Hearings

Because of these considerations, we request that the Council before forwarding any proposed package of consumer legislation to Congress, consider seeking from Congress, instead, the broadest authorization possible to legislate in all areas relating to consumer credit sales and loan abuses, including interest rates, insurance requirements, and other areas where Congress, by already enacting specific laws has reserved to itself power to further legislate. With that authorization the Council itself could enact comprehensive consumer protection laws of the type now proposed by the Commission.

MARIBETH HALLORAN, Neighborhood Legal Services Program, Washington, D.C.

JOSEPH F. SMITH,

Washington, D.C.

Neighborhood Consumer Information Center,

DISTRICT OF COLUMBIA CITY COUNCIL REPORT

To: Council Members.

From: Sterling Tucker, Chairman, Housing and Urban Development Committee. Date: September 15, 1970.

Subject: FHA/VA Regulation

The Housing and Urban Development Committee has often outlined the vast dimensions of the housing crisis confronting the District of Columbia. Within this larger crisis, there has developed a critical shortage of mortgage financing with which to rehabilitate and build decent, affordable housing for our low and moderate income citizens. Housing construction under the Government subsidy programs has come to a complete standstill. Other moderate income housing supported by FHA mortgage insurance has been smothered by the large discount that must be paid in order to obtain financing. The lack of mortgage financing in some measure has been caused by the fact that the current 82% interest rate on FHA insured mortgages is in excess of the District's 8% usury ceiling. Under current law, the interest rate applicable to FHA and VA mortgages is established by the Secretary of Housing and Urban Development.

Though mortgage financing has been in short supply in the District of Columbia for several years, the situation initially reached a critical point when the Federal National Mortgage Association (FNMA) last fall announced that it was withdrawing from the secondary mortgage market in the District of Columbia because of its legal judgment that the prevailing interest rate in combination with discount points paid by the seller was in violation of the District's usury law. FNMA subsequently rescinded this action and agreed to purchase FHA and VA mortgages in the District. Shortly thereafter, the Secretary of HUD raised the interest rate on government-supported housing loans from 72% to 8%, a rate which on its face exceeds the District's 8% interest rate limit.

In response to these developments, the Council and the Mayor submitted legislation to the Congress that would exempt FHA and VA mortgages from the District's interest rate limit. I testified before both the House and Senate District Committees in support of the legislation. The bill gained easy passage in the Senate, was approved by the House District Committee, but was defeated on the floor of the House. On the same day that the House of Representatives rejected the bill, it passed and sent to the Senate a separate bill that exempted loans granted to rural electrification cooperatives from the District's usury limit. In the Senate, that bill was amended by adding a section that would authorize the D.C. Council to exempt from time to time FHA and VA mortgages from the effect of the usury law. Several weeks ago, this bill passed the House and was adopted by a House-Senate conference and later by both houses of Congress. This Committee has moved expeditiously to implement this legislation by, first, securing immediate publication in the D.C. Register, as is required by the Administrative Procedure Act, and then by setting a date for a public hearing.

On September 8, 1970, the Committee held a public hearing to review the major issues surrounding a regulation to implement the terms of the legislation. All invited witnesses were sent a copy of the legislation and a proposed regulation that would have exempted all FHA and VA mortgages. In addition, letters were sent to leading banks and savings and loan institutions asking for comments on the proposed legislation and an indication of the extent to which they were involved in FHA and VA mortgage financing in the District of Columbia.

Testifying at the hearing were Walter Fauntroy and Channing Phillips, representing MICCO and HDC; Henry Nichols and Rudolph Taylor, representing real estate groups involved in selling FHA and VA supported housing; Thornton Owen and Joseph Mahoney, representing financial institutions involved with providing mortgage money. The Committee also heard from witnesses representing consumer groups and other organizations deeply concerned with housing in the District.

There is universal agreement that, at a minimum, the Council should exempt FHA and VA mortgages receiving government interest rate subsidies. However, there are two other issues about which there was some disagreement: (1) the length of time the exemption should be in effect and method of reviewing it, and (2) whether or not the exemption should cover all FHA and VA mortgage programs or only those receiving interest subsidy.

Method of Reviewing the Exemption and Length of Time

The Committee has narrowed to three the alternatives on the question of how the Council should review the exemption. First, the Council could adopt a regulation that would be open-ended, subject only to periodic Council review of existing mortgage market conditions. Second, the regulation could provide for an automatic repeal after a specified period. Third, the regulation could expressly direct the Housing and Urban Development Committee to review mortgage market conditions and the impact of the exemption during a specified period, requiring the Committee to make a specific recommendation at the end of that time as to whether or not the exemption should be continued.

It is the recommendation of the Committee that the third alternative be adopted. The first laternative-that of an open-ended exemption-is unacceptable, in our judgment, becuase the higher interest rates that will result from the exemption, as a matter of public policy, demand formal review procedures. As this Committee has observed on many occasions, higher interest rates are not the solution to the problem of mortgage financing, and a FHA/VA usury exemption can only be a short term solution. The second alternative of automatically repealing the regulation at the end of a specified period also poses many difficulties. It will take several months before the impact of the regulation can be measured, and an automatic repeal provision may serve to artificially inhibit the willingness of financial institutions to commit funds for FHA and VA mortgages. The alternative the Committee is proposing has the advantage of providing flexibility, while at the same time, creating a formal review procedure under which the Council will be required to make a judgment as to whether the exemption should be continued. It would seem that this would not inhibit investment in quite the same way as an automatic repeal provision.

It is further recommended that the Council direct the Housing and Urban Development Committee to report at the end of a ten month period. This gives the Committee a sufficient amount of time to gauge the impact of the exemption, and at the same time allows mortgage financing to develop some momentum. We believe this is a sound approach and strongly recommend it to you. It should be added, however, that this ten month time period is not intended to preclude the Council from repealing the exemption at an earlier time should there be some dramatic development requiring such a change.

Extent of Exemption

The central remaining question is whether the Council should adopt a regulation exempting all FHA and VA mortgages or only those receiving federal interest rate subsidies. This question does not resolve itself easily, but it is the recommendation of this Committee that the Council, at least for the present, adopt a full exemption which includes all FHA and VA programs.

The issue arises because where the federal government provides an interest rate subsidy, all interest over 1% is absorbed by the federal government. Thus, the increased interest cost is not passed on to the housing consumer. We are assured that upon Council adoption of the exemption several hundred units of low and moderate income housing will receive financing. Most of these projects have been stalled solely because of the interest rate crisis. As I mentioned, all witnesses testifying at our public hearing supported, at a minimum, exempting FHA interest rate subsidy mortgages.

The larger question remains, however, as to whether a broad exemption for all FHA and VA mortgages should be adopted. One disadvantage of the broad exemption is obvious. Any additional interest rate that is charged as a result of the exemption must be borne by the purchaser of the housing and not by the federal government, as is true under the interest rate subsidy program. The Committee has been urged, for this reason, not to exempt such mortgages. We are deeply

sympathetic with the plight of the moderate income home buyer who must pay increased amounts for his housing. But we are not convinced that this is a greater evil than denying them the right to purchase a home. We believe that moderate income families who desire to purchase a home and who are willing to pay a higher but still reasonable interest rate should be allowed to do so. If the Council were to fail to exempt these mortgages, returning Viet Nam veterans would find it very difficult, if not impossible, to obtain the highly favorable benefits available under the Veteran's Administration Program. This is also true for other moderate income families, such as teachers, policemen, and firemen, who often can only obtain housing with the assistance of FHA programs. We believe it is unfair to deny these families an opportunity to own a home.

Also, this has some importance to the well-being of the District, because by denying the exemption to the moderate income families we only deny them the opportunity to buy a house in the District of Columbia. They can go to Maryland or Virginia to purchase a home, paying 82% interest. The District can no longer afford to lose middle class, home owning citizens who provide needed tax revenue and stability to our community.

As we have said, higher interest rates are not the solution to the problems of mortgage financing in the District. It is clear that even when interest rates in the District were competitive, many financial institutions did not significantly contribute to the providing of financing for low and moderate income District families, but rather invested in slum speculation and suburban housing. According to statistics developed by Congresswoman Leonore Sullivan's Ad Hoc Subcommittee on Heme Financing Practices and Procedures, 35% of the loans given by a sample of District's financial institutions were to absentee owners. Fifty-six percent of the mortgages by the savings and loan institutions were to borrowers living in middle-upper income neighborhoods in the District and in the suburbs. As Mrs. Sullivan's subcommittee observed:

"The time has arrived to call the private money sector of the Nation's economy to account and to determine whether it can and will meet the housing requirements of all the Nation's people or whether new public vehicles must be designed and established to fill the unmet need."

It may be that the ultimate answer is national legislation. Congressman Wright Patman and Congresswoman Leonore Sullivan in their dissent to the Report of the Commission on Mortgage Interest Rates recommended a number of solutions, such as making available for mortgage financing government trust funds like social security. This Committee does not have sufficient evidence to know what a final answer might be, but we do know that we must search for more adequate solutions. Between now and the time when we must report back to the Council, this Committee will explore the extent to which local financial institutions are contributing to the solving of our housing crisis. We will meet with representatives of local financial institutions to assess their ability and willingness to enlarge their involvement in financing low and moderate income housing. Periodically, over the next ten months we shall ask them to supply us with firm data and statistics relating to their participation in FHA and VA financing.

We have been asked to develop some guidelines as to the specific amount of investment expected by the Committee. We believe it is too early to develop specific figures, but at a minimum, if the FHA and VA interest rate exemption is to continue, our expectation is that all financial institutions must substantially increase their involvement in providing financing for low and moderate income home purchases. We note from recently gathered statistics that there are a number of institutions with substantially less than 50% of their in-force loans made in low and moderate income areas of the District. We are reluctant to establish a firm formula at this time, but we believe that it is an idea worth pursuing. We would expect that a savings and loan institution chartered to do business in the District would be willing to serve the community by providing at least one-half of its loans to low and moderate income families in the District, who are most in need of such assistance. This sets an expectation and a basis for our reviewing the impact of the regulation so that we can make a recommendation to the Council in ten months not only with respect to whether the exemption should be continued, but also with respect to legislative solutions that might be necessary, should an exemption not result in substantially more mortgage financing for low and moderate income families in the District.

Mr. Chairman, I move that the Council adopt the attached Regulation which exempts FHA and VA mortgages from the District's usury law and directs the Council's Housing and Urban Development Committee to review the impact of the regulation and make a recommendation as to whether it should be continued no later than August 1, 1971.

Regulation No.

TITLE

16.

Regulation

.of the

District of Columbia

Enactment Date

EXEMPTION OF CERTAIN LOANS AND MORTGAGES FROM THE USURY
LAW OF THE DISTRICT OF COLUMBIA

WHEREAS, chapter 33 of title 28 of the District of Columbia Code provides that interest on loans made in the District shall not exceed eight percent per annum; and

WHEREAS, the District of Columbia Council is authorized by Section 2 of the Act approved August 28, 1970 (Public Law 91-335) to exempt from the provisions of such chapter 33 mortgages and loans insured or guaranteed under the National Housing Act or chapter 37 of title 38 of the United States Code, if the interest rate on the mortgages and loans is subject to regulation by an officer or agency of the Federal Government; and

WHEREAS, Section 3 (a) of the Act approved May 7, 1968 (Public Law 90-301) authorizes the Secretary of Housing and Urban Development to establish the maximum interest rates for certain mortgage insurance programs authorized by the National Housing Act, and the Secretary, pursuant to such authority, has fixed at eight and one-half percent the maximum rate of interest on mortgages insured under such programs on and after January 5, 1970 (35 F.R. 179; 24 CFR, Chapter II); and

WHEREAS, Section 1803 (c) (1) of chapter 37 of title 38 of the United States Code authorizes the Administrator of Veteran's Affairs to establish the maximum interest rate on loans guaranteed or insured under that chapter and the Administrator, pursuant to such authority, has fixed at eight and one-half percent the max.m.m rate of interest on real estate loans made on and after January 5, 1970 (35 FR.181;

Submitted on first reading at a meeting of the District of Columbia City Council on

I hereby certify that this regulation is true and adopted (or readopted) as stated therein.

P-251

Date

Secretary of the City Council

Certified copies are available.

2.of.?..

Section 3.

1234

38 CFR 36.4311 (a)); and

WHEREAS, the Council has determined that if the urgent housing needs of the people be met, the present state of the mortgage market in the District requires that mortgage and loans insured or guaranteed under the National Housing Act or chapter 37 of title 38 of the United States Code not be subject to the interest rate limitations of chapter 33 of title 28 of the District of Columbia Code.

NOW, THEREFORE, BE IT ENACTED by the District of Columbia Council that:

Section 1.

Mortgages and loans insured or guaranteed under the National Housing Act or chapter 37 of title 38 of the United States Code, the Interest rates of which are subject to regulation by an officer or agency of the Federal Government, are exempt from the provisions of chapter 33 of title 28 of the District of Columbia Code.

Section 2.

The Housing and Urban Development Committee of the District of Columbia Council shall review the effect of the exemption provided in Section 1 to assess the extent to which such exemption results in a greater availability of mortgage financing for low and moderate income families and to gauge the impact of such exemption on such families. The Committee shall report its findings and shall make a recommendation as to whether such exemption should be extended and as to legislation to remedy the shortage of mortgage financing, should that continue to be the case, no later than August 1, 1971.

This Regulation shall take effect immediately upon enactment.

3'2

P-110

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