Banks Bomb on Stress Tests for Minority Lending

A buoyant Treasury Secretary Timothy Geithner reassured the public that the big 19, that's the 19 giant banks and financial houses that to hear Geithner tell it the fate of Western capitalism rests on, have passed the Treasury imposed "stress" test with if not flying colors, at least steady drip colors. That wasn't hard to do. Taxpayers greased the skids of the 19 with more than $50 billion in handouts. And the stress tests were puff ball tests that imposed neither tough nor new government enforced financial requirements or restrictions on the banks.

The debate rages just how much taxpayer cash the banks and financial houses really need, how much more they'll need, how long they'll need it, and will the money really ensure permanent solvency. But forgotten in the hubbub over the Geither glossed report is the painful fact that thousands of black and Latino homeowners are still left holding the financial bag for the sub prime mess that taxpayers are forced to bail the banks out of.

Two reports by Fair Finance Watch and the Center for Public Integrity on mortgage lending practices, issued on the eve of the Geithner bank stress test report, revealed that from 2005 to 2007 the 19 bailed out banks and financial houses got into hock to taxpayers to nearly one trillion dollars. They ran up the bulk of the debt through the toxic sub prime loans to mostly minority home buyers. The banks ran up the debt through holding companies, investment houses, financial and real estate subsidiaries and through stock purchases and sales.

The reports also showed that the sub prime loans did little to help revitalize grossly underserved minority communities. In fact Bank of America which holds its cup out for another $ 34 billion taxpayer hand out 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 B of A was hardly the sole loan 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 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 taxpayer bail out cash. Income had little to do with who the lenders pitched their sub prime loans to. Race and the neighborhoods they lived in were the prime determinants. A HUD study found that upper income blacks were one-and-a-half times as likely to have a sub prime loan as persons that lived in low-income white neighborhoods.

Sub prime lending at times took on elements of loan racketeering; a racket that hurt and still hurts tens of thousands of would be black and Latino homeowners. The lender's bait and switch tactics, the deliberately garbled contracts, deceptive and faulty lending, questionable accounting practices, and charged hidden fees, all with the connivance of sleepy-eyed see-no-evil oversight of federal regulators, are well known and documented. Their snake oil loan peddling wreaked havoc with thousands of mostly poor, strapped homeowners.

The recent reports on the lending practices of the top banks, though, make clear, that they 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 sub prime 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 rise in its profits.

Sub prime lending albeit highly profitable for a brief time was not a crushing risk for the banks when the loans went sour. The banks offset their losses through tax write offs, increased loan and service fees and charges, lower saver interest rates, and stock sales and swaps. They have one more trump card to cleanse their toxic debt: the taxpayer's pocketbook.

They have played that card magnificently. The great flaw in all this is that banks are still largely left to self-police themselves. They determine how much they'll lend, and to who. They will continue to make loans to minority home buyers, 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 those loans. That's a stress test that the banks won't have to take, let alone pass.