Drained Wealth, Withered Dreams
The Disparate Impact of
Predatory Lending in the Twin Cities
ACORN Housing Corporation
757 Raymond Avenue, Suite 200, St. Paul, MN 55114
651-203-0008
Drained Wealth, Withered Dreams
A study of the Disparate Impact of Predatory Lending in the
Twin Cities
Table of Contents
- Introduction
. . . . . P. 3
- Summary
of Findings . . . . . P. 8
- Map
of Subprime Refinance Lending Patterns in the Twin Cities . . . . . P. 11
- Findings
. . . . P. 12
- Metrowide
Trends . . . . . P.12
i.
Low and Moderate Income Neighborhoods
ii.
Minority Neighborhoods
iii.
Low and Moderate Income, White neighborhoods
- All
Cities in Hennepin and Ramsey Counties . . . . . P. 17
- Minneapolis
and St. Paul neighborhoods . . . . . P. 20
- Individual
census tracts . . . . . P. 25
5. Methodology . . . . . P. 29
- The
exclusion of low and moderate income neighborhoods from the economic
mainstream . . . . . P. 30
- Half
of all subprime borrowers may have qualified for a better loan . . . . .
P. 32
- Predatory
Lending Practices . . . . . P. 33
- Recommendations
. . . . . P. 39
- About
ACORN and ACORN Housing . . . . . P. 43
- Endnotes
. . . . . P. 46
We gratefully acknowledge the University of Minnesota’s
Center for Urban and Regional Affairs (CURA) Graduate Research Assistant David
Tyler McKay for conducting the research which made this report possible and the
St. Paul Foundation, Otto Bremer Foundation, and Headwaters Fund for supporting
our work against predatory lending.
INTRODUCTION
David and Dorothy have owned
a home in North Minneapolis for over 10 years.
They received a loan solicitation in the mail for $5,000 from Household
Finance in the form of a live check. Shortly after they deposited the check, a
Household representative called them and said he knew they had some more credit
card debt, and that he could loan them some more money to pay off the cards.
David and Dorothy’s only
income is $1,100 a month from SSI, and they already had a first mortgage
payment of $439 to another lender. Although they needed the money, they were
very concerned about being able to afford the new loan and wanted to make sure
that they didn’t lose their house. The Household representative told them that
the interest rate would be 14% with a monthly payment of $239, and that the
loan would not be secured by their house. The loan ended up being at
21.75% interest with a monthly payment of $535 and was secured by their
house.
David and Dorothy are now behind on their loan and facing
foreclosure.
------------------------------------------------------------------------------------------------------------
Sylvia Barron is a 66 year old homeowner who lives on the
East Side of St. Paul. She earns $9.41
an hour at a knitting factory where she has worked for almost 20 years and receives
$781 a month from social security. Since
1995, she has refinanced her house several times and taken out several second
mortgages, all after being solicited by the lender or finance company. The lenders took advantage of Ms. Barron and
despite her good credit, charged her high interest rates and fees. She recently had to file bankruptcy and is in
danger of losing her house.
In December 1998, she refinanced with Alpine
Mortgage. Although her new loan did give
her a lower monthly payment, Ms. Baron was unaware that she had been given a 10
year balloon mortgage. In 10 years, when Ms. Baron would be almost 75 years
old, and after she had paid $538 a month for the 10 years, totaling over
$64,560, she would have only paid about $9,000 on the principal, and she would
have to make a balloon payment for the balance of the loan, $64,913, or face
foreclosure.
In April 2000, Ms.
Baron received a call from Conseco Finance, with whom she had a small account
through her Menards charge card. Conseco
told her that they could lend her some additional money and that she could
probably get an 11% or 12% interest rate.
Conseco sent someone out to her house to have her sign
the papers, which were actually for a much higher interest rate, which Ms.
Barron was not told about. Ms. Barron was given two loans. The first loan was at 13.95% interest and was
for $21,000, which paid off an existing loan Ms. Barron had for $17,125 and
which she was not looking to refinance. $2,302, or 11% of the loan, went to
Conseco for fees and Ms. Barron received the remainder, just $1,382. The second loan which was at 19.99% interest
was for $10,000, of which $1,077, also 11% of the loan, was for fees.
The dramatic increase in
subprime loan originations in the last decade and the concurrent rise in the
incidence of abusive lending practices have created a crisis of epidemic
proportions for communities of color, elderly homeowners, and low-income
neighborhoods – the plague of predatory mortgage lending. The above family is just one of the thousands
of unsuspecting Minnesota homeowners who have been robbed by a predatory
lender, and these modern day loan sharks continue to sink their teeth into new
victims every day.
While much attention in the Twin
Cities has been paid to the issue of “property flipping,” which is a kind of
fraud in the sale of homes, there is much less awareness of the problem of
predatory lending in the refinance and home equity markets, which, judging by
the numbers, may be an even bigger problem.
In 1999 in the Twin Cities, subprime lenders made three times more
refinance loans than purchase loans, and this difference may be even greater in
subsequent years. Whereas rising housing prices and heightened awareness have
greatly slowed the numbers of new property flipping victims, the problem of
predatory lending with refinance and home equity loans has continued
unabated. In fact, the dramatic increase
in home values in the Twin Cities has exacerbated this problem by making
more homeowners targets for predatory lenders intent on stripping their equity.
While not all subprime
lenders are predatory, the overwhelming majority of predatory loans are
subprime, and the subprime industry is a fertile breeding ground for predatory
practices. Subprime loans are intended for people who are unable to obtain a
conventional prime loan at the standard bank rate. The loans have higher interest rates to
compensate for the potentially greater risk that these borrowers represent.
There is a legitimate place for flexible loan products for people whose credit
or other circumstances will not permit them to get loans on “A” terms. Predatory lending occurs when loan terms or
conditions become abusive or when borrowers who would qualify for credit on
better terms are targeted instead for higher cost loans. Unfortunately, these
problems pervade too much of the subprime industry.
The Chairman of Fannie
Mae, Franklin Raines, estimated that as many as half of the borrowers who
receive a high cost subprime loan could have instead qualified for a traditional
mortgage at a lower interest rate[i]. Other borrowers who are not in a position to
qualify for an “A” loan are also routinely overcharged in the subprime market,
with rates and fees which reflect what a lender or broker thought they could
get away with, rather than any careful assessment of the actual credit
risk. Incentive systems which reward
brokers and loan officers for charging more make this a widespread problem.
Other abusive loan
practices include: making loans without regard to a
borrower’s ability to repay; padding loans with exorbitant fees; requiring
borrowers to purchase unnecessary credit insurance; using high-pressure tactics
to encourage repeated refinancing by existing customers and tacking on extra
fees each time, a practice known as “flipping”; saddling borrowers in high cost
loans with onerous terms such as balloon payments and prepayment penalties;
obstructing customers from refinancing with other companies to gain better
terms; and misrepresenting the specifics of the loan.
Predatory lending practices are even more insidious because
they specifically target members of our society who can least afford to be
stripped of their equity or life savings, and have the fewest resources to
fight back when they have been cheated. This report has a number of disturbing
findings detailing how minority and low-income communities are the target for a
disproportionate number of subprime loans. For instance in 1999:
· In
Hennepin County, the Phillips/Whittier neighborhoods in Minneapolis received 68
subprime refinance loans, more than the 55 subprime refinance loans in all of
Minnetonka. In contrast, though,
Phillips/ Whittier had just 104 prime refinance loans -- 10 times fewer than
the 1,086 prime refinance loans in Minnetonka.
· In Ramsey County, the North End neighborhood
in St. Paul had 75 subprime refinance
loans, more than the 69 subprime refinance loans in Arden Hills, Vadnais
Heights, Falcon Heights, Shoreview, North Oaks, and Long Lake combined. These suburbs, however, had a combined total
of 1,190 prime refinance loans, 5 times more than the 224 prime refinance loans
in the North End.
Predatory lenders seek to take advantage of homeowners who, after years
of real and perceived bank discrimination, may feel that they have no other
options. The historical neglect by banks
and Wall Street investment firms have effectively shut these communities out of
the economic mainstream and created a credit void which is now too often being
filled by unscrupulous, overpriced lending.
In October 2000, ACORN released a report entitled “Separate
and Unequal: Predatory Lending in America.”
The report documented the prevalence of subprime lending among minority
and low-income families and the creation of a type of financial apartheid.
Nationally, African-American homeowners who refinanced were
almost 4 times more likely than white homeowners to receive a subprime loan,
and Latinos were almost twice as likely.
Low-income white homeowners were three times more likely than
upper-income white homeowners to receive a subprime loan when refinancing, and
moderate income white homeowners were more than twice as likely as upper income
white homeowners to receive a subprime loan[ii].
In the Twin Cities, ACORN found similar and in some cases
even more disturbing patterns:
· African-American
homeowners who refinanced[iii]
were 5 times more likely than white homeowners to receive a subprime loan, and
Latino homeowners who refinanced were twice as likely as white homeowners to
receive a subprime loan. Subprime
lenders accounted for 41% of all the refinance loans made to African-American
homeowners and 17% of all refinance loans made to Latino homeowners, but just
8% of the refinance loans made to white homeowners.
· The racial disparity
was still present when comparing minority borrowers with white borrowers of the
same incomes, especially among higher income borrowers. One out of every six refinance loan received
by upper-income African-Americans was from a subprime lenders, as was one out
of every nine refinance loans received by upper-income Latinos. In contrast,
just one out of every 25 of the refinance loans received by upper-income whites
was from subprime lenders. In
addition, upper-income African-Americans were more likely than low-income
whites to receive a subprime loan when refinancing.
· The situation was even
worse for low and moderate income African-Americans. Subprime lenders
accounted for almost two out of every three refinance loans, 63%, received by
low-income African-American homeowners and half of the refinance loans made to
moderate-income African-American homeowners.
· Subprime lenders also
target lower income white homeowners. Subprime
lenders made 17% of all refinance loans received by low-income white homeowners
and 12% of all refinance loans made to moderate income white homeowners,
compared to just 4% of the refinance loans to upper income white
homeowners.
In this report, we expand
upon our previous research and examine the level of subprime lending
city-by-city in Hennepin and Ramsey County and neighborhood-by-neighborhood in
Minneapolis and St. Paul.
As in the previous study,
the statistics discussed here demonstrate that the Twin Cities are still have
two separate and very unequal financial systems: one for whites and one for
minorities, one for the rich and one for the poor. Subprime
lending, with its inflated prices and attendant abuses, is becoming the
dominant form of lending in minority communities. In certain parts of
North and South Minneapolis, half or more of the refinance loans received in
these areas were from subprime lenders.
Although low-income
and minority communities suffer from an extreme concentration of higher cost,
harmful loans, the problem should not be viewed as one that only affects
minorities. The vast majority of
subprime borrowers, and thus predatory lending victims, are white. Nor
should predatory lending be viewed solely as a problem affecting the inner
city. Minneapolis and St. Paul did
receive a disproportionate share of subprime loans. However, almost three-quarters of the more
than 6,000 subprime refinance loans made in the Twin Cities Metropolitan
Statistical Area in 1999 were made outside Minneapolis and St. Paul.
The damage that predatory
lending does in our communities cannot be underestimated. Homeownership provides the major source of
wealth for low-income and minority families. Home equity accounts for
two-thirds of the net wealth of families with annual incomes below $20,000 and
half of the net wealth of families with annual incomes between $20,000 and
$50,000[iv].
Rather than strengthening
neighborhoods by providing needed credit based on this accumulated wealth,
predatory lenders have contributed to the further deterioration of
neighborhoods by stripping homeowners of their equity and overcharging those
who can least afford it, leading to foreclosures and vacant houses.
The Coalition for Responsible Lending in North Carolina has
estimated that predatory lending practices such as inflated interest rates,
pre-payment penalties, and lost equity due to unnecessary fees amount to an
average excess cost of $10,000 each year per subprime loan[v]. High-cost subprime lenders made over 6,000
refinance loans in the Twin Cities area in 1999, exacting an economic toll of
more than $60 million just from these new loans.
SUMMARY OF FINDINGS
¨ Homeowners in low and moderate-income neighborhoods
are 5 times more likely than homeowners in upper-income neighborhoods to
receive a subprime loan when refinancing.
Subprime lenders accounted for 25% of
all refinances made in low and moderate income census tracts, but just 5% of
the refinance loans made in upper-income census tracts. Even homeowners in middle income
neighborhoods were twice as likely as homeowners in upper-income neighborhoods
to receive a subprime loan[vi].
¨ Homeowners in minority neighborhoods are 4 1/2
times more likely than homeowners in predominantly white neighborhoods to
receive a subprime loan when refinancing and homeowners in integrated
neighborhoods are 2 ½ times more likely than homeowners in predominantly
white neighborhoods to receive a subprime loan. Subprime
lenders accounted for 37% of all refinances made in census tracts in which more
minorities make up more than half of the population and 20% of the refinance
loans in census tracts in which minority residents make up between 10% - 49% of
the population. In contrast, subprime
lenders accounted for just 8% of the refinance loans made in census tracts in which
minorities are less than 10% of the population.
¨ Homeowners in low and moderate income, white
neighborhoods are 4 times more likely than homeowners in upper-income
white neighborhoods to receive a subprime loan when refinancing. In census tracts in which whites make up more
than 90% of the population, Subprime lenders accounted for 20% of all
refinances made in low and moderate income tracts, but just 5% of the refinance
loans made in upper-income tracts. Even
homeowners in middle income, white neighborhoods were twice as likely as homeowners
in upper-income, white neighborhoods to receive a subprime loan.
¨In Minneapolis and St. Paul, lower income neighborhoods
with large minority populations have high concentrations of subprime
lending. In 3 of the 11
neighborhoods in Minneapolis, subprime lenders accounted for 30% or more of the
refinance loans made in those neighborhoods:
Near North (44%); Phillips/ Whittier (40%); and Camden (30%). In 3 of the 15 neighborhoods in St. Paul,
subprime loans represented more than 25% of the refinance loans made in those
neighborhoods: Thomas Dale (34%); Summit University (27%); and North End (25%)[vii].
¨ Minneapolis and St. Paul also have neighborhoods with
minimal levels of subprime lending, creating large disparities in the
prevalence of subprime lending between neighborhoods.
· In the Summit Hill
neighborhood in St. Paul, subprime lenders made just 4.8%
of the refinance loans made in that neighborhood. Compared to homeowners in
Summit Hill who refinanced, Thomas- Dale homeowners were over 7 times
more likely to receive a subprime loan, and Summit-University homeowners
were 5.5 times more likely to receive a subprime loan.
· In the Southwest
neighborhood in Minneapolis, just 6.6% of the refinance loans
were
from subprime lenders. Compared to
Southwest homeowners who
refinanced, Near North homeowners were almost 7 times more likely to
receive
a
subprime loan, and Phillips/Whittier homeowners were 6 times more likely to
receive
a subprime loan.
¨There are a number of
other glaring disparities between individual neighborhoods within Minneapolis
and St. Paul, as well as between some of these neighborhoods and entire
suburban cities.
· In
Minneapolis:
* The
Southwest and Phillips/Whittier neighborhoods each had 68
subprime
refinance loans, although Southwest had 966 prime refinance
loans,
9 times more than the 104 prime refinances in Phillips/ Whittier.
* The Camden area had
almost 3 times as many subprime refinance loans
as Southwest Minneapolis, 189 compared to
68, but less than half as
many prime refinance loans, only 434
compared to 966.
· In Hennepin County:
* The
68 subprime refinance loans made in the Phillips/Whittier
neighborhoods
was more than in all of Minnentonka, which had just 55.
In contrast,
though, Phillips/ Whittier had just 104 prime refinance loans
-- 10 times fewer than the 1,086 prime
refinances in Minnetonka.
* The
Near North neighborhood in Minneapolis had about as many
subprime refinance loans, 222, as Plymouth,
Minnetonka, Eden Prairie,
and Edina combined, 228, although Near
North had 16 times fewer
prime refinance loans than these four
suburbs, just 281 compared to
4,472.
· In St. Paul:
*
Summit-University and the North End each had about as many subprime
refinance loans, 68 and 75 respectively, as
the Highland Park,
Macalester-Groveland, Merriam Park
neighborhoods, which had a
combined total of 81 subprime refinance
loans. However, Summit-
University and the North End each had 5
times fewer prime refinance
loans, 189 and 224 respectively, than the 1,034 prime refinance loans
made in Highland, Mac-Groveland, and Merriam Park.
* Thomas-Dale had 8
times more subprime refinance loans than Summit
Hill, 56
compared to just 7, but fewer prime refinance loans, 108 in
Thomas-Dale compared to 138 in Summit Hill.
· In Ramsey County:
* The North End area had more subprime refinance
loans, 75, than Arden
Hills, Vadnais Heights, Falcon Heights,
Shoreview, North Oaks, and
Long Lake, which had a combined total of 69
subprime refinance loans.
However, the North End had just 224 prime
refinance loans, 5 times
fewer than the combined total of 1,190
prime refinance loans in these
other cities.
All Cities in Hennepin and Ramsey County
¨In seven cities, subprime loans made up more than 12% of
all the refinance loans made in those cities: Minneapolis
(17.6%); St. Paul (16.4%); Brooklyn Center (16.3%); Robbinsdale (14.5%);
Hopkins (14.1%); Crystal (13.3%); and North St. Paul (12.9%). In addition to Minneapolis and St. Paul,
these cities are all considered the inner ring suburbs and have median incomes
below the area median income, with the exception of North St. Paul which is
just slightly above the median income.
¨ In six cities, subprime lenders accounted for less than
5% of all the refinance loans made in those cities: Eden Prairie (4.9%); Minnetonka
(4.8%); Plymouth (4.5%); Dayton (3.9%); Orono (4.6%); and Arden Hills (3.6%).
These cities are all considered the wealthier, outer ring suburbs, and with the
exception of Dayton are upper income areas with median incomes well above 120%
of the area median income. Dayton is slightly
above the median income.
¨Disparities exist within certain cities which have both
areas with large concentrations of subprime lending and areas with minimal
levels of subprime lending. In
Golden Valley, one census tract had 12% of its refinance loans made from
subprime lenders, while another census tract had 0%. In St. Louis Park, subprime lenders accounted
for 17% of all refinance loans made in one census tract, but just 1.5% of the
loans made in another tract. In
Bloomington, 22% of the refinance loans in a certain census tract were from
subprime lenders, compared to only 3% of the loans in another census
tract.
FINDINGS
Metrowide Patterns
Homeowners in low, moderate, and even middle income
neighborhoods were significantly more likely than homeowners in upper-income
neighborhoods to receive a high-cost subprime loan when refinancing[viii].
Homeowners in low-income neighborhoods were 6 times more
likely than homeowners in upper-income neighborhoods to receive a subprime loan
when refinancing, while homeowners in moderate income neighborhoods were 5
times more likely than homeowners in upper income neighborhoods to receive a
subprime loan. Even homeowners in middle-income neighborhoods were twice as
likely as homeowners in upper-income neighborhoods to receive a subprime loan.
One out of every three refinance loans made in a low-income
census tract and one out of every four refinance loan made in a moderate income
census tract were from a subprime lender. In contrast, subprime lenders made just one
out of every 19 refinance loans made in upper-income census tracts.
|
Census Tract Income
|
Total # of refinance loans
|
# of subprime refinance
loans
|
Subprime Refinances as
Percentage of all refinances
|
|
Low Income
|
972
|
297
|
30.56%
|
|
Moderate Income
|
3978
|
956
|
24.03%
|
|
Middle Income
|
16,239
|
1,645
|
10.13%
|
|
Upper Income
|
10,284
|
541
|
5.26%
|
Homeowners in low and moderate income neighborhoods
received a significantly greater share of subpirme refinance loans than of
prime refinance loans.
Homeowners in low-income neighborhoods received a 3.6 times
larger share of subpirme refinance loans than of prime refinance loans.
Low-income neighborhoods received almost
9% of all the subprime refinance loans made in Hennepin and Ramsey counties,
but just 2.4% of the prime refinance loans.
Homeowners in moderate income neighborhoods received a 2.5
times greater share of subprime refinance loans than they did of prime
refinance loans. 28% of all subpirme
refinance loans in Hennepin and Ramsey counties were made in moderate income
neighborhoods, compared to just 11% of the prime refinance loans.
In contrast, upper income neighborhoods received a 2.2 times
greater share of prime refinance loans than of subprime refinance loans. 35% of all prime refinance loans in Hennepin
and Ramsey counties were made in upper income neighborhoods, while only 16% of
the subprime refinance loans were made in these neighborhoods.
|
Census Tract Median Income
|
Share of prime
refinances
|
Share of subprime
refinances
|
|
Low Income
|
2.41%
|
8.64%
|
|
Moderate Income
|
10.78%
|
27.80%
|
|
Middle Income
|
52.06%
|
47.83%
|
|
Upper Income
|
34.75%
|
15.73%
|
Moderate income
neighborhoods received almost twice as large a share of subprime refinance
loans as upper-income neighborhoods, but a three times smaller share of prime
refinance loans.
Homeowners in integrated and minority neighborhoods were
much more likely than homeowners in white neighborhoods to receive a subprime
loan when refinancing.
Homeowners in minority neighborhoods were 4.5 times more
likely than homeowners in predominantly white neighborhoods to receive a
subprime loan when refinancing, while homeowners in integrated neighborhoods
were 2.5 times more likely than homeowners in predominantly white neighborhoods[ix]
to receive a subprime loan.
Subprime lenders accounted for 37% of all refinance loans
made in predominantly minority census tracts, 20% of the refinance loans made
in integrated census tracts, and just 8% of the refinance loans made in
predominantly white neighborhoods.
|
Percentage of Census Tract
Population that is Minority
|
Total # of refinance loans
|
# of subprime refinance
loans
|
Subprime Refinances as
Percentage of all refinances
|
|
>50%
|
977
|
357
|
36.54%
|
|
25-49%
|
1154
|
308
|
26.69%
|
|
10-24%
|
4308
|
762
|
17.69%
|
|
<10%
|
25034
|
2012
|
8.04%
|
Homeowners in minority neighborhoods received a
disproportionately greater share of subprime refinance loans than of prime
refinance loans.
Homeowners in minority neighborhoods received a 5 times
larger share of subpirme refinance loans than of prime refinance loans.
Minority neighborhoods received more than 10% of all the subprime refinance
loans made in Hennepin and Ramsey counties, but just 2% of the prime refinance
loans.
Homeowners in integrated neighborhoods received a 2 times
greater share of subprime refinance loans than they did of prime refinance
loans. More than 31% of all subpirme
refinance loans in Hennepin and Ramsey counties were made in integrated
neighborhoods, compared to just 16% of the prime refinance loans.
In contrast, predominantly white neighborhoods received a
1.4 times greater share of prime refinance loans than of subprime refinance
loans. Over 82% of all prime refinance
loans in Hennepin and Ramsey counties were made in predominantly white
neighborhoods, while only 59% of the subprime refinance loans were made in
these neighborhoods.
|
Percentage of Census Tract
Population that is Minority
|
Share of prime refinances
|
Share of subprime
refinances
|
|
>50%
|
2.21%
|
10.38%
|
|
25-49%
|
3.02%
|
8.96%
|
|
10-24%
|
12.65%
|
22.16%
|
|
<10%
|
82.12%
|
58.51%
|
Homeowners in low, moderate, and even middle income, white
neighborhoods are more likely than homeowners in upper-income white
neighborhoods to receive a subprime loan when refinancing.
In census tracts in which
whites make up more than 90% of the population, homeowners in low and moderate
income areas are 4 times more likely than homeowners in upper income, white
neighborhoods to receive a subprime loan when refinancing.
Subprime lenders
accounted for 20% of all refinances made in low and moderate income,
predominantly white census tracts, but just 5% of the refinance loans made in
upper-income, predominantly white census tracts. Even homeowners in middle income,
predominantly white neighborhoods were twice as likely as homeowners in
upper-income, predominantly white neighborhoods to receive a subprime loan.
For census
tracts in which minorities make up less than 10% of the population
|
Census Tract Median Income
|
Total # of refinances
|
Total # of subprime
refinances
|
Subprime Refinances as
Percentage of all refinances
|
|
Low and Moderate Income
|
1011
|
202
|
19.98%
|
|
Middle Income
|
13756
|
1270
|
9.23%
|
|
Upper Income
|
10267
|
540
|
5.26%
|
Homeowners in low and moderate income, white neighborhoods
received a significantly greater share of subprime refinance loans than of
prime refinance loans.
Homeowners in low and moderate income, white neighborhoods
received a 2.3 times larger share of subprime refinance loans than of prime
refinance loans. Low and moderate income, white neighborhoods received 10% of
all the subprime refinance loans made to white neighborhoods in Hennepin and
Ramsey counties, but just 4.4% of the prime refinance loans.
In contrast, upper income, white neighborhoods received a
1.7 times greater share of prime refinance loans than of subprime refinance
loans. 45% of all prime refinance loans
in white neighborhoods in Hennepin and Ramsey counties were made in upper
income neighborhoods, while only 27% of the subprime refinance loans were made
in these neighborhoods.
For census
tracts in which minorities make up less than 10% of the population
|
Census
Tract Median Income
|
Share of prime refinances
|
Share of subprime refinances
|
|
Low and Moderate Income
|
4.41%
|
10.0%
|
|
Middle Income
|
59.8%
|
63.1%
|
|
Upper Income
|
44.6%
|
26.8%
|
All Cities in Hennepin
and Ramsey Counties
Of all the cities in
Hennepin and Ramsey Counties, Minneapolis and St. Paul had the largest
percentage of refinance loans made from subprime lenders. However, despite the high concentration of
subprime loans in certain neighborhoods, which will be discussed in detail
later, Minneapolis and St. Paul as a whole did not have that much greater a
percentage of subprime loans than some other cities.
Seven cities had more than 12% of their total refinances
from subprime lenders.
|
City
|
Total # of refinances
|
Total # of subprime
refinances
|
Subprime Refinances as
Percentage of all refinances
|
|
Minneapolis
|
6529
|
1146
|
17.6%
|
|
St. Paul
|
4478
|
732
|
16.4%
|
|
Brooklyn
Center
|
578
|
94
|
16.3%
|
|
Robbinsdale
|
296
|
43
|
14.6%
|
|
Hopkins
|
234
|
33
|
14.1%
|
|
Crystal
|
511
|
68
|
13.3%
|
|
North
St. Paul
|
241
|
31
|
12.9%
|
One of the commonalities
between these seven cities is that in addition to Minneapolis and St. Paul,
they are the inner ring suburbs, and as a whole have a lower median income.
Minneapolis and St. Paul
have a median income below 80% of the median income for the Twin Cities
Metropolitan Statistical Area (MSA).
Brooklyn Center, Crystal, Robbinsdale, and Hopkins all have a median
income below 100% of the area median income, while North St. Paul is just
slightly above the median income.
Six cities, with at least 125 refinance loans, had less than
5% of their refinances from subprime loans.
|
City
|
Total # of refinances
|
Total # of subprime
refinances
|
Subprime Refinances as
Percentage of all refinances
|
|
Eden
Prairie
|
1183
|
58
|
4.9%
|
|
Minnetonka
|
1141
|
55
|
4.8%
|
|
Orono
|
196
|
9
|
4.6%
|
|
Plymouth
|
1436
|
65
|
4.5%
|
|
Dayton
|
285
|
11
|
3.9%
|
|
Arden
Hills
|
141
|
5
|
3.6%
|
All of the above cities,
with the exception of Dayton, are considered upper-income areas, with a median
income well above 120% of the area median income. In addition, they are
primarily the newer, developing, and wealthier suburbs.
Minneapolis and St. Paul received a disproportionate share
of subprime loans.
Minneapolis and St. Paul
each had almost twice as large a share of subprime loans than of prime loans.
· 48% of all the subprime refinance loans made in
Hennepin County were made in
Minneapolis, compared to just 26% of the prime refinance loans.
· 70% of all the subprime refinance loans made in
Ramsey County were made in St. Paul, compared to just 49% of the prime
refinance loans.
In contrast, the
wealthiest suburbs received twice as large a share of prime refinance loans as
of subprime refinance loans. Of all the refinance loans made in Hennepin
County:
· Plymouth received 7% of the prime loans, but just
3% of the subprime
refinances;
· Eden Prairie received 6% of the prime loans, compared to 2% of the
subprime
loans; and
· Minnetonka received 5% of the prime loans and just
2% of the subprime
refinances.
Of all the refinance
loans made in Ramsey County, Roseville and Shoreview each received 7% of all
the prime refinances made in Ramsey County, but just 3% of the subprime
refinances.
ALL CITIES IN HENNEPIN AND RAMSEY COUNTY
|
City
|
Total # of refinances
|
# of subprime refis
|
Percentage subprime
|
|
Minneapolis
|
6529
|
1146
|
17.6%
|
|
St. Paul
|
4478
|
732
|
16.4%
|
|
Brooklyn Center
|
578
|
94
|
16.3%
|
|
Robbinsdale
|
296
|
43
|
14.6%
|
|
Hopkins
|
234
|
33
|
14.1%
|
|
Crystal
|
511
|
68
|
13.3%
|
|
North St. Paul
|
241
|
31
|
12.9%
|
|
Richfield
|
644
|
76
|
11.8%
|
|
Wayzata
|
88
|
10
|
11.4%
|
|
Brooklyn Park
|
1482
|
167
|
11.3%
|
|
Little Canada
|
134
|
13
|
11.3%
|
|
Maplewood
|
668
|
64
|
9.6%
|
|
Moundsview
|
214
|
19
|
8.9%
|
|
St. Louis Park
|
899
|
77
|
8.6%
|
|
New Hope
|
357
|
30
|
8.5%
|
|
White Bear Lake
|
576
|
48
|
8.3%
|
|
Lauderdale
|
26
|
2
|
7.7%
|
|
Bloomington
|
1675
|
128
|
7.6%
|
|
Champlin
|
908
|
69
|
7.6%
|
|
New Brighton
|
409
|
30
|
7.3%
|
|
Corcoran
|
151
|
11
|
7.3%
|
|
Roseville
|
533
|
35
|
6.6%
|
|
Long Lake
|
46
|
3
|
6.5%
|
|
North Oaks
|
96
|
6
|
6.3%
|
|
Golden Valley
|
468
|
28
|
6.0%
|
|
Shoreview
|
588
|
35
|
6.0%
|
|
Maple Grove
|
1549
|
88
|
5.7%
|
|
Independence
|
217
|
12
|
5.5%
|
|
Edina
|
940
|
50
|
5.3%
|
|
Falcon Heights
|
77
|
4
|
5.2%
|
|
Vadnais Heights
|
311
|
16
|
5.1%
|
|
Eden Prairie
|
1183
|
58
|
4.9%
|
|
Minnetonka
|
1141
|
55
|
4.8%
|
|
Orono
|
196
|
9
|
4.6%
|
|
Plymouth
|
1436
|
65
|
4.5%
|
|
Dayton
|
285
|
11
|
3.9%
|
|
Arden Hills
|
141
|
5
|
3.6%
|
|
Medina
|
101
|
1
|
1.0%
|
Minneapolis
Neighborhoods
The areas with the lowest
incomes and the largest minority populations also had the greatest
concentration of subprime loans.
Subprime loans accounted for: 44% of all the refinance loans made in
Near North; 40% of the refinances made in Phillips/Whittier; 30% of the
refinance loans in Camden; and 24%, of the refinances made in Powderhorn.
In contrast, subprime
loans represent a much smaller percentage of the refinances made in the
Southwest and Calhoun/Isles neighborhoods, areas with higher incomes and
smaller minority populations.
There are glaring
disparities in the lending patterns in Minneapolis neighborhoods.
¨ The Phillips/ Whittier
neighborhood and Southwest neighborhoods each had 68 subprime refinance loans,
although Southwest had 9 times more prime refinance loans, 966, than the 104
prime refinance loans in Phillips/ Whittier.
¨ The Camden area, with 189
subprime refinance loans, had almost 3 times as
many subprime refinances as
Southwest, but less than half as many prime
refinances, just 434.
|
Neighborhood[x]
|
Total # of refinance loans
|
Total # of subprime
refinances
|
Subprime Refinances as %
of all refinances
|
|
Near North
|
503
|
222
|
44.1%
|
|
Phillips/ Whittier
|
172
|
68
|
39.5%
|
|
Camden
|
623
|
189
|
30.3%
|
|
Powderhorn
|
769
|
185
|
24.1%
|
|
Northeast
|
738
|
116
|
15.7%
|
|
University
|
270
|
32
|
11.9%
|
|
Nokomis
|
1181
|
141
|
11.9%
|
|
Longfellow
|
551
|
62
|
11.3%
|
|
Calhoun/ Isles
|
548
|
45
|
8.2%
|
|
Central (Dowtown)
|
113
|
8
|
7.1%
|
|
Southwest
|
1034
|
68
|
6.6%
|
¨ Compared to homeowners in
Southwest Minneapolis who refinanced: ·
Near North homeowners were almost 7 times more likely to receive a
subprime loan;
·
Phillips/Whittier homeowners were 6 times more likely to receive a
subprime loan;
· Camden homeowners
were almost 5 times more likely to receive a
subprime loan;
· Powderhorn homeowners
were almost 4 times more likely to receive a
subprime loan; and
· Northeast homeowners
were 2.5 times more likely to receive a
subprime loan.
In addition to the startling comparisons between individual
Minneapolis neighborhoods, there are also a number of striking contrasts
between specific Minneapolis neighborhoods and entire suburban cities in
Hennepin County.
· The Phillips/ Whittier
neighborhoods alone had more subprime refinances than in all of Minnetonka, 68
compared to 55, but ten times fewer prime refinance loans, 104 compared to
1086.
· The Near North
neighborhood in Minneapolis had about as many subprime
refinance loans, 222, as Plymouth,
Minnetonka, Eden Prairie, and Edina
combined, 228, although Near North
had 16 times fewer prime refinance loans
than these four suburbs, just 281
compared to 4,472.
St. Paul Neighborhoods
In St. Paul, as in Minneapolis, the
areas that have the lowest incomes and the largest minority populations also
have the greatest concentration of subprime loans. Subprime loans accounted for: 34% of all the
refinance loans made in the Thomas-Dale neighborhood; 27% of the refinance
loans made in Summit-University; and 25% of the refinance loans made in the
North End.
In contrast, subprime loans represent
a much smaller percentage of the refinances made in the Summit Hill, Highland
Park, Macalester-Groveland, and Merriam Park neighborhoods, areas with higher
incomes and smaller minority populations.
|
Neighborhood
|
Total # of Refinance loans
|
Total # of Subprime
refinance loans
|
Subprime Refinances as Percentage
of all refinances
|
|
Thomas Dale
|
164
|
56
|
34.2%
|
|
Summit-University
|
257
|
68
|
26.5%
|
|
North End
|
224
|
75
|
25.1%
|
|
Payne-Phalen
|
439
|
105
|
23.9%
|
|
W. 7th St.
|
222
|
51
|
23.0%
|
|
Dayton’s Bluff
|
216
|
44
|
20.4%
|
|
East Side
|
378
|
71
|
18.8%
|
|
Hamline-Midway
|
238
|
40
|
16.8%
|
|
West Side
|
265
|
43
|
16.2%
|
|
St. Anthony
|
82
|
11
|
13.4%
|
|
Battle Creek
|
264
|
31
|
11.7%
|
|
Como
|
249
|
19
|
7.6%
|
|
Downtown
|
27
|
2
|
7.4%
|
|
Highland Park/
Mac-Groveland/ Merriam
Park[xi]
|
1115
|
81
|
7.3%
|
|
Summit Hill
|
145
|
7
|
4.8%
|
As in Minneapolis, these figures show alarming disparities
in the lending patterns in St. Paul neighborhoods.
¨ Summit-University and the
North End each had about as many subprime
refinance loans, 68 and 75
respectively, as the Highland Park, Macalester-
Groveland, Merriam Park
neighborhoods, which had a combined total of 81
subprime refinance loans. However, Summit-University and the North End
each
had 5 times fewer prime refinance
loans, 189 and 224 respectively, than the 1,034
prime refinance loans made in
Highland, Mac-Groveland, and Merriam Park.
¨ Thomas-Dale had 8 times more subprime refinance loans than Summit Hill,
56
compared
to just 7, but fewer prime refinance loans, 108 in Thomas-Dale
compared
to 138 in Summit Hill.
¨ Compared to homeowners in
Summit Hill who refinanced:
· Thomas-Dale homeowners were over 7 times
more likely to receive a
subprime loan;
· Summit-University homeowners were 5.5 times
more likely to receive
a subprime loan;
· North End and Payne-Phalen homeowners were
5 times more likely to
receive a
subprime loan;
· Dayton’s Bluff and West 7th
Street homeowners were over 4 times
more likely to receive a subprime loan;
and
· East Side, West Side, and Hamline-Midway
homeowners were each
over 3 times more likely to receive a
subprime loan.
In addition to these striking disparities between individual
St. Paul neighborhoods, there are also a number of contrasts between specific
St. Paul neighborhoods and entire suburban cities in Ramsey County. For instance,
¨ The North End area had
more subprime refinance loans, 75, than Arden Hills,
Vadnais Heights, Falcon Heights,
Shoreview, North Oaks, and Long Lake
combined, 69, but over 5 time fewer
prime refinance loans, 224 compared to
1,190.
Individual Census Tracts
To view the above
statistics as a whole for each city, or in the case of Minneapolis and St. Paul
for each neighborhood, does not capture the complete picture of the impact of
subprime and predatory lending on specific pockets both in Minneapolis and St.
Paul, as well as in some of the suburbs.
MINNEAPOLIS
As shown above, both the
Near North and Phillips/Whittier neighborhoods in Minneapolis clearly have high
concentrations of subprime loans, with subprime lenders accounting for 44% and
40% of all the refinance loans made in these areas, respectively. However, there is additional cause for
concern when we realize that individual census tracts within these
neighborhoods have even higher levels of subprime lending. In seven census
tracts in these Minneapolis neighborhoods, half or more of the refinance loans
were made by subprime lenders.
|
Census Tract/ Neighborhood
|
Total # of refinances
|
Total # of subprime
refinances
|
Subprime Refinances as
Percentage of all refinances
|
|
78
(Phillips)
|
21
|
15
|
71%
|
|
28
(Near North)
|
35
|
23
|
66%
|
|
14
(Near North)
|
49
|
26
|
53%
|
|
20
(Near North)
|
47
|
24
|
51%
|
|
32
(Near North)
|
49
|
25
|
51%
|
|
72
(Phillips)
|
24
|
12
|
50%
|
The disparities between
areas within the same city are also alarmingly greater when we compare
individual census tracts. In Minneapolis,
whereas subprime lenders made between 50% to 75% of all refinance loans in the
above census tracts, there were three census tracts, all in the Calhoun-Isles
area, in which subprime lenders made less than 3% of the refinance loans.
|
Census Tract/ Neighborhood
|
Total # of refinances
|
Total # of subprime
refinances
|
Subprime Refinances as
Percentage of all refinances
|
|
55 (Calhoun-Isles)
|
61
|
1
|
1.6%
|
|
92 (Calhoun-Isles)
|
51
|
1
|
2.0%
|
|
67 (Calhoun –Isles)
|
39
|
1
|
2.6%
|
ST. PAUL
A similar pattern exists
in St. Paul. While subprime lenders
accounted for 34% of the refinance loans in Thomas-Dale, 26% of the refinances
in Summit-University, and 24% of the refinance loans in Payne-Phalen, there are
three census tracts in these neighborhoods in which more than 40% of the refinance
loans were made by subprime lenders.
|
Census Tract/ Neighborhood
|
Total # of refinances
|
Total # of subprime
refinances
|
Subprime Refinances as
Percentage of all refinances
|
|
335
(Summit- University)
|
47
|
22
|
47%
|
|
325
(Thomas-Dale)
|
51
|
23
|
45%
|
|
315 (Payne-Phalen)
|
29
|
12
|
41%
|
In contrast, there were three census tracts in St. Paul in
which subprime lenders accounted for 2% or less of all the refinance loans.
|
Census Tract/ Neighborhood
|
Total # of refinances
|
Total # of subprime
refinances
|
Subprime Refinances as
Percentage of all refinances
|
|
356
(Summit Hill)
|
28
|
0
|
0%
|
|
375
(Highland/ Mac-Grove/ Merriam)
|
109
|
2
|
1.8%
|
|
349
(Highland/ Mac-Grove/ Merriam)
|
50
|
1
|
2%
|
SUBURBS
There are some suburban census tracts which had a much
greater concentration of subprime lending than the individual suburb as a
whole. In particular, there were six
suburban census tracts in which subprime lenders accounted for more than 20% of
the refinance loans made in these tracts.
|
Census Tract (City)
|
Total # of refinances
|
Total # of subprime
refinances
|
Subprime Refinances as
Percentage of all refinances
|
|
248.02
(Richfield)
|
37
|
8
|
21.6%
|
|
254.01
(Bloomington)
|
78
|
17
|
21.8%
|
|
203.02
(Brooklyn Center)
|
40
|
9
|
22.5%
|
|
249.01
(Richfield)
|
30
|
7
|
23.3%
|
|
210.02
(Crystal)
|
33
|
8
|
24.2%
|
|
205.00 (Brooklyn Center)
|
89
|
23
|
25.8%
|
In contrast, there were three suburban census tracts with at
least 20 refinance loans which had no subprime refinance loans.
|
Census Tract/ City
|
Total # of refinances
|
Total # of subprime
refinances
|
Subprime Refinances as
Percentage of all refinances
|
|
251 (Bloomington)
|
20
|
0
|
0%
|
|
218 (Golden Valley)
|
55
|
0
|
0%
|
|
410.02 (Moundsview)
|
42
|
0
|
0%
|
OTHER CITIES IN HENNEPIN COUNTY WITH
DISPARITIES
|
Bloomington
|
|
|
|
|
Census Tract with
Highest Percentage
|
Total # of refinances
|
# of subprime refis
|
Percentage subprime
|
|
254.01
|
78
|
17
|
21.8%
|
|
Census Tract with
Lowest Percentage
|
Total # of refinances
|
# of subprime refis
|
Percentage subprime
|
|
256.01
|
38
|
1
|
2.6%
|
|
Brooklyn Center
|
|
|
|
|
Census Tract with
Highest Percentage
|
Total # of refinances
|
# of subprime refis
|
Percentage subprime
|
|
202
|
104
|
17
|
16.4%
|
|
Census Tract with
Lowest Percentage
|
Total # of refinances
|
# of subprime refis
|
Percentage subprime
|
|
203.03
|
76
|
7
|
9.2%
|
|
Brooklyn Park
|
|
|
|
|
Census Tract with
Highest Percentage
|
Total # of refinances
|
# of subprime refis
|
Percentage subprime
|
|
268.09
|
85
|
16
|
18.8%
|
|
Census Tract with
Lowest Percentage
|
Total # of refinances
|
# of subprime refis
|
Percentage subprime
|
|
268.12
|
135
|
9
|
6.7%
|
|
Crystal
|
|
|
|
|
Census Tract with
Highest Percentage
|
Total # of refinances
|
# of subprime refis
|
Percentage subprime
|
|
210.02
|
33
|
8
|
24.2%
|
|
Census Tract with
Lowest Percentage
|
Total # of refinances
|
# of subprime refis
|
Percentage subprime
|
|
209.02
|
58
|
5
|
8.6%
|
|
Edina
|
|
|
|
|
Census Tract with
Highest Percentage
|
Total # of refinances
|
# of subprime refis
|
Percentage subprime
|
|
235.01
|
68
|
8
|
11.8
|
|
Census Tract with
Lowest Percentage
|
Total # of refinances
|
# of subprime refis
|
Percentage subprime
|
|
240.01
|
55
|
1
|
1.8%
|
|
Golden Valley
|
|
|
|
|
Census Tract with
Highest Percentage
|
Total # of refinances
|
# of subprime refis
|
Percentage subprime
|
|
216.01
|
93
|
11
|
11.8
|
|
Census Tract with
Lowest Percentage
|
Total # of refinances
|
# of subprime refis
|
Percentage subprime
|
|
218
|
55
|
0
|
0%
|
|
Hopkins
|
|
|
|
|
Census Tract with
Highest Percentage
|
Total # of refinances
|
# of subprime refis
|
Percentage subprime
|
|
232
|
41
|
8
|
19.5%
|
|
Census Tract with
Lowest Percentage
|
Total # of refinances
|
# of subprime refis
|
Percentage subprime
|
|
233
|
93
|
9
|
9.7%
|
|
Richfield
|
|
|
|
|
Census Tract with
Highest Percentage
|
Total # of refinances
|
# of subprime refis
|
Percentage subprime
|
|
249.01
|
30
|
7
|
23.3%
|
|
Census Tract with
Lowest Percentage
|
Total # of refinances
|
# of subprime refis
|
Percentage subprime
|
|
242
|
91
|
6
|
6.6%
|
|
St. Louis Park
|
|
|
|
|
Census Tract with
Highest Percentage
|
Total # of refinances
|
# of subprime refis
|
Percentage subprime
|
|
226
|
60
|
10
|
16.7%
|
|
Census Tract with
Lowest Percentage
|
Total # of refinances
|
# of subprime refis
|
Percentage subprime
|
|
229.01
|
69
|
1
|
1.5%
|
Methodology
This
study analyzes data released by the Federal Financial Institutions Examination
Council (FFIEC) about the lending activity of more than 7,800 institutions
covered by the Home Mortgage Disclosure Act (HMDA). HMDA requires
depository institutions with more than $30 million in assets as well as
mortgage companies which make substantial numbers of home loans to report data
annually to one of the member
agencies of the FFIEC--the Board of Governors of the Federal Reserve System,
the Federal Deposit Insurance Corporation, the National Credit Union
Administration, the Office of the Comptroller of the Currency, and the Office
of Thrift Supervision--and to the Department of Housing and Urban Development
(HUD). The reporting includes the number and type of loans correlated by
the race, gender, income, and census tract of the applicants, and the
disposition of those applications, in each Metropolitan Statistical Area (MSA)
where loans are originated.
HMDA data does not specifically include information on
subprime lending. In order to analyze
data on the subprime market, we utilized the annual list developed by HUD of
subprime lenders and then grouped the data together for these lenders. In 1999,
HUD identified 251 mortgage and finance companies as subprime lenders because a
majority of the loans they originated were subprime loans. While this is the best method available for
analyzing the data, it does provide an underestimation of the actual level of
subprime lending for two main reasons: 1) Not all lenders report HMDA
data. For instance, according to the American
Banker, Household Finance was the largest subprime residential mortgage
originator in 2000 with over $15 million in loans--none reported under HMDA;
and 2) there is still no way to identify subprime loans made by prime lenders,
lenders who are not included on the HUD list.
For instance, Wells Fargo and Countrywide are two of the nation’s
largest mortgage lenders and make a substantial number of subprime loans.
However, because a majority of their loans are considered prime loans, they are
not included on HUD’s list and therefore their subprime loans are not included
in the study.
The Exclusion of Low-income and Minority Neighborhoods from the
Economic Mainstream
Predatory lenders have been able to get away with abusive
practices in part because they are exploiting the history of racial
discrimination and neighborhood redlining by traditional financial
institutions.
In September 2000, ACORN released a report, “Home Equity and
Inequity,” which examined loan data in fifty metropolitan areas and found
continuing and even growing racial and economic disparities in mortgage lending. On average among these fifty metropolitan
areas, African-American mortgage applicants were rejected 2.23 times more often
than white applicants, and Latinos were denied 1.80 times more often than
whites. The report also found that while low and moderate income neighborhoods
comprise 30% of the metropolitan areas examined, these neighborhoods only
received 12% of the loans made in these metropolitan areas. Furthermore, residents of low and moderate
income neighborhoods were 3 times more likely to be turned down for a loan than
residents of upper-income neighborhoods[xii].
This statistical analysis has been corroborated by a report
from the Urban Institute, prepared for HUD, which concluded that minority
homebuyers face discrimination from mortgage lenders. The report cited “paired testing” which
showed that minorities were less likely to receive information about loan
products, received less time and information from loan officers, and were
quoted higher interest rates[xiii].
Nationwide over the last two decades, banks have reduced
their presence in low-income and minority neighborhoods. A study by economists at the Federal Reserve
found that the number of banking offices in low and moderate income areas
decreased 21% from 1975 to 1995, while the total number of banking offices in
all areas rose 29% during this same period. This is significant because studies
have documented that the proximity of a bank’s branches to low and moderate
income neighborhoods is directly related to the level of lending made by the bank
in those neighborhoods[xiv].
In 1998, 22% of families with incomes less than $25,000 did
not have a bank account[xv].
Having a bank account is a basic, yet important, entry point
into the mainstream economy and traditional financial services. A bank account can help a consumer handle
their finances, save money, and establish the type of credit which is often a
prerequisite to receiving a conventional loan.
In addition, having an account establishes a relationship with a bank
which makes it more likely that the consumer will contact that bank regarding
loans and other services. Furthermore,
the consumer will also be contacted by the bank as it markets its other
products, such as mortgages and refinance, to its existing customer base[xvi].
The ten million American families without bank accounts
represent a substantial market of consumers who require alternative financial
services. In response, a “fringe
economy” has emerged made up of check-cashing stores, pawnshops, and pay day
lenders, which are then able to overcharge lower income consumers. Many of these “shadow banks” are funded by
mainstream banks. For instance, Wells
Fargo, the seventh largest bank in the country, has arranged more than $700
million in loans since 1998 to three of the largest check cashers: Ace Cash
Express, EZ Corp., and Cash America[xvii].
The exclusion of low-income and minority communities from
traditional banking services has also resulted in the lack of financial
knowledge which is often necessary to receive a loan with beneficial terms. A
study by Benedict College found that half of African-Americans with good credit
ratings thought they had bad credit[xviii].
These factors have created an
environment which was ripe to be picked by predatory lenders who aggressively target these underserved
communities with a bombardment of mailings, phone calls, and door-to-door
solicitations. Sales to the
captive audience of the sub-prime market are driven by inappropriate and
deceptive marketing practices that encourage potential borrowers to believe that
they have no better credit options for their legitimate credit needs.
While the faces of
predatory lenders may appear to be those of small-time crooks, the kingpins
behind predatory lending can be found among some of the world’s largest
financial institutions, and in fact, many of the same institutions which
created the situation by their failure to serve certain communities are now
opportunistically reaping the profits.
Sometimes these
institutions have direct ownership of subprime lending subsidiaries, such as
Wells Fargo and its Wells Fargo Financial Division, which includes Director’s
Acceptance, or Citigroup and its Citifinancial Division, which has 1,170 branch
offices and recorded a 77% increase in net income to $390 million in 1999[xix]. Citigroup recently expanded its subprime
lending operation even more with the acquisition of Associates, the nation’s
largest consumer lender, which has 1,300 branches in the U.S. and in 1999 had
$1.5 billion in profits, its 25th consecutive year of record earnings.
In other cases, these institutions, particularly investment
firms, bankroll predators by securitizing
their mortgages and selling them to investors. Four of the leading names
on Wall Street -- Lehman Brothers, Merrill Lynch, Prudential Securities, and
Salomon Smith Barney (which is also part of Citigroup) securitized over $30
billion of subprime loans in 1999[xx].
Many Subprime Borrowers May Have Qualified for a Lower Cost Loan
The fact that a part of the boom in subprime lending,
especially to minorities, is a result of the neglect of certain communities by
“A” lenders, is further underlined by the considerable evidence that many
subprime borrowers could have qualified for “A” loans at lower rates.
Franklin Raines, the Chairman of Fannie Mae, stated that as
many as half of all subprime borrowers could have instead qualified for a lower
cost conventional mortgage, which according to Raines, would save a borrower
more than $200,000 over the life of a thirty year loan[xxi].
This conclusion is supported by other sources. Inside
Mortgage Finance published a poll of the 50 most active subprime lenders
which also found that up to 50 percent of their mortgages could qualify as
conventional loans[xxii]. Freddie Mac has estimated that as many as 35
percent of borrowers who obtained mortgages in the subprime market could have
qualified for a lower cost conventional loan[xxiii].
In an investigation of subprime lenders, the Department of Justice found that
approximately 20% of the borrowers had FICO credit scores above 700,
significantly higher than the minimum score of 620 which is usually required to
receive a prime interest rate[xxiv].
The most obvious consequence for borrowers who have been
improperly steered into subprime loans is that they are unnecessarily paying
more than they should. In the loans that
were examined by the Department of Justice, the borrowers were paying interest
rates of 11 and 12 percent and 10 to 15 points of the loan in fees, while
borrowers with a prime loan had 7 percent interest rates and just 3 or 4 points
of the loan in fees.
The subprime lenders trade group, the National Home Equity
Mortgage Association (NHEMA) stated that from 1997 to 1999, subprime loans have
had an average interest rate between 2.5% and 4.0% above the rate that prime
borrowers are charged[xxv]. NHEMA also estimated that subprime lender
charge an average of 1.5 to 3 basis percentage points more in fees than
conventional lenders[xxvi]. Many subprime borrowers are, however, charged
significantly more than these figures.
As discussed in this report, subprime loans are
disproportionately made to lower income borrowers. This means that subprime
lenders are overcharging those homeowners who can already least afford it. The unnecessarily higher costs of a subprime
loan impact homeowners in several ways.
The added expense increases the likelihood that the homeowner will be
unable to make the mortgage or other payments on time, which hurts their
credit, and thus keeps them trapped in the subprime market with unfavorable
loan terms. In addition, the higher
costs strip homeowners of their hard-earned equity and prevent them from
building future equity. Furthermore, having a subprime loan means that the
homeowner is more likely to be subject to a host of predatory practices, beyond
just higher rates and fees, which will be discussed in more detail in the next
section. All of these factors make it
more likely that the homeowner will ultimately and unnecessarily lose their
house in foreclosure.
PREDATORY LENDING
PRACTICES
The reach and effect of abusive practices by predatory
lenders have increased along with the dramatic growth of the subprime industry.
The following are some of the more common predatory practices.
Single Premium Credit Insurance
Credit insurance is insurance linked to a specific debt or
loan. The insurance will pay off that
particular debt if the borrower loses the ability to pay either because of
sickness (credit health insurance), death (credit life insurance), or losing
their job (credit unemployment insurance).
Many subprime lenders, such as Associates and Household,
have their own subsidiaries or affiliates which sell credit insurance. Thus, when a person who is taking out a loan
with that lender is sold credit insurance for that loan, they are in fact also
paying the premium to that same lender. If a borrower ever actually makes a
claim on their insurance policy, the credit insurance doesn’t pay the borrower
– it pays the company that made the loan.
The lender essentially pays the insurance claim to itself.
Credit insurance is extremely expensive for consumers as
compared to other forms of insurance. In the insurance industry, companies and
lines of insurance are measured by loss ratios – the amount of direct losses
incurred (claims paid out, etc.) compared to the amount of direct premiums
earned (policies written). Group life
and group accident and health insurance have historically had loss ratios of 75
percent. The National Association of
Insurance Commissioners determined that 60 percent is the minimum loss ratio
that should be allowed for credit life and credit disability insurance. The
actual loss ratios for credit insurance are far below even this low
threshold. Consumers Union reported in
1999, that for every dollar taken in with credit insurance premiums, insurers
paid out less than thirty-nine cents, for a loss ratio below 39%[xxvii].
To make matters still worse, the majority of credit
insurance policies sold in the subprime industry are known as “single premium”
policies, which means that instead of making regular monthly, quarterly, or
annual payments as people do with other insurance such as auto or homeowners,
the credit insurance is paid in one lump sum payment, which may be as high or
even higher than $10,000. The insurance
premium is financed into the loan, increasing the total loan amount, and the
borrower must pay monthly interest on the amount of the insurance premium. This “single premium” arrangement has
considerable benefit to the lender and insurer, but does nothing but damage to
the borrower.
Finally, ACORN and many others have found too many cases
where lenders told borrowers that in order to get a loan, they would have to
take out credit insurance. A former loan officer with Associates, which has
been acquired by Citigroup and is one of the nation’s largest subprime lenders,
said that many customers didn’t or couldn’t read the forms disclosing the fees,
and that thousands of dollars in credit insurance were often added into the
loan without asking the borrower if they needed or wanted it. His supervisors
told him, “If you don’t have to tell ‘em and they don’t ask, don’t tell ‘em.
Just get ‘em to initial it”[xxviii].
Under pressure from
community groups, several of the nation’s largest subprime lenders, such as
Household and Associates announced that they would stop selling single premium
credit insurance with their mortgages.
A St. Paul homeowner refinanced
with Associates and received a $55,252 loan.
Included in this loan amount was $9,156 for credit life, credit
accident, and credit unemployment insurance through Associates Financial Life
Insurance Company. Financing this amount
into the loan, which was at l3.85% interest, will cost the homeowner a total of
$348,880 over the course of the thirty-year loan term. Of his $648 monthly payment, $108 is just
from the credit insurance. (Another $3,777 of the loan was for fees and closing
costs, which will cost an additional $16,200 over the life of the loan).
Pre-Payment Penalties
Pre-payment
penalties are an extremely common feature of subprime loans and can have a
damaging impact on borrowers. More than
two-thirds of subprime loans have pre-payment penalties, compared to less than
2% of conventional prime loans[xxix]. The penalties come due when a borrower pays
off their loan early, typically through refinancing or a sale of the house. The
penalty may remain in force for periods ranging from the first two to five
years of the loan, and is often as much as six months interest on the
loan. For a $100,000 loan at 11%
interest, this would be over $5,000.
When a borrower with a
prepayment penalty refinances, the amount of the penalty ends up being financed
into the new loan. In effect, for
borrowers who refinance or sell their houses during the period covered by the prepayment
penalty, the penalty functions as an additional and expensive fee on the loan,
further robbing them of their equity.
Lenders argue that
prepayment penalties protect against frequent turnover of loans, and that as a
result of the higher rates which investors are willing to pay for loans with
prepayment penalties, they are able to charge borrowers lower interest
rates. The truth is, however, that very
large numbers of subprime borrowers do refinance within the period covered by
the prepayment penalty and may well end up paying more in the penalty than they
“saved” even if their interest rate was reduced. It is particularly pernicious
when prepayment penalties keep borrowers trapped in the all too common
situation of paying interest rates higher than they should be.
Another particularly
damaging instance of prepayment penalties is when they are combined with an
adjustable rate loan. Borrowers are sold
a loan with a starting rate which lasts for two or three years and which then
rises dramatically. When, faced with the
new higher interest rate, they look to refinance, they find that they will have
to pay a prepayment penalty.
Too often, borrowers are
unaware that their loans contain a prepayment penalty. Lenders’ agents simply
fail to point it out, or they are deliberately misleading, telling borrowers
that they can refinance to a lower rate later, while neglecting to inform them
of the prepayment penalty which will be charged if they do so. Many borrowers are misled in this way even
when they have been presented with the legally required disclosure. This and other crucial documents are easy to
miss in the mounds of paperwork involved in closing a loan.
Prepayment penalties on
subprime loans thus too often have the effect of keeping people tied to a
lender which overcharged them, and certainly prevent people who establish and
maintain improved credit from moving to a better loan. It makes no sense to penalize subprime
borrowers who are doing the right thing and paying their loans on time.
An
Anoka couple wanted to lower the monthly payment on their two mortgages and
were looking to refinance. A Household
Finance representative told them he could save them $200 to $300 a month, and
they went ahead with the refinance.
They ended up with two mortgages from Household, one
for $133,000 at 10.49% interest and a second mortgage for $10,000 at 21.7 %.
This gave them a total monthly payment of $1,501 -- $125 more than before. Their first mortgage also included almost
$10,000 in fees. They had very good
credit and when they looked into refinancing in order to receive a better
interest rate, they found out that both of their loans had pre-payment
penalties which required that if they refinanced within the first five years of
the loan, they would have to pay a penalty of six months interest – more than
$7,000. Mainstream lenders will not
refinance them, because between their loan amount and the prepayment penalties,
their new loan would have to be for over $150,000 and their house was worth
only about $140,000.
Balloon Payments
There are circumstances
on prime loans, loans at “A” rates, where balloon payments make sense, but for
most subprime borrowers they are extremely harmful. Balloon mortgages,
especially when combined with high interest rates, make it more difficult for
borrowers to build equity in their home.
After paying for some number of years on the loan, with the bulk of the
payments going, as they do in the early years of a loan, to the interest,
homeowners with balloon mortgages are forced to refinance in order to make the
balloon payment. They incur the
additional costs of points and fees on a new loan, and they must start all over
again paying mostly interest on a new loan, with another extended period,
usually thirty years, until their home is paid for.
While one might expect that borrowers whose loans contain
balloon payments would receive some beneficial trade-off, such as lower
interest rates, this does not appear to be the case. In addition, many borrowers are unaware that
their loan has a balloon payment which will ultimately force them to refinance.
A Mounds View couple refinanced in 1998 and received
an $89,250 loan at 9.95% interest from Mercantile Mortgage. After fifteen years
of paying $780 a month for a total of $138,400, they would still have to make a
balloon payment of $73,564. In addition,
the loan had a prepayment penalty if
they paid off the loan during the first three years.
Home improvement scams
Some
home improvement contractors deliberately target their marketing efforts to
lower income neighborhoods where homes are in most need of repairs, and where
the owners are unable to pay for the service.
The contractor tells the homeowner that they will arrange for the
financing to pay for the work and refers the homeowner to a specific broker or
lender, even driving them to the lender’s or broker’s office. Sometimes the contractor begins the work
before the loan is closed, so that even if the homeowner has second thoughts
about taking the loan, they are forced into it in order to pay for the work.
The lender often makes the payments directly to the lender, which means that
the homeowner has no control over the quality of the work. As a result, the
work may not be done properly or even at all, but the homeowner is still stuck
with a high-interest, high fee loan.
Payments
directly to contractors for work that is not yet done are too often a problem
in loans not initially solicited by contractors as well.
Loan Flipping
Loan flipping is a practice in which
a lender, often through high-pressure or deceptive
sales tactics, encourages repeated
refinancing by existing customers and tacks on thousands of dollars in
additional fees each time. Some lenders will intentionally start borrowers with
a loan at a higher interest rate, so that the lender can then refinance the
loan to a slightly lower rate and charge additional fees to the borrower. This kind of multiple refinancing is never
beneficial to the borrower and results in the further loss of equity. Flipping can also take place when competing
lenders refinance the same borrowers repeatedly, promising benefits each time
which are not delivered or which are outweighed by the additional costs of the
loan.
A Maplewood family received a
check in the mail from Household Finance for $4,000 in January 1999. A month later, Household persuaded them to
refinance and borrow more money. In
January 2000, Household encouraged them to take out an additional loan. In August 2000, Household persuaded them to
refinance these two loans along with their first and second mortgages they had
with other lenders. The Household
representative said that he could lower their total monthly payments by
about $400, but their new mortgage payment ended up being about $400 higher
than it was before. This was due to the
fact that the new loan included over $16,5000 in closing costs and whereas the
loans they had with other lenders were at 8% and 9% interest rates, the
Household loan has an interest rate of 13.43%.
Making
Loans Without Regard to the Borrower’s Ability to Pay
Some predatory lenders make loans
based solely on a homeowner’s equity, even when it is obvious that the
homeowner will not be able to afford their payments. For mortgage brokers, the motivation to
engage in this kind of practice is a short-sighted desire for the fees
generated by the loan. Loan officers at mortgage companies may have similar
motivations based on earning commissions, regardless of the consequence to the
lender for which they work. For some
lenders, especially when there is significant equity in a home, the motivation
is the ultimate foreclosure on the house which can then be resold for a profit.
A Vietnamese immigrant owned a
home in Minneapolis. As with most
properties in the Twin Cities, his home value escalated rapidly in recent years
and a representative from New Century Mortgage sought to take advantage of this
increased equity and solicited him for a second mortgage to consolidate his
debt. The new loan for $47,390 was at
13.4% interest and had a monthly payment of $612, in addition to his first
mortgage payment of $645 to another lender, for a total housing payment of $1,257
a month. At the time that he received
the loan, he had been working at a Plastic Company and had gross earnings of
$1,600 a month, meaning that his housing payment was 79% of his income. As
would be expected, he has fallen behind on both of his payments and is facing
foreclosure.
Negative Amortization
In a negatively amortized loan, the borrower’s payment does
not cover all of the interest due, much less any principal. The result is that despite regularly making
the required monthly payment, the borrower’s loan balance increases every month
and they lose, rather than build, equity.
Many borrowers are not aware that they have a negative amortization loan
and don’t find out until they call the lender to inquire why their loan balance
keeps going up. Predatory lenders use negative amortization to sell the
borrower on the low payment, without telling them all of the information.
A Minneapolis homeowner with
good credit received a $64,000 loan through a mortgage broker. The broker told
her the loan would have an interest rate
of 5.5% and a monthly payment of $363.
However, she was not told that this was only a “teaser rate” and that
the interest rate would increase and soon rise to 8.4%. Her monthly payment of $363, which was based
on the “teaser” interest rate, remained the same, and so did not cover all of
the interest due. Thus, even when she
makes her full payment, her principal amount increases. The homeowner was unaware that her loan
contained these terms.
Yield
Spread Premiums
A yield spread premium is
compensation from a lender to a mortgage broker for the broker’s success in
getting the borrower to accept a higher interest rate or more fees than the
lender would have given the borrower at their standard or “par” rate. Yield spread premiums create an obvious
incentive for brokers to make loans with the highest interest rates and fees
possible, regardless of whether the borrower could qualify for better
terms. In addition, most borrowers are unaware
of the existence of yield spread premiums and how their loan relates to the
broker’s compensation.
A Minneapolis
homeowner with good credit received a $57,600 loan through New Century
Mortgage. The loan, which had a fixed
interest rate of 9.75% for two years and then was adjustable every six months
after that, was arranged through a mortgage broker, Universal Mortgage.
Universal Mortgage charged the borrower a 6% origination fee and New Century
charged the borrower another $850 for processing fees. In addition, New Century paid Universal
Mortgage a yield spread premium of $1,152 – 2% of the loan – for getting the
homeowner to accept this loan.
RECOMMENDATIONS
For Lenders
All lenders
which engage in subprime lending should pledge adherence to a meaningful ”Code
of Conduct” that includes: fair
pricing; avoidance of abusive and equity stripping loan terms and conditions,
such as balloon payments, prepayment penalties, and single premium credit
insurance; full and understandable disclosures of loan costs, terms, and
conditions; a loan review system that rejects fraudulent or discriminatory
loans; making no loans which clearly exceed a borrower’s ability to repay;
refraining from charging fees which bear no relation to the costs of the
services performed; and not refinancing loans where there is no net benefit to
the borrower. These lenders should
review their loan portfolios and compensate borrowers whose loans clearly
violate this code. Additionally, subprime
lenders should develop products which allow borrowers with a consistent record
of on-time payments to move to lower interest rates.
Lenders which offer
prime as well as subprime products should establish uniform pricing and
underwriting guidelines for all of their lending subsidiaries, and for all
of the communities in which they do business, so that consumers in lower-income
and minority communities do not receive worse terms because of where they live
or who they are. All “A” lenders should increase their outreach and loan volume
in underserved communities for their prime loan products.
For Legislators and Regulators
Congress and state
legislatures should hold hearings on and pass strong anti-predatory lending
legislation that would protect consumers from abusive practices, which have
been especially targeted at lower-income and minority communities. Federal
legislation has already been introduced that would strengthen the protections
in the Home Ownership Equity Protection Act (HOEPA), extend those protections
to more borrowers in high-cost home loans, and establish penalties for
violating the law that are more in line with the damage caused to borrowers.
Federal banking
regulators, in their evaluations of a bank's CRA performance, should give
closer scrutiny to a bank’s involvement in predatory lending. Regulators should consider not just the
number of loans the bank originates to low-and moderate-income borrowers, but
also the quality of those loans. In addition, banks that purchase high-cost
loans with predatory terms made to lower-income borrowers should be penalized under
CRA for buying those loans, not rewarded.
The Federal Reserve
Board should act on its statutory authority to lower the HOPEA threshold,
define points and fees more comprehensively, and to regulate unfair and
deceptive practices.
Congress should
increase the funding level for HUD’s Housing Counseling Program for future
years to $100 million annually. Fannie
Mae, Freddie Mac, mortgage lenders, and state and local governments should
mandate and expand funding for programs that provide basic information about
lending and enable people to protect themselves from predatory practices. The most effective tool for helping minority
and lower-income families to become successful homeowners is high quality loan
counseling and home buyer education by community based entities.
The Federal Reserve
Board should expand the Home Mortgage Disclosure Act (HMDA) disclosure
requirements to include information on the cost of credit, such as fees,
interest rates, and prepayment penalties, provided to different communities, as
well as foreclosure data. The Fed should
also close loopholes that allow some lenders making significant numbers of
purchase, refinance, home equity and home improvement loans to avoid reporting
HMDA information.
Federal and State
regulators should increase their scrutiny of predatory lending practices,
including examining the interest rates other costs of loans as well as their
distribution. Federal and state authorities should devote the necessary
resources to investigating and prosecuting lending abuses.
For Consumers
To Protect Yourself From Predatory Lenders
Before
you begin loan shopping, visit your local non-profit housing counseling center
to set up an appointment with a counselor to evaluate your financial situation
and to discuss your loan needs. ACORN Housing Corporation is a HUD certified
housing counseling agency and can be reached at (651) 203-0008. You can also
call HUD for a list of the certified counseling agencies nearest you.
You
can and should also talk with a housing
counselor if you are already in the middle of the loan process, you should
still talk to a housing counselor to evaluate the loan offers you are
receiving if you are in the middle of
the loan process. Many of the borrowers who receive
high cost loans could have qualified for a lower
cost loan from a bank.
Ignore
high-pressure solicitations, including home visit offers.
Before you sign anything, take the time to have an expert, such as a housing
counselor or lawyer--look over any purchase agreement, offer, or any other
documents.
Don’t agree to or
sign anything that doesn’t seem right even if the seller or lender tells
you that “it’s the only way to get the loan through” or “that’s the way it’s
done.” Look over everything you sign to make sure all your information is
correct, including your income, debts and credit. Do not sign blank loan documents or documents
with blank spaces “to be filled out later.”
Before
closing your loan, get a copy of your loan papers with the final loan terms and
conditions, so you have enough time to examine
them. If anything is dramatically
different at closing, don’t sign it.
Beware
of loan terms and conditions that may mean higher costs for you:
• High points
and fees: Bank loans usually cost 1-3% of the loan amount for points and
fees to the lender. If you are being charged more than 5%, find out why. Then
shop around.
• Single
premium credit life or credit disability insurance: This kind of insurance,
which is financed into your loan, is very expensive compared to other insurance
policies and paying it up front requires you to pay interest as well.
•Prepayment
Penalty: Many subprime loans include prepayment
penalties, which require you to pay thousands of dollars extra if you refinance
your loan within the first several years of the loan. Make sure you know if the loan you are
offered has a prepayment penalty, how long it is in effect, and how much it
will cost. If there is a chance that you will refinance during that time, you
should probably get a loan without prepayment penalty.
Balloon Payments: Balloon
mortgages have the payments structured so that after making all your monthly
payments for several years, you still have to make one big “balloon payment”
that is almost as much as your original loan amount.
Adjustable Rates—Beware of
low “teaser” introductory rates on adjustable mortgages because many of these
adjustable rate loans only adjust one way -- up. If your loan has a fixed
initial rate, make sure you know when and by how much the interest rate will
increase and what your new monthly payments will be. Find out the highest rate your can go to and
what the monthly payments would be at that rate. Don’t count on a promise that the lender will
refinance the loan before your payments increase.
Mandatory
Arbitration: Some predatory lenders include mandatory
arbitration
clauses in their
home loans. Signing these mean giving up your right to sue
in
court if the lender does something you believe is illegal.
Be
Careful with Debt Consolidation Loans. If
you are thinking of a debt consolidation loan, be aware that although it may
lower your monthly payments in the short term, you may end up paying more in
total over time. Also, there is an
important difference between most of your bills, such as for credit cards, and
mortgage debt. When you consolidate
other bills with your mortgage, you increase the risk of losing your home if
you can’t make the payment.
Look Out for Home
Improvement Scams. Some home improvement
contractors work together with lenders and brokers to take advantage of
homeowners who need to make repairs on their homes. They get the homeowner to take out a
high-interest, high-fee loan to pay for the work, and then the lender pays the
contractor directly. Too often, the work
is not done properly or even at all.
·
Get several bids from different home improvement
contractors. Don’t get talked into
borrowing more money than you need.
·
Check with the state Attorney General’s office
to see if they have received any complaints about the contractor.
·
Don’t let a contractor refer you to a specific
lender to pay for the work. Shop around
with different lenders in order to make sure that you are getting the best
possible loan.
·
Make sure any check written for home
improvements is not written directly to the contractor. It should be in your
name only or written to both you and the contractor. Do not sign over the money
until you are satisfied with the work they have completed.
If
you feel that you have been discriminated against or are a victim of predatory
lending call ACORN at (651) 642-9639 or e-mail us at mnacorn@acorn.org.
ACORN and ACORN Housing’s Campaign to End Predatory Lending:
What is ACORN and ACORN Housing Corporation?
ACORN is the nation's largest
community organization of low- and moderate-income families, with over 100,000
member families organized into 500 neighborhood chapters in 40 cities across
the country. Since 1970 ACORN has taken action and won victories on issues of
concern to our members. Our priorities include: better housing for first time
homebuyers and tenants, living wages for low-wage workers, more investment in
our communities from banks and governments, and better public schools. We
achieve these goals by building community organizations that have the power to
win changes -- through direct action, negotiation, legislation, and voter
participation.
ACORN Housing Corporation (AHC)
is a national, non-profit organization which provides housing counseling and
education services to low and moderate income families. Since 1991, AHC has helped over 1,000 low and
moderate income families purchase homes in the Twin Cities, and in 1999, AHC
expanded its efforts to also assist existing homeowners.
Background on Campaign Against Predatory Lending
For over two decades, ACORN has
waged a campaign against bank redlining, worked to increase access to credit
for low-income and minority neighborhoods, and fought for greater community
reinvestment by financial institutions.
Many banks and mortgage companies answered the call and responded by changing
their policies and practices and developing loan products that better meet the
community’s credit needs. ACORN’s sister
organization, ACORN Housing Corporation, has utilized these loan products with
its homebuyer counseling and education program to help over 35,000 low and
moderate-income families realize their dream of homeownership.
Despite the improvements made by
some banks, the industry as a whole has continued to neglect inner city
neighborhoods and low-income borrowers, opening the door for abuse and scandal
by predatory lenders. During ACORN’s
daily door-to-door organizing in these neighborhoods, we have encountered a
growing number of homeowners who have been taken advantage of by predatory
lenders and are at risk of losing their home, jeopardizing their own future as
well as the stability of their communities.
With our successful track record in taking on some of the largest
financial institutions in the country, we decided we had to take on this new
task of fighting predatory mortgage lending.
In addition to reports such as this one documenting the
abuses and impact of predatory lending, ACORN has fought against predatory
lending on several fronts.
Confronting Predatory Lenders
ACORN has engaged in protests against specific predatory lenders using a wide range of tactics
to publicize their abuses, pressure them to change their practices, and
generate support for ACORN’s efforts to get regulatory intervention and needed
legislation. ACORN members have confronted some of the worst local offenders in
a number of cities and targeted some lenders nationally. These actions have won
restitution for individual predatory lending victims as well as forcing some of
the nation’s largest subprime lenders to enter into negotiations with ACORN with
the goal of making credit available to people who need it on fair and equitable
terms.
In July 2000, ACORN signed a precedent-setting agreement
with one of the nation’s largest subprime lenders, Ameriquest Mortgage
Company. The agreement includes a program
of lending in ten ACORN cities which will make subprime loans with no
prepayment penalties, no credit insurance, a limit on points and fees of 3% of
the loan, interest rates below the standard for the market, and which includes
ACORN Housing Corporation loan counseling for every potential borrower, to
ensure that the right people are matched with the right loans. We believe that
it has the potential to raise standards throughout the industry.
ACORN has now turned its attention to Household Finance and
its subsidiary Beneficial Loan and Thrift and is engaged in a similar national
campaign against this company.
Legislative Changes at the Local, State, and Federal Level
ACORN has been working on
state legislation to curb predatory lending in a number of states and will
continue to work for a strong anti-predatory lending bill at the federal level,
as well. Both the proposed state and federal bills would impose limitations on
high cost loans, and improve upon existing federal law by lowering the interest
rate and fee thresholds which define high cost loans. The law would not prohibit the making of
these loans, but restrict the lender from including additional terms that strip
equity and lock borrowers into harmful loans.
In addition, the legislation would require borrowers to receive loan
counseling from a non-profit organization before receiving a high cost
loan.
ACORN members in cities across the country are also working
on local legislation that would use the incentive of city business to move lenders
to meet higher lending standards.
Outreach and Education
In 2001, ACORN and ACORN Housing announced a new initiative
against predatory lending. The objective of the campaign is to provide families
with the information they need to avoid entering into predatory loans. ACORN has been distributing printed
brochures through mailings, churches, ACORN’s daily door-to-door activities,
and at neighborhood meetings. The brochures include, in easy to understand
language, descriptions of specific predatory practices, information about
alternatives to predatory lenders, and the phone number for trained AHC
counselors to provide assistance to families who are considering loans that may
have predatory characteristics. Through these channels, we are working directly
with families that are most at risk of borrowing from a predatory lender.
Housing Counseling and Education
Similar to ACORN Housing’s program for first-time
homebuyers, we are providing one-on-one counseling services to existing
homeowners to help them obtain a refinance, home improvement, or home equity
loan on fair terms. We are working with homeowners to help them improve their
credit and prepare themselves prior to submitting an application for a loan, or
if they have already been turned down, we will develop an action plan with them
so they can qualify for a good loan.
In addition to the one-on-one counseling, we are also
beginning to offer a workshop designed specifically for homeowners who are
considering refinancing or getting a home equity loan.
Assisting Victims of Predatory Lending
ACORN and ACORN Housing are helping families who have been
victimized by predatory lenders by helping them obtain credit insurance
refunds, refinance to a loan at better terms, or prevent foreclosure. As part of our campaign, we are also
conducting intensive outreach to locate borrowers who have been victimized by
predatory lenders. We have been
distributing printed brochures which will inform people to call AHC if they think
they have a predatory loan and acquiring lists of borrowers with loans from
companies that have been identified as engaging in predatory practices, and
then mailing, phoning, and visiting the people on these lists.
Ensuring Enforcement of Current Laws
ACORN is working for greater regulatory involvement against
predatory lenders, pressing state and federal officials to aggressively
investigate lenders and take appropriate measures, such as revocation of
licenses and prosecution. ACORN
and ACORN Housing staff, who have received extensive training on identifying
and understanding predatory practices, meet individually with homeowners to
review their loan documents and learn the circumstances under which the loan
was originated. When we uncover abusive,
deceptive, or illegal practices, we refer these cases to the appropriate state
agency, such as the Minnesota Attorney General and Minnesota Department of
Commerce, or federal agencies, such as the Federal Trade Commission, HUD, the
Department of Justice, and bank regulatory agencies.
March 2, 2000.
[ii] Low-income
is defined as having an income below 50% of the Area Median Income (AMI). Moderate income is defined as having an
income between 50% - 79% of the AMI.
Upper income is defined as having an income above 120% of the AMI.
[iii] All
figures for refinancing are for conventional mortgages, excluding loans for
manufactured housing.
[iv]
Harvard University Joint Center for Housing Studies, “The State of the Nation’s
Housing: 2000.”
[v]
Coalition for Responsible Lending Issue Paper, “Quantifying the Economic Cost of Predatory Lending”
Eric Stein,
2001.
[vi] Low and
moderate income neighborhoods are census tracts in which the median income is
less than 80% of the Area Median Income (AMI) for the Twin Cities Metropolitan
Statistical Area (MSA). Middle income
neighborhoods are census tracts in which the median income is between 80% -
120% of the AMI. Upper income
neighborhoods are census tracts in which the median income is above 120% of the
AMI.
[vii] Due to the
overlap of census tracts between neighborhood boundaries, we have grouped Minneapolis
into 11 neighborhoods and St. Paul into 15 neighborhoods for the purpose of
this study.
[viii] Low-income neighborhood is defined as a
census tract in which the median income is less than 50% of the Area Median
Income (AMI) for the Minneapolis-St. Paul Metropolitan Statistical Area
(MSA). Moderate income neighborhoods are
defined as census tracts in which the median income is between 50%-79% of the
AMI. Middle income neighborhoods are
defined as census tracts in which the median income is between 80%-119% of the
AMI. Upper income neighborhoods are
defined as census tracts in which the median income is above 120% of the
AMI.
[ix] Minority
neighborhoods are defined as census tracts in which more than half of the
residents are people of color. Integrated
neighborhoods are defined as census tracts in which between 10% to 50% of the
residents are people of color.
Predominantly white neighborhoods are defined as census tracts in which
minorities make up less than 10% of the population.
[x] The following
neighborhood groupings were used: Near
North (includes Harrison, Near North, Willard Hay, Hawthorne, and Jordan
neighborhoods); Camden (includes McKinley, Folwell, Cleveland,
Camden-Webber, Victory, Lind-Bohannon, and Shingle Creek neighborhoods); Powderhorn
(includes Bancroft, Standish, Corcoran, Powderhorn Park, Central, Bryant,
and Lyndale neighborhoods); Northeast (includes Marshall Terrace,
Columbia, Waite Park, Bottineau, Sheridan, Holland, Logan Park, Audubon Park,
Windom Park, Northeast Park, St. Anthony West and St. Anthony East; University
(includes Como, Prospect Park, Cedar-Riverside, West Bank, University of
Minnesota, Marcy-Holmes, and Nicolett Island neighborhoods); Nokomis
(includes Diamond Lake, Wenonah, Morris Park, Minnehaha, Keewaydin, Hale, Page,
Field, Northrup, and Ericsson neighborhoods); Longfellow (includes
Hiawatha, Howe, Cooper, Longfellow, and Seward neighborhoods); Calhoun-Isles
(includes West Calhoun, ECCO, Carag, Lowry Hill East, East Isles, Cedar
Isles-Dean, Bryn Mawr, Kenwood, and Lowry Hill); Central/Downtown
(includes Stevens Square, Loring Heights, Loring Park, Elliot Park, Downtown
East, Downtown West, and North Loop neighborhoods); Southwest (includes
Kenny, Windom, Armatage, Tangletown, Lynnhurst, Fulton, Linden Hills, East
Harriet, and Kingfield).
[xi] Due to the overlap of census tracts, the
Highland Park, Macalester-Groveland, and Merriam Park neighborhoods are grouped
together for the purposes of this study.
[xii] The report
examined applications for conventional home purchase loans. Low and moderate income neighborhoods are
defined as census tracts in which the median income is below 80% of the median
income for the entire metropolitan area.
Upper income neighborhoods are census tracts in which the median income
is more than 120% of the area’s median income.
[xiii] “What We
Know About Mortgage Lending Discrimination,” The Urban Institute, September
1999.
[xiv] “The
Community Reinvestment Act After Financial Modernization: A Baseline Report,”
U.S. Treasury Department, April 2000.
[xv] Federal
Reserve Board Summary of Consumer Finances 1998.
[xvi] U.S.
Treasury Department, April 2000.
[xvii] “Easy
Money,” Business Week, April 24,
2000.
[xviii] The State, 2/22/2000
[xix] Business Week.
[xx] Ibid.
[xxi] Business
Wire, “Fannie Mae has
Played Critical Role in Expansion of Minority Homeownership Over Past Decade;
March 2, 2000.
[xxii] Inside B&C Lending, June 10, 1996.
[xxiii]
“Automated Underwriting,” Freddie Mac,
September 1996.
[xxiv] “Making Fair Lending a Reality in the New
Millennium,” Fannie Mae Foundation, 2000.
[xxv] Jeffrey
Zeltzer, Executive Director, National Home Equity Mortgage Association-NHEMA,
4/26/2000, addressing HUD-Treasury Task Force on Predatory Lending, Atlanta,
GA)
[xxvi] “Widow
paying a price for high-cost loan” Kate Berry, Orange County Register, April 16, 2000.
[xxvii] Credit Insurance: The $2 Billion a Year
Rip-Off. Consumers Union and the Center for Economic Justice, March 1999.
[xxviii]
“Signing Their Lives Away: Ford Profits from Vulnerable Consumers,” Hudson,
Michael, Merchants of Misery: How Corporate
America Profits from the Poverty, Common Courage Press, 1996.
[xxix] “Curbing
Predatory Home Mortgage Lending: A Joint Report,” June 2000, U.S. Department of
Treasury and U.S. Department of Housing and Development.
[xxx] U.S.
Department of Treasury and U.S. Department of Housing and Development, June
2000.
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