Wednesday, March 2, 2016

Drained Wealth, Withered Dreams: The Disparate Impact of Predatory Lending in the Twin Cities



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

  1. Introduction . . . . . P. 3

  1. Summary of Findings . . . . . P. 8

  1. Map of Subprime Refinance Lending Patterns in the Twin Cities . . . . . P. 11
 
  1. Findings . . . . P. 12

    1. Metrowide Trends  . . . . . P.12
i.                 Low and Moderate Income Neighborhoods
ii.               Minority Neighborhoods
iii.             Low and Moderate Income, White neighborhoods
    1. All Cities in Hennepin and Ramsey Counties . . . . . P. 17
    2. Minneapolis and St. Paul neighborhoods . . . . . P. 20
    3. Individual census tracts . . . . . P. 25

5. Methodology . . . . . P. 29

  1. The exclusion of low and moderate income neighborhoods from the economic mainstream . . . . . P. 30

  1. Half of all subprime borrowers may have qualified for a better loan . . . . . P. 32

  1. Predatory Lending Practices . . . . . P. 33

  1. Recommendations . . . . . P. 39

  1. About ACORN and ACORN Housing . . . . . P. 43

  1. 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


Metrowide Patterns

¨ 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.

Minneapolis and St. Paul Neighborhoods

¨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

Mortgages with balloon payments are arranged so that after making a certain number of regular payments, the borrower must pay off the remaining loan balance in its entirety, in one “balloon payment.”  The specified time period after which the balloon payment must be paid can range from five to seven to ten or fifteen years. About ten percent of subprime loans have balloon payments[xxx].


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. 




[i]  Business Wire,“Fannie Mae has Played Critical Role in Expansion of Minority Homeownership,” 
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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