17.25, according to USA Today.

“The focus on overdraft protection on the Hill has helped legislators to understand that payday lending can be looked at as a cheaper alternative to overdraft charges,” said Steven Schlein, a spokesman for the Community Financial Services Association, the trade group for payday lenders.

Consumer advocates say that’s not necessarily true – and that neither of those high-cost options is a good one. Regardless, the industry has the money to get its message and arguments out in Washington. It doubled its lobbying expenditures in the last two years years to more than $4 million, according to the Center for Responsibility and Ethics in Washington. Top recipients of payday lending money in the 2008 campaign cycle include such influential lawmakers as Sen. Tim Johnson (D-S.D.), Rep. Luis Gutierrez (D-Ill.), who reversed his support for a payday lending ban and sponsored much weaker reforms after accepting substantial contributions from the industry, and Sen. Richard Shelby (R-Ala.).

“It’s not that many dollars, especially compared to other groups, but what’s striking is how much more the payday lending industry is spending than it used to,” said Naomi Seligman, a CREW spokesperson.

D. Lynn DeVault, board chair of the Community Financial Services Association, recently told Checklist, a trade publication for check cashing stores and payday lenders, that the industry is pouring its resources into Capitol Hill, increasing its federal lobbying budget by four times this year alone to fight off more than 14 bills in the House and Senate that affect payday lending. The group strongly opposes a measure that would cap rates on all consumer loans at 36 percent, co-sponsored by Sen. Richard Durbin, D-Ill. It even still dislikes the weaker bill sponsored by Gutierrez, who said in July that he would no longer accept industry contributions. Schlein said payday lenders will oppose in principle any payday reforms coming from Washington, contending that states should handle the issue.

DeVault said the group’s increased lobbying spending represents some 60 percent of its total budget, forcing it to cut back on consumer education and community outreach programs.

“We’re cutting back everywhere so we can put our resources behind this federal effort,” she told Checklist.

For that reason, Fox, of the Consumer Federation of America, doesn’t consider the payday lending fight anywhere near over, despite recent successes, including the 36 percent rate cap on payday loans to military personnel imposed by Congress in 2006.

“It’s always a concern,” she said. “Families burned by payday lenders don’t have the same Gucci Gulch ability to take on Congress.”

The industry’s efforts to fend off pending regulation in Washington are a twist on the tactics of financial services firms during the subprime boom. After lobbying from the lending industry, the Office of the Comptroller of the Currency in 2004 exempted banks and mortgage companies from tough state anti-predatory lending laws.

In states still facing payday reform fights, intense battles are underway.

In  Wisconsin, payday lenders have recruited 29 lobbyists for various payday reform proposals – the most lobbyists hired for a single issue in recent memory, said Gordon Hintz, D-Oshkosh, sponsor of the bill to impose a rate cap. Payday lenders also were the No. 1 campaign contributor during the first reporting period of this year, he said. Along with Hintz’s bill, other measures are being proposed in Wisconsin that would benefit payday lenders with lesser reforms, and have the industry’s support. Wisconsin is one of the last states without an interest rate limit on payday loans.

“It’s a gold mine here right now,” Hintz said, noting that even campaign consultants who helped get him elected have been lured to the opposition’s side. “I had no idea I’d be getting into something like this.”

As a result, it’s the “Mother Teresa coalition” of groups like the Catholic Conference and other nonprofits that support payday limits, up against the money and clout of payday lenders, Hintz said. “There is no interest group for people who were taken advantage of by payday lenders,” he said.

Hintz also said it was his understanding that payday lenders were tired of losing in other states, and as a result planned a major campaign in Wisconsin. Lawmakers are expected to consider payday lending reform proposals before the end of the year, he said.

In Colorado, the payday lending industry has been busy raising its profile and contributing to minority groups and events, said Matt Sundeen, senior policy analyst and general counsel with The Bell Policy Center, a nonprofit, nonpartisan research group.

Last month, former Denver Bronco Willie Green, director of corporate development and community outreach for the payday lender Advance America, presented the Urban League of Metropolitan Denver with a $10,000 contribution on behalf of his employer. Payday lender Moneytree for the first time sponsored the annual El Grito 5k run/walk, a major event for the Hispanic community.

Despite the industry’s financial clout, Sundeen said consumer advocates in Colorado are encouraged by the defeat of payday lenders in other states, where the industry far outspent opponents.”Clearly, they are very active in our state as well,” Sundeen said. “But we hope in 2010 we’ll be able to take care of payday legislation.”

It may not be that simple. In Ohio, where voters approved a 28 percent rate cap on payday loans last year, payday lenders are working to circumvent the law by continuing to make payday loans under two older consumer loan laws still on the books, said David Rothstein, a researcher with nonpartisan Policy Matters Ohio. “Those laws were never meant for payday loans,” he said. “The payday lenders are certainly doing everything they can” to continue making loans, he said.

Schlein, the industry spokesman, said payday lenders are keeping up the fight in Ohio, and will keep spending money in states where payday reforms are being considered. They also will work in Washington to prevent lawmakers from trying to put any limits on payday loans. “We always are going to fight hard,” he said.

Which means the battle over high-rate, short-term loans to people in financial distress won’t be over anytime soon.

But what I really liked about her piece — in addition to taking on a subject few have paid attention to during the crisis — is her description of a new subprime documentary, set in Baltimore.

In a new documentary film about the subprime crisis, “American Casino,” solid black citizens — a high school social studies teacher, a psychotherapist, a minister — relate how they lost their homes when their monthly mortgage payments exploded. Watching the parts of the film set in Baltimore is a little like watching the TV series “The Wire,” except that the bad guys don’t live in the projects; they hover over computer screens on Wall Street.

As TWI noted last week, lawsuits over racial discrimination in subprime lending are winding their way through the court system. Some of the allegations are nothing short of shocking; in one suit recently classified as a class action case, Wells Fargo is accused of using loan software with discounts on rates and fees in white communities, but forbidding loan officers in minority communities from access to it.

Wells Fargo has strongly denied these and other charges. But Ehrenreich’s report is further evidence that the conversation over the racial implications of subprime lending is shifting. It’s no longer just about blaming poor and minority borrowers for the crisis. Instead, the focus is turning to questions about the the morality of lenders, who discovered a gold mine in selling high-rate mortgages to minority communities, and took full advantage of it.

Flickr: TheTruthAbout...

Just a year ago, the theory that poor and minority borrowers were to blame for the housing crisis took hold with a vengeance, and so did the belief that the government forced lenders to make subprime mortgages to meet affordable housing goals. The view took on greater prominence in the heat of a presidential campaign, and an obscure anti-redlining law known as the Community Reinvestment Act became a scapegoat for subprime lending and the collapse of the mortgage market.

Illustration by: Matt Mahurin

Things have changed quite a bit since then, as the spotlight has shifted to lenders and their behavior during the boom. States and cities continue to aggressively pursue subprime lending discrimination suits, and judges across the country are signaling a willingness to move forward with some cases. As the lawsuits wind their way through the court system, more details and allegations about the inner workings of the subprime world are emerging. And as startling as some of the charges already have been — a former loan officer for Wells Fargo testified in one affidavit that employees regularly referred to minority borrowers as “mud people” and called subprime mortgages “ghetto loans,” — there’s even more ahead, said David Berenbaum, executive vice president of the National Community Reinvestment Coalition.

“The ‘smoking guns’ are coming out,” Berenbaum said, referring to possible evidence that lenders targeted minority communities and borrowers for higher priced loans. “And I expect more and more of these smoking guns to become apparent.”

In the latest development, a Superior Court Judge in Los Angeles recently certified a 2005 lending discrimination lawsuit against Wells Fargo as a class action case. The suit contends that area managers at the bank refused access in some minority neighborhoods to a software program that allowed for discounted prices on mortgage loans. Barry Cappello, a partner with Cappello & Noel in Santa Barbara, which represents some 10,000 to 20,000 borrowers in the suit, said he believes it is the first subprime lending discrimination suit in California to be classified as a class action.

According to Cappello, Wells Fargo introduced a program in 2002 called “Loan Economics,” which gave loan officers the authority to offer discounts to loan applicants. The savings on lower fees and interest rates could be significant, ranging from $500 to as much as $10,000 per loan. The suit claims that the Los Angeles area Wells Fargo manager refused to allow loan officers operating in certain minority neighborhoods to offer the program. Borrowers in predominantly white neighborhoods were given access to the software.

Cappello said the suit stemmed from complaints by black and Hispanic loan officers for Wells Fargo, who said they asked to use the software in their branches but upper management refused.

Wells Fargo is fighting the suit and has denied all the charges. In a statement, the bank said, “We are disappointed in this ruling and intend to vigorously defend this matter as the case proceeds. The decision does not indicate the court believes the underlying allegations have any merit. We feel the allegations represent a complete mischaracterization of our long-standing commitment to responsible lending and the pricing practices and tools we use. The policies, systems and controls we have in place ensure race is not a factor in the pricing or products we offer.”

The case could go to trial in about a year, Cappello said.

More lawsuits are expected in the near future over the treatment of Hispanic borrowers in Arizona and Texas, who were offered high-cost loans they didn’t understand at misleadingly low teaser rates, then refinanced into even more expensive loans than their initial mortgages, Cappello said.

Wells Fargo, the nation’s largest home lender,  also has been a target of lawsuits elsewhere. Last month, Illinois Attorney General Lisa Madigan sued the lender, alleging that blacks and Hispanics were sold high-cost subprime loans more frequently than white borrowers with similar incomes. The suit contended loan officers were offered incentives by the bank to steer borrowers into the more expensive loans, and that white borrowers generally received the lower-cost prime mortgages.

Some borrowers thought they were getting prime loans from Wells Fargo Home Mortgage, the suit also charged. But their loans actually came from Wells Fargo Financial, the bank’s subprime unit.

In Iowa, two watchdog groups charged this week that minority homeowners in Des Moines were three times more likely to receive high cost subprime loans from Wells Fargo than white homeowners.

In June, the New York Times reported on affidavits from a 2008 lawsuit by the city of Baltimore against Wells Fargo over subprime lending, which charged that the bank targeted blacks in Baltimore and suburban Maryland for high-interest subprime loans. Former loan officers testified in affidavits about using terms like “mud people” and “ghetto loans.” The bank also had an emerging markets unit that pinpointed black churches as fertile ground for selling subprime loans, according to the former officers. And in March, the NAACP filed suits in federal court in California against Wells Fargo and HSBC, alleging minority borrowers were more likely to be issued higher rate subprime loans than white borrowers with similar credit scores and qualifications. Both banks have strongly denied the charges. The NAACP also has pending litigation against nearly a dozen other banks and lenders over subprime lending discrimination.

Should the charges in the lawsuits be proven, it would amount to massive violations of the Fair Housing Act, the Equal Credit Opportunity Act, and other fair housing and lending laws, Berenbaum noted. Enforcing fair lending laws has been “an issue the government has failed to address over the past decade,” he said. Lenders could face criminal penalties from the government for violating fair housing laws, and they could be subject to punitive damages and fines from government lawsuits.

Big lenders like Wells Fargo and HSBC are obvious targets for suits because of their size and the amount of lending they did. In addition, many other lenders and originators of subprime loans have gone out of business, complicating efforts to address allegations of lending discrimination through lawsuits.

That leaves a major question regarding all the lending still unanswered, Berenbaum said: Where has the U.S. government been? The Federal Reserve reported in 2005 that an analysis of federal mortgage data found that blacks and Hispanics were more likely to receive higher interest rates on mortgage loans – and that it intended to examine the practices of 200 lenders as a result.

But nothing’s happened since that announcement, Berenbaum noted. Instead, as the years go on, and the government takes no action, allegations about price differences in mortgage loans based on the race of borrowers and their neighborhoods continue to grow.

Economists and media pundits — themselves mostly gentlemanly elites anxious to please corporate America — are slow to make the accusation that what happened here was truly criminal, and so miss the real story. The American people understand that when a group of bankers shuffle some paper unproductively and get away with hundreds of billions of dollars in bonuses, yet cause a loss of $40 trillion in global wealth and cause approximately 100 million people to become unemployed worldwide, there is only one word to describe it: criminal. [...]

Why isn’t the FBI breaking down the doors of the commercial and investment banks and grabbing computers so as to preserve incendiary e-mails that will most definitely implicate executives? Why are managements that caused this still in their jobs and still receiving bonuses? Are the bonuses paid to the folks at AIG that caused its collapse nothing more than hush money? How can the rating agencies still be in business? Why don’t we make one arrest and lean on the bankster to see if he will fold like the cheap suit that he is and name other conspirators? The FBI spends more time investigating $2,000 drug buys than they have to date investigating the biggest heist in the history of the world: $40 trillion, that’s trillion with a T, that’s 40 million bags each containing $1 million.

Talbott’s arguments bring to mind a recent investigative series by the Sarasota Herald-Tribune, which used public records to document who was behind the flipping and mortgage fraud that have decimated the area, with $450 million in defaulted loans.

Nearly 40 percent of the people involved in questionable flips in Sarasota and Manatee counties were industry insiders — real estate agents, developers, lawyers and mortgage brokers. Of the 37 groups discovered by the newspaper, 21 were organized by real estate agents or mortgage brokers.

Some of the people who organized or participated in flips were considered leaders of their profession. One was recognized as one of the top 50 Re/Max real estate agents in the world. Another won multiple awards from the Mortgage Bankers Association of Florida. Some flippers identified by the Herald-Tribune were seen as key clients by local banks and were allowed to pick their own appraisers or had loan approvals expedited to quickly close deals.

In the email thread, Johnson agrees that more criminal investigations are called for, but points out that investigations can be lengthy and more charges actually may be on the way. He adds that an equally worrisome problem were the actions during the crisis that were perfectly legal — such as campaign contributions to politicians who did the bidding of the financial industry.

That’s true, but the criminal piece of this shouldn’t get left behind. I’ve heard the argument before that numerous criminal investigations are ongoing and it’s just a matter of time before we begin to see more prosecutions — but I’ll believe that when I finally see it. In the meantime, the Sarasota stories point out that the real estate industry has a responsibility to do a much better job of policing itself. Award-winning agents who engaged in flipping schemes based on fraud should be hounded out of the profession. And if the industry won’t do it on its own, then someone else needs to do it for them, either by aggressive criminal investigations and prosecutions or some kind of public censure.

As it stands now, everyone up and down the line is getting away with it when it comes to predatory mortgage lending, from the brokers at the bottom to the investors at the top. As Talbott points out, it’s not hard for the American public to figure out that something criminal went wrong in a $40 trillion meltdown. Now it’s the justice system’s turn to do the same.

I’ve run out of patience with tired memes and discredited claims by fools and partisans.

The rhetoric of those pushing nonsense on the public in an attempt to confuse rather than illuminate  — the phrase is “agnotology” –  only serves to aid the lobbyists working on behalf of the Banks and Investment houses to maintain the status quo.

All is well, nothing to see here, move along.

Well, its time to put up or shut up: I hereby challenge any of those who believe the CRA is at prime fault in the housing boom and collapse, and economic morass we are in to a debate. The question for debate: “Is the CRA significantly to blame for the credit crisis?”

A mutually agreed upon time and place, outcome determined by a fair jury, for any dollar amount between $10,000 up to $100,000 dollars (i.e., for more than just bragging rights).

I can’t help but applaud this. No matter how many times it has been shot down, the blame-the-CRA myth keeps coming back to life. As TWI has explained, the CRA, a 1977 anti-redlining law, didn’t even cover the unregulated lenders who made most of the subprime loans during the housing boom. There’s simply no evidence for this assertion.

The movement to blame the CRA started during the fall campaign season, seized by conservatives as a convenient scapegoat for the financial crisis. It  came back to life recently, when bloggers like The Atlantic’s Megan McArdle picked up on Clusterstock postings by John Carney, once again citing the CRA as regulation gone wrong.

As McArdle put it, the CRA’s role in the crisis is “understated by liberals who are unwilling to admit that regulation, too, can produce hideous unintended consequences.”

Felix Salmon at Reuters has knocked down most of this. But I’d like to add something that’s regularly missed in the CRA debate. What the anti-regulation types miss is that the CRA never was much of a regulation to begin with. As Guy Cecala, publisher of Inside Mortgage Finance, which covers the subprime industry, told TWI, lenders never took the CRA all that seriously to begin with. The lending industry viewed the CRA as an extremely loose regulation. Lenders joked about how you’d have to mug an elderly, disabled, minority woman in a wheelchair to lose your positive CRA rating.

How that got turned on its head so that the CRA has become a symbol of regulation gone wrong is an example of what happens when idealogues who don’t know how an industry really works take over the debate. If Ritholtz’s bold offer gets some of this out on the table — and then off the table for good — it’s all for the better.

Salmon reports that Carney may be willing to take up Ritholtz on the challenge. So let the games begin. And let them put an end to the blame-the-CRA movement for good.

Fremont General Corp. once one of the nation’s top 10 subprime lenders, has agreed to pay $10 million to resolve charges it preyed on low-income borrowers and used misleading terms to sell them loans they couldn’t afford, the Boston Herald reports. The Herald called Fremont “America’s most notorious subprime mortgage firm.” And according to Massachusetts Attorney General Martha Coakley, who brought the suit against Fremont, its practices provided a model of the kind of predatory lending that caused the housing crisis.

The Attorney General’s Office filed suit on October 5, 2007, in Suffolk Superior Court against Fremont and its parent company, Fremont General Corporation based on the defendants’ unfair and deceptive loan origination and sales conduct. The complaint specifically alleges that the company was selling risky loan products that it knew was designed to fail, such as 100% financing loans and “no documentation” loans.  The complaint further alleged that the company sold these loans through third party brokers and provided financial incentives to these brokers to sell high cost products.

That pretty much covers just about everything that went wrong with lending during the boom.

Fremont is in bankruptcy now after shuttering its subprime lending operations. But the settlement is still noteworthy, as a reminder of the kind of lending that went on. It also means Fremont finally faces some consequences for its predatory behavior — along with the $10 million fine, Fremont agreed to not foreclose on “unfair” loans, Coakley’s office said. That means at least some borrowers who got steered into high-rate Fremont loans will get a break.

Speaking of foreclosures, just last week we noted the sad case of an 85-year-old widow in California who was losing her home of 50 years to foreclosure.

Her lender? Fremont.

Maybe it’s California’s turn to face down the neighborhood bully.

Gillam, a widow, said she has owned hair salons and baby supply stores for decades. When her baby store hit a rough patch, she borrowed $412,500 in 2005 and then refinanced with Fremont Investment & Loan for $556,000 in 2006. Before those two loans, her home had been paid for, she said.

The $556,000 is gone and so is her business, Gillam said.

“I am broke,” she said.

Gillam has no one to turn to for help, she said.

“I have no family,” she said. “All mine are dead.”

Mortgage Insider’s Matthew Padilla says he’s seeing evidence that more new foreclosures involve people who cashed out the equity from their homes, as Gillam did, and not from people who bought homes at the height of the boom.

The lender in this case, Fremont, was a major subprime firm that went out of business last year, done in by the subprime market meltdown. Fremont was the target of several state investigations into predatory lending, accused of selling high-rate loans to borrowers who couldn’t afford them.

Gillam isn’t alone in her inability to save her house. The New York Times reported that the Obama administration’s housing rescue plan hasn’t rescued all that many homeowners so far. It highlighted the case of Eileen Ulery, who called her lender, Countrywide (now Bank of America), to alter her loan after she lost her job. Countrywide tried to sell her another loan with a higher interest rate.

Ulery is 63 and lives alone in a modest, two-bedroom condo in suburban Mesa, Ariz. She used equity from her home during the boom to buy a car, a Hyundai, and fix her roof. She used to bring home $1,000 every two weeks from her job as an executive assistant at Arizona State University. But she lost the job in a round of budget cuts. She’s not late on her mortgage yet — but she’s headed there.

Ulery should be eligible for a loan modification under the Obama administration’s plan. But a Bank of America spokesman told the Times she was offered refinancing instead because the bank doesn’t yet have a system in place to offer loan modifications to borrowers who aren’t seriously delinquent.

As you go about your day today — maybe buying coffee, going for a run, rushing off to work — it’s unlikely you’ll have on your mind the nation’s housing crisis and the people who represent the statistics behind all those foreclosures.

But sometime today an 85-year-old widow in California will lose her home of 50 years in an auction at a civic center, and a 63-year-old woman in Arizona will prepare to lose hers, with nowhere to turn for help.