Thursday, June 9, 2016

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



Drained Wealth, Withered Dreams II

The Disparate Impact of
Predatory Lending in the Twin Cities

June 2004



757 Raymond Avenue, Suite 200, St. Paul, MN 55114
651-642-9639

and



ACORN Housing Corporation
757 Raymond Avenue, Suite 200, St. Paul, MN 55114
651-203-0008


Drained Wealth, Withered Dreams II

A study of the Disparate Impact of Predatory Lending in the Twin Cities



Table of Contents

1.  About ACORN and ACORN Housing . . . . . P. 3

  1. Introduction . . . . . P. 4

  1. Summary of Findings . . . . . P. 9

  1. Findings . . . . P. 13

    1. Metrowide Trends  . . . . . P.13
                                                    i.     Low and Moderate Income Neighborhoods
                                                  ii.     Minority Neighborhoods
                                                iii.     Low and Moderate Income, White neighborhoods
    1. All Cities in Hennepin County . . . . . P. 23
    2. Minneapolis neighborhoods . . . . . P. 26

  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. Methodology . . . . . P. 44

  1. Endnotes . . . . . P. 45

We gratefully acknowledge the University of Minnesota’s Center for Urban and Regional Affairs (CURA) for conducting the research which made this report possible and the Otto Bremer Foundation, St. Paul Foundation, Minneapolis Foundation, Jay and Rose Phillips Foundation, and Headwaters Fund for supporting our work against predatory lending.







ACORN, the Association of Community Organizations for Reform Now,  is the nation's largest community organization of low- and moderate-income families, with over 150,000 member families organized into 700 neighborhood chapters in 60 cities across the country. Since 1970 ACORN has taken action and won victories on issues of concern to our members. ACORN’s 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. ACORN achieve these goals by building community organizations that have the power to win changes -- through direct action, negotiation, legislation, and voter participation.  ACORN’s website is at www.acorn.org.



           

In 1986, ACORN Housing originated from neighborhood-based campaigns conducted by ACORN.  ACORN Houisng is a national, non-profit organization which provides housing counseling and education services to low and moderate income families.  Since its inception, ACORN Housing has grown to have offices in 32 cities and provides mortgage counseling to more individuals than any other organization in the country.  ACORN Housing is also the national leader in assisting victims of predatory lending by providing refinancing at improved terms, through loan modification, and by conducting outreach that teaches individuals to identify and avoid predatory loans.  ACORN Houisng has helped over 50,000 low and moderate income families realize their dream of buying a home.  Since 1991, ACORN and ACORN Housing have helped over 1,300 families in the Twin Cities buy homes. ACORN Housing’s web site is at www.acornhousing.org

INTRODUCTION

In 2001, Minnesota ACORN and ACORN Housing released a report examining the level of subprime lending city-by-city in Hennepin and Ramsey counties and neighborhood-by-neighborhood in Minneapolis and St. Paul.

In this study, we have updated those findings for Hennepin County and looked at the change in lending from 1999 to 2002.  As in the previous study, this report has a number of disturbing findings demonstrating that the Twin Cities 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. 



● In 2002, homeowners in the Near North neighborhood of Minneapolis who refinanced were almost 12 times more likely than homeowners in the Calhoun/ Isles neighborhood to receive a subprime loan and Camden homeowners were 7 times more likely.

· Subprime lenders made 425 refinance loans in the Near North neighborhood in 2002, while they made just a total of 436 refinances in the suburbs of Eden Prairie, Plymouth, Edina, and Minnetonka combined.  In contrast, prime lenders made 15,773 refinances in these four suburbs -- 20 times more than the 729 refinances they made in Near North .

In many ways, the problem is getting worse and the disparities are growing.

● In 1999, homeowners in minority neighborhoods were 5.2 times more likely than homeowners in predominantly white neighborhoods to receive a subprime loan when refinancing.  In 2002, these homeowners in minority neighborhoods were 6.2 times more likely.

● In 1999, homeowners in low and moderate-income neighborhoods were 4.8 times more likely than homeowners in upper income neighborhoods to receive a subprime loan when refinancing. In 2002, these homeowners in low and moderate- income neighborhoods were 5.1 times more likely.



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.

Fannie Mae has estimated that as many as half of the borrowers in subprime loans could have instead qualified for a lower cost mortgage[1].   Freddie Mac suggested a somewhat lower, but still extremely large figure – that as many as 35 percent of borrowers who obtained mortgage in the subprime market could have qualified for a prime loan[2].  In last 2002, a senior HSBC executive acknowledged after the bank’s purchase of major subprime lender Household International was announced that 46% of Household’s real estate-backed loans were to borrowers with ‘A’ credit[3].  The financial difference is enormous: borrowers can easily pay $200,000 more in payments on a 30-year subprime loan.

Too often higher rate subprime loans are also loaded with abusive features – high fees, large and extended prepayment penalties, financed single premium credit insurance – which cost borrowers even more money, and can keep them trapped into the higher interest rate.  When a borrower with good credit in a high rate loan is also charged inflated up front fees, assessed a prepayment penalty, and/or sold financed single premium credit insurance, it often leaves them without enough equity to refinance into a loan at a more reasonable rate.  Borrowers are also often trapped into loans when lenders or servicers damage their credit scores by falsely reporting late payments and inflated loan amounts; sometimes the simple fact of taking out a subprime loan or a home-equity line of credit – regardless of a borrower’s repayment record – can damage a borrower’s credit score[4].

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 that 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.

These loans are too often loaded with additional abusive features like financed credit insurance, hidden balloon payments, and mandatory arbitration clauses.  As a result, such borrowers also find themselves trapped into high rate loans even once they have improved their credit.  Many borrowers are also repeatedly solicited, and repeatedly refinanced into high rates, losing equity through every transaction, in a practice known as flipping.

Unfortunately, these problems pervade too much of the subprime industry.  In the past few years, two of the largest subprime mortgage lenders – Household International and The Associates, which is now owned by Citifinancial – announced respective settlements of $485 million and $240 for engaging in predatory lending practices. While these figures were the largest settlements in American history for any type of consumer complaints, the dollar figures are well below the financial damage these companies have inflicted on their borrowers.  Abuses are also widespread among unscrupulous mortgage brokers, who convince consumers they are acting to secure the lowest-priced loan when they are actually taking kickbacks from lenders to jack up interest rates, in addition to their standard origination fees[5].

 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. Subprime lending is disproportionately concentrated among minority, low-income, and elderly homeowners[6]

Many in the lending industry argue that the disproportionate concentration of subprime loans among lower income and minority borrowers is only a reflection of the greater risk that these borrowers represent based on their lower credit ratings.  However, Fannie Mae has stated that the racial and economic disparities in subprime lending cannot be justified by credit quality alone.  According to Fannie, loans to lower-income customers perform at similar levels as loans to upper income customers; indeed, some recent research suggests that mortgages to low-and moderate-income borrowers perform better than other mortgages when the lower prepayment risk is taken into account[7].  In addition, the level of disparity presented in studies which showed that black households had more credit problems than white households was not even close to the levels of disparities seen in subprime lending[8].

Predatory lending threatens to reverse the progress that has been made in increasing homeownership rates among minority and lower income families.  Many in the subprime industry like to portray their primary role as helping families realize the American Dream of homeownership.  But the vast majority of subprime loans are refinances and home equity loans to existing homeowners, not purchase loans.

While it is important for homeowners to be able to use the equity in their homes to meet financial needs, predatory lenders bombard homeowners in many communities with refinance offers that lead to loans at higher rates, with inflated fees, and other abusive terms.  By stripping equity, increasing indebtedness, and even costing families their homes, these practices cause homeowners to lose their equity, rather than use it for their benefit.  The significant rise in home values in the Twin Cities has exacerbated this problem by making more homeowners targets for predatory lenders intent on stripping their equity.

The Coalition for Responsible Lending in North Carolina has estimated that predatory practices such as inflated interest rates, prepayment penalties, and lost equity due to unnecessary fees, cost Americans a staggering $9.1 billion a year.  The group also figured out than in Minnesota, predatory lending exacts an economic toll of $165 million a year from stripped equity and excess interest.

Despite increased awareness of the issue and some progress over the last few years in combating the problem, predatory lending has continued, as these modern day loan sharks sink their teeth into new prey every day.  The number of refinance loans made in Hennepin County by subprime lenders almost doubled from 1999 to 2002, increasing from 2,386 in 1999 to 4,371 in 2002.




During this period, the percentage of all refinance loans that were made by subprime lenders fell from 10% in 1999 to 7% in 2002, although this was primarily a reflection of the growth in prime refinances to historically low interest rates. However, the growth in prime refinances for low-income neighborhoods (177%) and moderate income neighborhoods (185%) substantially trailed the increase for upper income neighborhoods (234%). 

The damage that predatory lending does in our communities cannot be overestimated, as  homeownership provides the major source of wealth for low-income and minority families.  In 2002, 62% of African-American households’ net wealth and 51% of Hispanic households’ net wealth resided in their homes – compared to 31% for white households. And even that data understates the importance of home equity, since most stocks and other non-home equity wealth is heavily concentrated at the top of all population groups.  Home equity represents 75% of the net wealth for Hispanics in the bottom two income quintiles (0-40%) and 79% of the net wealth for African-Americans in the second income quintile (20-40%).[9]

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.  Many studies have shown a link between increased levels of subprime lending – where predatory lending practices are concentrated – and increased foreclosures. The prevalence of predatory lending abuses in the subprime market has been a major factor behind record-breaking foreclosure rates in recent years.  In Hennepin County foreclosures increased 15% from 2002 to 2003[10].

The last few years have seen a growing recognition of the serious harm being caused by predatory lending, and federal and state regulators have begun to take modest yet significant steps against the abuses.  The Office of Thrift Supervision moved forward in July 2003 with regulations that effectively restored consumer protection laws on late fees and prepayment penalties in about half the states.  Despite some dire industry predictions, consumers in states with such protections have not seen their access to home loans restricted – only now fewer are trapped in excessive rates by large and extended prepayment penalties.  In October 2002, the Federal Reserve used its regulatory authority under the federal Home Ownership Equity Protection Act (HOEPA) to announce two significant changes: counting single-premium credit insurance policies as a fee under the HOEPA test and expanding HOEPA coverage to more first mortgages with high rates.

Unfortunately, federal regulators have also taken others steps that are undermining the fight against predatory lending.  As this study and other research indicate, subprime lenders have been so successful in targeting lower-income and minority communities in large part because banks and thrifts have long neglected those communities; households without adequate access to prime products are easy marks for predatory loans.  Although the federal Community Reinvestment Act (CRA) has provided the primary means to push banks to live up to their obligations to serve all communities, the regulators recently issued a joint proposed rule that would weaken the CRA regulations.  In addition, the Office of the Comptroller of the Currency (OCC) has moved forward with regulations to exempt national banks and their operating subsidiaries from state anti-predatory lending laws despite substantial evidence that institutions supervised by the OCC are engaging in predatory lending.

A few recent developments in the secondary mortgage market have benefited homeowners. Freddie Mac and Fannie Mae – building upon their earlier standards for purchasing of subprime loans that have been helpful in discouraging abusive terms like financed single-premium credit insurance – both recently announced that they are no longer buying subprime loans that contain mandatory arbitration clauses.  These clauses are designed to prevent borrowers from taking lenders or brokers that have violated the law to court, instead shifting them over into an arbitration system that is stacked against their interests.  In addition, the three major bond rating agencies – Fitch, Moody’s, and Standard & Poor’s – have all announced that they will continue rating subprime loans in all of the states that have passed anti-predatory lending laws, helping ensure a steady flow of capital to the subprime market in those states.

This is welcome news for those states in which the legislatures have enacted anti-predatory lending laws.[11]  However, many abusive predatory lending practices continue to be legal in Minnesota where the banking and mortgage industry has used its power and influence to thwart any legislative efforts.

The financial industry regularly makes unsubstantiated claims that legislation will cut off access to credit, but state anti-predatory lending laws are rapidly developing a solid track record of reducing the number of abusive loans without impinging on the availability of credit.  After the North Carolina governor earlier announced that the state’s 1999 law had saved homeowners $100 million in its first year, a UNC study found that the law caused a dramatic reduction in the number of loans with predatory terms while average subprime interest rates in the states rose less than the national average – indicating that the state’s in-flow of capital has not been restricted.[12]

As more state anti-predatory laws lead to meaningful reforms in the pricing of subprime loans without producing negative side effects, predatory lenders seeking to preserve a status quo where homeowners can easily be exploited have ratcheted up pressure on Congress to preempt state consumer protection laws.  Rep. Bob Ney (R-OH) has introduced an industry-supported preemption bill, HR 883, that would undermine enforcement of the limited existing federal law while hampering the efforts of housing counseling agencies that struggle daily to refinance homeowners out of predatory loans.  In contrast, Sen. Paul Sarbanes (D-MD) – ranking Democrat on the Senate Banking Committee – has introduced legislation, S. 1928, that closely tracks the protections of the
successful state laws.  The path Congress chooses will determine whether homeownership remains a viable path for large numbers of people of color and low-and moderate-income Americans to a basic level of financial security and stability.


SUMMARY OF FINDINGS




Hennepin County Patterns


1) Homeowners in low and moderate-income neighborhoods were 5.1 times more likely than homeowners in upper income neighborhoods to receive a subprime loan when refinancing. 

► Subprime lenders accounted for 17.10% of all refinances made in low and moderate income census tracts, but just 3.34% of the refinance loans made in upper-income census tracts[13].

2) This disparity grew from 1999 when homeowners in low and moderate-income neighborhoods were 4.8 times more likely than homeowners in upper income neighborhoods to receive a subprime loan.

► In 1999, subprime lenders accounted for 24.99% of all refinances made in low and moderate income census tracts, but just 5.17% of the refinance loans made in upper-income census tracts.

3) Although the share of refinance loans made by subprime lenders in low and moderate- income neighborhoods declined from 1999 to 2002, upper income neighborhoods saw a larger decrease, resulting in the greater disparity.

► Subprime lenders accounted for 17.10% of the refinances made in low and moderate-income census tracts in 2002, a 32% decrease from 1999 when they were responsible for 24.99% of the refinances.  Subprime lenders made 3.34% of the refinances in upper income neighborhoods in 2002, 35% fewer than in 1999 when they made 5.17% of the refinances in these neighborhoods.

4) Homeowners in minority neighborhoods were 6.2 times more likely than homeowners in predominantly white neighborhoods to receive a subprime loan when refinancing and homeowners in integrated neighborhoods were 2.5 times more likely than homeowners in predominantly white neighborhoods to receive a subprime loan. 

►Subprime lenders accounted for 30.89% of all refinances made in census tracts in which minorities make up more than half of the population and 12.46% of the refinance loans in integrated census tracts in which minority residents make up between 10%-49% of the population.  In contrast, subprime lenders accounted for just 4.97% of the refinance loans made in census tracts in which minorities are less than 10% of the population.



 

5) This disparity grew from 1999 when homeowners in minority neighborhoods were 5.2 times more likely than homeowners in predominantly white neighborhoods to receive a subprime loan when refinancing and homeowners in integrated neighborhoods were 1.9 times more likely.

► In 1999, subprime lenders accounted for 40.48% of all refinances in minority census tracts and 18.85% of the refinances in integrated census tracts, but just 7.82% of the refinance loans made in predominantly white census tracts.

6) Although the share of refinance loans made by subprime lenders in minority neighborhoods declined from 1999, predominantly white neighborhoods saw an even larger decrease, resulting in greater disparity. 

► Subprime lenders accounted for 30.89% of the refinances made in minority census tracts in 2002, a 24% decrease from 1999 when they were responsible for 40.48% of the refinances.  Subprime lenders made 4.97% of the refinances in upper income neighborhoods in 2002, 36% fewer than in 1999 when they made 7.82% of the refinances in these neighborhoods.

7) Homeowners in low and moderate income, white neighborhoods are 4.2 times more likely than homeowners in upper-income white neighborhoods to receive a subprime loan when refinancing.

In census tracts in which white residents make up more than 90% of the population, subprime lenders accounted for 11.95% of all refinances made in low and moderate income tracts, but just 2.87% 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.

8) This disparity grew from 1999 when homeowners in low and moderate income white neighborhoods were 3.8 times more likely than homeowners in predominantly white neighborhoods to receive a subprime loan when refinancing.

► In census tracts in which white residents make up more than 90% of the population, subprime lenders accounted for 19.55% of all refinances made in low and moderate income tracts in 1999, but just 5.14% of the refinance loans made in upper-income tracts.  

9) Although the share of refinance loans made by subprime lenders in low and moderate income white neighborhoods declined from 1999, upper income white neighborhoods saw an even larger decrease, resulting in greater disparity. 

► Subprime lenders accounted for 11.95% of the refinances made in low and moderate income white neighborhoods in 2002, a 39% decrease from 1999 when they were responsible for 19.55% of the refinances.  Subprime lenders made 2.87% of the refinances in upper income white neighborhoods in 2002, 44% fewer than in 1999 when they made 5.14% of the refinances in these neighborhoods.

Minneapolis Neighborhoods






1) In Minneapolis, lower income neighborhoods with large minority populations have the highest concentrations of subprime lending.  Subprime lenders accounted for more than 15% of the refinance loans in 4 of the 11 Minneapolis neighborhoods:  Near North (35%); Camden (21%); Phillips/ Whittier (18%); and Powderhorn (15%). 

These same neighborhoods had the highest levels of subprime lending in 1999: Near North (44%); Camden (30%); Phillips/ Whittier (40%); and Powderhorn (24%).

2) Minneapolis also has neighborhoods with minimal levels of subprime lending.  Subprime lenders accounted for 5% or less of the refinance loans in 3 of the 11 neighborhoods: Downtown (5%); Southwest (3%); and Calhoun/ Isles (3%).

These same neighborhoods had the lowest levels of subprime lending in 1999: Downtown (8%); Southwest (7%); and Calhoun-Isles (8%).

3) The disparity in the prevalence of subprime lending between certain Minneapolis neighborhoods soared from 1999 to 2002.   In 2002, Near North homeowners who refinanced were 11.6 times more likely Calhoun/Isles homeowners to receive a subprime loan and Camden homeowners were 7 times more likely.

In 1999, Near North homeowners who refinanced were 5.4 times more likely than Calhoun/Isles homeowners to receive a subprime loan and Camden homeowners were 4.6 times more likely.

4) Although the share of refinance loans made by subprime lenders in Near North and Camden declined from 1999 to 2002, the Southwest neighborhood saw an even larger decrease, resulting in greater disparity. 

► The percentage of refinances made by subprime lenders decreased 21% in Near North, 30% in Camden, and 52% in Southwest from 1999 to 2002.












All Cities in Hennepin County

1) In four cities in 2002, subprime lenders made at least 10% of all the refinance loans made in those cities: Brooklyn Center (12.0%); Minneapolis (10.7%); Robbinsdale (10.0%); and Crystal (10.0%). 

These cities also had the largest levels of subprime lending in 1999: Brooklyn Center (16.3%); Minneapolis (17.6%); Robbinsdale (14.5%); and Crystal (13.3%). 

2) In four cities, subprime lenders accounted for less than 3% of all the refinance loans made in those cities:  Eden Prairie (2.6%); Plymouth (2.8%); Edina (2.9%); and Minnetonka (2.9%).

These cities also had the largest levels of subprime lending in 1999: Eden Prairie (4.9%); Plymouth (4.5%); Edina (5.3%); and Minnetonka (4.8%).

3) The disparity between the city in Hennepin County with the highest concentration of subprime loans and the city with the lowest grew from 1999 to 2002.

In 2002, homeowners in Brooklyn Center who refinanced were 4.6 times more likely than homeowners in Eden Prairie to receive a subprime loan, while in 1999
homeowners in Minneapolis were 3.9 times more likely than homeowners in Plymouth to receive a subprime loan. 











FINDINGS

Homeowners in low, moderate, and even middle income neighborhoods in Hennepin County were significantly more likely than homeowners in upper-income neighborhoods to receive a high-cost subprime loan when refinancing and the disparity increased from 1999 to 2002.

Homeowners in low-income neighborhoods were 5.6 times more likely than homeowners in upper income neighborhoods to receive a subprime loan when refinancing, homeowners in moderate-income neighborhoods were 5 times more likely, and even homeowners in middle-income neighborhoods were twice as likely.

Subprime lenders accounted for 18.62% of the refinances made in low-income neighborhoods, 16.62% in moderate-income neighborhoods, 6.83% in middle-income neighborhoods, and 3.34% in upper income neighborhoods.

2002 Hennepin County
Census Tract Income
Total # of refinance loans
# of subprime refinance loans
Subprime Refinances as Percentage of all refinances
Low Income
1944
362
18.62%
Moderate Income
6089
1012
16.62%
Middle Income
30358
2074
6.83%
Upper Income
27637
923
3.34%


In 2002 in Hennepin County almost 1 out of every 5 refinances made in a low-income census tract and 1 out of every 6 refinances made in a moderate income census tract were from a subprime lender.  1 out of every 15 loans in a middle-income census tract was from a subprime lender. In contrast, subprime lenders made just 1 one out of every 30 refinance loans made in upper-income census tracts.


Although the prevalence of subprime lending declined in Hennepin County neighborhoods of all income levels from 1999, upper income neighborhoods saw the largest decrease. 

In 1999, subprime lenders accounted for 28.09% of the refinances made in low-income census tracts, 23.94% in moderate-income neighborhoods, and 5.17% in upper income neighborhoods.

1999 Hennepin County
Census Tract Income
Total # of refinance loans
# of subprime refinance loans
Subprime Refinances as Percentage of all refinances
Low Income
794
223
28.09%
Moderate Income
2343
561
23.94%
Middle Income
11126
1163
10.45%
Upper Income
8,499
439
5.17%

Upper income neighborhoods experienced the largest decrease in the share of supbrime loans, while the smallest decline was in moderate-income neighborhoods.

Subprime Loans as Percentage of All Refinances in Hennepin County
Census Tract Income
1999
2002
Change from 1999 to 2002
Low Income
28.09%
18.62%
- 33.7%
Moderate Income
23.94%
16.62%
- 30.6%
Middle Income
10.45%
6.83%
- 34.6%
Upper Income
5.17%
3.34%
- 35.4%

The greater decrease in the level of subprime lending in upper income neighborhoods resulted in an increase in the disparity between neighborhoods.

In 2002, homeowners in low-income neighborhoods were 5.6 times more likely than homeowners in upper-income neighborhoods to receive a subprime loan when refinancing, while homeowners in moderate income neighborhoods were 5.0 times more likely than homeowners in upper income neighborhoods to receive a subprime loan.

This represents an increase in the disparity from 1999 when homeowners in low-income neighborhoods were 5.4 times more likely than homeowners in upper-income neighborhoods to receive a subprime loan when refinancing, while homeowners in moderate-income neighborhoods were 4.6 times more likely than homeowners in upper income neighborhoods to receive a subprime loan. Middle-income homeowners were still twice as likely as homeowners in upper-income neighborhoods to receive a subprime loan.

Homeowners in low and moderate income neighborhoods received a significantly greater share of subprime refinance loans than of prime refinance loans.

In 2002, low-income Hennepin County neighborhoods received a 3.22 times larger share of subprime refinance loans than of prime refinance loans.  8.28% of all the refinances made in Hennepin County were in low-income neighborhoods, while just 2.57% of the prime refinance loans were in these neighborhoods.

In 2002, homeowners in moderate income neighborhoods in Hennepin County received a 2.81 times greater share of subprime refinance loans than they did of prime refinance loans.  23.15% of all subprime refinance loans in Hennepin County were made in moderate income neighborhoods, compared to just 8.23% of the prime refinance loans. 

In contrast in 2002, upper income neighborhoods in Hennepin County received a 2.05 times greater share of prime refinance loans than of subprime refinance loans.  43.33% of all prime refinance loans in Hennepin County were made in upper income neighborhoods, while only 21.12% of the subprime refinance loans were made in these neighborhoods.

2002 Hennepin County
Census Tract Median Income
# Prime Refinances
Share of Prime Refinances

# Subprime Refinances
Share of Subprime Refinances
Low Income
1,582
2.57%
362
8.28%
Moderate Income
5,077
8.23%
1,012
23.15%
Middle Income
28,284
45.87%
2,074
47.45%
Upper Income
26,714
43.33%
923
21.12%
TOTAL
61,657
100%
4371
100%

In 2002, moderate income neighborhoods in Hennepin County received over 23% of the subprime loans made in the county, a larger share than the 21% received in upper income neighborhoods.  However, moderate income neighborhoods received a five times smaller share of prime refinances than upper income neighborhoods, just 8% compared to 43%.



The disparity between neighborhoods of different incomes was even greater within Minneapolis, than in Hennepin County as a whole. 

Subprime lenders accounted for a larger share of the refinance loans made in low and moderate income census tracts in Minneapolis than in the low and moderate income census tracts in Hennepin County as a whole.  At the same time, subprime lenders accounted for a smaller share of the refinance loans in upper income tracts.

In 2002 in Minneapolis, subprime lenders accounted for 21.12% of the refinances made in low-income neighborhoods, 16.90% in moderate income neighborhoods and 2.96% in upper income neighborhoods.

2002 Minneapolis
Census Tract Income
Total # of refinance loans
# of subprime refinance loans
Subprime Refinances as Percentage of all refinances
Low Income
1619
342
21.12%
Moderate Income
5682
960
16.90%
Middle Income
7052
490
6.95%
Upper Income
3243
96
2.96%



The prevalence of subprime lending declined in Minneapolis neighborhoods of all income levels from 1999, although the largest decrease was in upper income neighborhoods. In 1999, subprime lenders accounted for 32.22% of the refinances made in low income census tracts, 24.79% in moderate income neighborhoods, and 6.52% in upper income neighborhoods.

1999 Minneapolis
Census Tract Income
Total # of refinance loans
# of subprime refinance loans
Subprime Refinances as Percentage of all refinances
Low Income
658
212
32.22%
Moderate Income
2186
542
24.79%
Middle Income
2642
324
12.26%
Upper Income
1043
68
6.52%

Upper income neighborhoods in Minneapolis experienced the largest decrease in the share of supbrime loans, while the smallest declines were in low and moderate income  Minneapolis neighborhoods.

Subprime Loans as Percentage of All Refinances in Minneapolis
Census Tract Income
1999
2002
Change from 1999 to 2002
Low Income
32.22%
21.12%
- 34.45%
Moderate Income
24.79%
16.90%
- 31.83%
Middle Income
12.26%
6.95%
- 43.31%
Upper Income
6.52%
2.96%
- 54.60%

The greater decrease in the level of subprime lending in upper income Minneapolis neighborhoods resulted in an increase in the economic disparity between neighborhoods.

In 2002, Minneapolis homeowners in low-income neighborhoods were 7.3 times more likely than homeowners in upper-income neighborhoods to receive a subprime loan when refinancing, while homeowners in moderate income neighborhoods were 5.7 times more likely than homeowners in upper income neighborhoods to receive a subprime loan. Even homeowners in middle-income neighborhoods were 2.3 times as likely as homeowners in upper-income neighborhoods to receive a subprime loan.

This represents an increase in the disparity from 1999 when homeowners in low-income neighborhoods were 4.9 times more likely than homeowners in upper-income neighborhoods to receive a subprime loan when refinancing, and homeowners in moderate income neighborhoods were 3.8 times more likely than homeowners in upper income neighborhoods to receive a subprime loan. Middle-income homeowners were 1.9 times more likely as homeowners in upper-income neighborhoods to receive a subprime loan.











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 6.2 times more likely than homeowners in predominantly white neighborhoods to receive a subprime loan when refinancing and homeowners in integrated neighborhoods were 2.5 times more likely than homeowners in predominantly white neighborhoods to receive a subprime loan. 

In 2002 in Hennepin County, subprime lenders accounted for 30.76% of all refinance loans made in predominantly minority census tracts, 12.46% of the refinance loans made in integrated census tracts, and just 4.97% of the refinance loans made in predominantly white neighborhoods[14].

2002 Hennepin County

Percentage of Census Tract Population that is Minority
Total  # of refinance loans
# of subprime refinance loans
Subprime Refinances as Percentage of all refinances
>50%
1,580
486
30.76%
25-49%
1,545
275
17.80%
10-24%
7,547
858
11.37%
<10%
55,356
2,752
4.97%



The prevalence of subprime lending declined in Hennepin County neighborhoods of all racial populations from 1999 when subprime lenders accounted for 40.09% of the refinances made in minority census tracts, 18.85% in integrated neighborhoods, and 7.82% in predominantly white neighborhoods.



1999 Hennepin County
Percentage of Census Tract Population that is Minority
Total  # of refinance loans
# of subprime refinance loans
Subprime Refinances as Percentage of all refinances
>50%
651
261
40.09%
25-49%
607
171
28.17%
10-24%
2,984
506
16.96%
<10%
18,520
1448
7.82%

Minority census tracts experienced the smallest decline in the share of refinance loans made by subprime lenders, while predominantly white census tracts experienced the greatest decline.

Subprime Loans as Percentage of All Refinances in Hennepin County

Percentage of Census Tract Population that is Minority
1999
2002
Change from 1999 to 2002
>50%
40.09%
30.76%
-23.27%
25-49%
28.17%
17.80%
-36.81%
10-24%
16.96%
11.37%
-32.96%
<10%
7.82%
4.97%
-36.45%


The greater decrease in the level of subprime lending in predominantly white neighborhoods resulted in an increase in the racial disparity between neighborhoods.

In 2002, homeowners in minority neighborhoods in Hennepin County were 6.2 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 to receive a subprime loan.

This was an increase from 1999 when Hennepin County homeowners in minority neighborhoods were 5.1 times more likely than homeowners in predominantly white neighborhoods to receive a subprime loan when refinancing, while homeowners in integrated neighborhoods were 1.9 times more likely than homeowners in predominantly white neighborhoods to receive a subprime loan.

Homeowners in minority neighborhoods received a disproportionately greater share of subprime refinance loans than of prime refinance loans.

Homeowners in minority neighborhoods received a 6 times larger share of subpirme refinance loans than of prime refinance loans. 11.1% of all the subprime refinance loans made in Hennepin County in 2002 were in minority neighborhoods, while just 1.8% of the prime refinance loans were made in these neighborhoods. 

Homeowners in integrated neighborhoods received a 2 times greater share of subprime refinance loans than they did of prime refinance loans.  25.9% of all subpirme refinance loans in Hennepin County in 2002 were made in integrated neighborhoods, compared to just 12.9% 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.  85.3% of all prime refinance loans in Hennepin County were made in predominantly white neighborhoods, while only 63.0% of the subprime refinance loans were made in these neighborhoods.

2002 Hennepin County
Percentage of Census Tract Population that is Minority
# Prime Refinances
Share of Prime Refinances
# Subprime Refinances
Share of Subprime Refinances
>50%
1094
1.77%
486
11.11%
25-49%
1,270
2.06%
275
6.29%
10-24%
6689
10.85%
858
19.63%
<10%
52604
85.32%
2752
62.96%
TOTAL
61657

4371























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 2002, homeowners in low and moderate income white neighborhoods in Hennepin County were 4.2 times more likely than homeowners in predominantly white neighborhoods to receive a subprime loan when refinancing, while homeowners in middle income white neighborhoods were 2.3 times more likely than homeowners in predominantly white neighborhoods to receive a subprime loan.

1 out of every 8 refinance loans made in a predominantly white, low or moderate income census tract was from a subprime lender.  In contrast, subprime lenders made just 1 out of every 35 refinance loans made in upper-income census tracts.

Subprime lenders accounted for 11.95% of all refinances made in low and moderate income, predominantly white census tracts, but just 2.87% of the refinance loans made in upper-income, predominantly white census tracts. 

2002 Hennepin County
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
1648
197
11.95%
Middle Income
27619
1805
6.54%
Upper Income
26089
750
2.87%


The prevalence of subprime lending declined in white neighborhoods of all income levels from 1999 when subprime lenders accounted for 19.55% of the refinances made in low and moderate income white census tracts, 9.219% in middle income white neighborhoods, and 5.14% in upper income white neighborhoods.

1999 Hennepin County

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
660
129
19.55%
Middle Income
9862
908
9.21%
Upper Income
7998
411
5.14%

Upper income white neighborhoods experienced the largest decrease in the share of supbrime loans, while the smallest decline was in middle income white neighborhoods.


Subprime Loans as Percentage of All Refinances in Minneapolis
Census Tract Income
1999
2002
Change from 1999 to 2002
Low and Moderate Income
19.55%
11.95%
38.87%
Middle Income
9.21%
6.54%
28.99%
Upper Income
5.14%
2.87%
44.16%

The greater decrease in the level of subprime lending in upper income predominantly white neighborhoods resulted in an increase in the economic disparity between neighborhoods.

In 2002, homeowners in low and moderate income white neighborhoods in Hennepin County were 4.2 times more likely than homeowners in predominantly white neighborhoods to receive a subprime loan when refinancing, while homeowners in middle income white neighborhoods were 2.3 times more likely than homeowners in predominantly white neighborhoods to receive a subprime loan.

This was an increase from 1999 when Hennepin County homeowners in low and moderate income white neighborhoods were 3.8 times more likely than homeowners in predominantly white neighborhoods to receive a subprime loan when refinancing, while homeowners in middle income white neighborhoods were 1.8 times more likely than homeowners in predominantly white neighborhoods to receive a subprime loan.
























All Cities in Hennepin County

In 2002, subprime lenders accounted for more than 10% of the refinances in four cities in Hennepin County:  Brooklyn Center (12.03%); Minneapolis (10.73%); Robbinsdale (10.03%); and Crystal (10.02%).

Despite the high concentration of subprime loans in certain Minneapolis neighborhoods, which will be discussed in more detail below, Brooklyn Center had the largest percentage of refinance loans that were from subprime lenders, and Minneapolis as a whole did not have that much greater a percentage of subprime loans than some of the surrounding suburbs.

2002
City
Total # of refinances
Total # of subprime refinances
Subprime Refinances as Percentage of all refinances
Brooklyn Center
1322
159
12.03%
Minneapolis
17596
1888
10.73%
Robbinsdale
877
88
10.03%
Crystal
1288
129
10.02%

These cities also had the highest levels of subprime lending in 1999. 

1999
City
Total # of refinances
Total # of subprime refinances
Subprime Refinances as Percentage of all refinances
Minneapolis
6529
1146
17.6%
Brooklyn Center
578
94
16.3%
Robbinsdale
296
43
14.6%
Crystal
511
68
13.3%

In 2002, subprime lenders accounted for less than 4% of the refinance loans made in five cities:  Maple Grove (3.32%); Minnetonka (2.87%); Edina (2.85%); Plymouth (2.79%); and Eden Prairie (2.59%).

2002
City
Total # of Refinances
Total # of subprime refinances
Subprime refinances as percentage of all refinances
Maple Grove
4763
158
3.32%
Minnetonka
3557
102
2.87%
Edina
3156
90
2.85%
Plymouth
4702
131
2.79%
Eden Prairie
4358
113
2.59%

These cities also had the lowest levels of subprime lending in 1999:

1999
City
Total # of Refinances
Total # of subprime refinances
Subprime refinances as percentage of all refinances
Maple Grove
1549
88
5.7%
Edina
940
50
5.3%
Eden Prairie
1183
58
4.9%
Minnetonka
1141
55
4.8%
Plymouth
1436
65
4.5%





ALL CITIES IN HENNEPIN COUNTY

2002
City
Total # of refinances
# of subprime refis
Percentage subprime
Brooklyn Center
1322
159
12.0%
Minneapolis
17596
1888
10.7%
Robbinsdale
877
88
10.0%
Crystal
1288
129
10.0%
Brooklyn Park
4172
362
8.7%
Hopkins
660
48
7.3%
Richfield
1709
122
7.1%
New Hope
916
60
6.6%
St. Louis Park
2605
161
6.2%
Champlin
1833
103
5.6%
Long Lake
94
5
5.3%
Dayton
1149
59
5.1%
Corcoran
355
18
5.1%
Bloomington
4500
213
4.7%
Independence
613
27
4.4%
Golden Valley
1361
56
4.1%
Orono
565
23
4.1%
Wayzata
264
9
3.4%
Maple Grove
4763
158
3.3%
Medina
379
12
3.2%
Minnetonka
3557
102
2.9%
Edina
3156
90
2.9%
Plymouth
4702
131
2.8%
Eden Prairie
4358
113
2.6%

 

1999
City
Total # of refinances
# of subprime refis
Percent subprime
Minneapolis
6529
1146
17.6%
Brooklyn Center
578
94
16.3%
Robbinsdale
296
43
14.6%
Hopkins
234
33
14.1%
Crystal
511
68
13.3%
Richfield
644
76
11.8%
Brooklyn Park
1482
167
11.3%
St. Louis Park
899
77
8.6%
New Hope
357
30
8.5%
Bloomington
1675
128
7.6%
Champlin
623
58
9.31%
Corcoran
151
11
7.3%
Long Lake
46
3
6.5%
Golden Valley
468
28
6.0%
Maple Grove
1549
88
5.7%
Independence
217
12
5.5%
Edina
940
50
5.3%
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%
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 in 2002.  Subprime loans accounted for: 35% of all the refinance loans made in Near North; 21% of the refinances made in Camden; 18% of those in Phillips/Whittier; and 15% of the refinances made in Powderhorn.

2002
Neighborhood[15]
Total # of refinance loans
Total # of subprime refinances
Subprime Refinances as % of all refinances
Near North
1217
425
34.92%
Camden
1715
364
21.22%
Phillips/ Whittier
457
82
17.94%
Powderhorn
1975
304
15.39%
Northeast
1866
161
8.63%
Longfellow
1520
126
8.29%
Nokomis
3052
214
7.01%
University
635
35
5.51%
Central (Dowtown)
529
24
4.54%
Southwest
3036
97
3.19%
Calhoun/ Isles
1558
47
3.02%


Compared to homeowners in the Calhoun/Isles area who refinanced, homeowners in:

· Near North were 11.6 times more likely to receive a subprime loan;

· Camden were 7.0 times more likely to receive a subprime loan;

· Phillips/Whittier were 5.9 times more likely to receive a subprime loan;

· Powderhorn were 5.1 times more likely to receive a subprime loan

· Northeast were 2.9 times more likely to receive a subprime loan

· Longfellow were 2.7 times more likely to receive a subprime loan


In 2002, more than 1 out of every 3 refinance loans made in Near North and more than 1 out of every 5 refinance loan made in Camden were from a subprime lender.  In contrast,
subprime lenders made just 1 one out of every 30 refinance loans made in Southwest or Calhoun/Isles.






The prevalence of subprime lending declined in all Minneapolis neighborhoods from 1999.

1999 Minneapolis
Neighborhood
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)
134
10
7.5%
Southwest
1034
68
6.6%
Although the level of subprime lending declined in all Minneapolis neighborhoods, the Near North neighborhood had by far the smallest decrease in the percentage of its loans made by subprime lenders



Subprime Loans as Percentage of All Refinances
Neighborhood
1999
2002
Change from 1999 to 2002
Near North
44.1%
34.9%
- 20.82%
Phillips/ Whittier
39.5%
21.2%
- 46.28%
Camden
30.3%
17.9%
- 40.79%
Powderhorn
24.1%
15.4%
- 36.14%
Northeast
15.7%
8.6%
- 45.03%
University
11.9%
8.3%
- 30.34%
Nokomis
11.9%
7.0%
- 41.09%
Longfellow
11.3%
5.5%
- 51.24%
Calhoun/ Isles
8.2%
4.5%
- 44.63%
Central (Dowtown)
7.5%
3.2%
- 57.24%
Southwest
6.6%
3.0%
- 54.24%



Due to the greater decrease in the level of subprime lending from 1999 from 2002 in certain neighborhoods, the disparity between neighborhoods increased.

· In 2002, Near North homeowners were 11.6 times more likely than homeowners in Calhoun/Isles to receive a subprime loan, while in 1999 they were 5.4 times more likely.


· In 2002, Camden homeowners were 7.0 times more likely than homeowners in Calhoun/Isles to receive a subprime loan, while in 1999 they were 4.6 times more likely.


· In 2002, Phillips/ Whittier homeowners were 5.9 times more likely than homeowners in Calhoun/Isles to receive a subprime loan, while in 1999 they were 4.8 times more likely.


· In 2002, Powderhorn homeowners were 5.1 times more likely than homeowners in Calhoun/Isles to receive a subprime loan, while in 1999 they were 2.9 times more likely.




Prime Refinances
Subprime Refinances
Neighborhood
1999
2002

Increase

1999
2002

Increase

Near North
281
792
182%
222
425
91%
Camden
434
1351
211%
189
364
93%
Phillips/Whittier
104
375
261%
68
82
21%
Powderhorn
584
1671
186%
185
304
64%
Northeast
622
1705
174%
116
161
39%
Longfellow
489
1394
185%
62
126
103%
Nokomis
1040
2838
173%
141
214
52%
University
238
600
152%
32
126
294%
Central (downtown)
124
505
307%
10
24
140%
Southwest
966
2939
204%
68
97
43%
Calhoun/Isles
503
1511
200%
45
47
4%












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 November 2003, ACORN released a report entitled The Great Divide, which examined 2002 and found continuing and even growing racial and economic disparities in mortgage lending.  In the Twin Cities metro area, African-Americans were 2.9 times more likely to be denied a conventional mortgage loan than white applicants.   Latinos were rejected
2.7 times more often than whites.

The disparities remain even when comparing applicants of the same income.  Upper-income African-Americans were denied 3.7 times more often than upper-income whites. Upper income Latinos were 3.5 times more likely to be rejected than upper-income whites. In fact, higher income minority applicants were rejected more often than less wealthy white applicants. 

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[16].

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[17].

In 2001, one-quarter of families with incomes below 80% of the area median income did not have a bank account[18].  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[19].

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 payday 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[20].  Payday lenders are also increasingly trying to rent out national bank charters to avoid state consumer protection laws.

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[21].

And there can be a difference between a borrower’s credit worthiness and the credit history that is available at a credit bureau.  Because credit scores do not reflect many sources of credit for lower-income families (utility bills, rent payments) and penalize for the use of finance companies, the credit worthiness of lower-income applicants may not be reflected in a consumer’s credit history.  Particularly since there are so many errors in credit reports, both the sophistication of a borrower to identify and correct errors prior to the application and the availability of proper credit counseling can impact the ability to get a lower cost loan.  We also cannot underestimate the impact of previous predatory loans on a borrower’s credit history.  Once a family has received a predatory loan, their credit can easily decline due to inability to make the payments, refusal to make payments on an unconscionable loan, bankruptcy due to the unaffordable payments, or even foreclosure.  A borrower who may have had good credit to begin with may then have ruined it due to the practices of a predatory lender.  And research indicates that subprime lending is higher in neighborhoods where families are less likely to have a credit score.

 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[22].










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[23].

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[24].  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[25]. 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[26].

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[27].  NHEMA also estimated that subprime lender charge an average of 1.5 to 3 basis percentage points more in fees than conventional lenders[28].  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, which are usually sold through a variety of high-pressure, bait-and-switch, and other deceptive sales tactics.

Financing Excessive Fees Into Loans


Predatory lenders often finance huge fees into loans, stripping thousands of dollars in hard-earned equity and racking up additional interest in the future.  Borrowers in predatory loans have been routinely charged fees of 5%-10% of the loan amount in fees, compared to the average 1%[29]  assessed by banks to originate loans.  Once the paperwork is signed and the rescission period expires, there is no way to get that equity back, and borrowers frequently lose up to $10,000 or $15,000 from their home while receiving little, if any benefit from the refinancing.  The damage is compounded at higher interest rates as borrowers pay tremendous interest costs in the several years it can take just to pay down the fees. Typically, the loan fees are kept below 8% in order to stay under the HOEPA fee threshold established by federal law, which would then require additional disclosures to the borrower and a few limited consumer protections.
           
The H’s bought their home in 1993 with a loan at a 7.5% interest rate. In 1995 they took out a second mortgage with Norwest Financial (now Wells Fargo Finanical) to finish their basement.  Wells Fargo refinanced this second mortgage several times, increasing the loan amount each time until in April 2000 they owed $58,500. In November 2001, Wells Fargo Financial refinanced their first and second mortgages. Their $212,396 loan included $16,281 in closing costs, of which $14,867 or 7% of the loan was for loan discount points.  Despite how much they were charged in discount points, their new loan had a 10.88% rate. 

Charging Higher Interest Rates than a Borrower’s Credit Warrants


While the interest rates charged by subprime lenders are intended to compensate lenders for taking a greater credit risk, too many borrowers are unnecessarily paying higher interest rates.  Borrowers with perfect credit are regularly charged interest rates 3 to 6 points higher than the market rates; with some subprime lenders, there simply is no lower rate, no matter how good the credit.  According to a rate sheet used by the Associates in the spring of 2000, their lowest interest rate for a borrower with excellent credit and a low loan-to-value ratio was over 10%, and since then Household borrowers with excellent credit were seeing rates above 11%.  And for borrowers with imperfect credit, rates are frequently much higher than even somewhat blemished credit would reasonably warrant, as well as for what the industry describes as standard rates for B,C or D borrowers.

A family had a 7.8% interest rate on their mortgage when they cashed a live check from Wells Fargo Financial to help out their unemployed adult son.  They didn’t understand the difference between WF Bank and WF Financial and when Wells Fargo Financial promised them a 6% interest rate, they decided to refinance to pay off some bill and buy new windows. A few weeks later, Wells said it would be an 8% rate and then at closing they found out that it would be 10%, despite Wells Fargo’s financing 7 discount points into their loan, which stripped away $7,813 of their equity.  The husband did not have one negative account on his credit report and six months after refinancing, the husband still had excellent credit with scores of 682, 731, and 680.   ACORN Housing was able to help the couple refinance into a 5.3% interest rate. 

Prepayment 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[30].  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, the penalty would be over $5,000, which would be financed into the new loan. For borrowers who refinance or sell their houses during the period covered by the prepayment penalty, the penalty functions as and 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 and quite predictable numbers of borrowers in subprime loans 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.

Borrowers are frequently unaware that their loans contain a prepayment penalty. Some lenders’ agents simply fail to point it out, while others deliberately mislead borrowers, telling them they can refinance later to a lower rate, without informing them of the prepayment penalty which will be charged. Even the most knowledgable borrowers can easily miss the prepayment penalty amid the mounds of paperwork, and end up robbed of additional equity or trapped in an excessive rate because the penalty boosts up their loan-to-value ratio.

In a significant step forward in July 2003, the federal Office of Thrift Supervision changed a rule interpretation that effectively restored a number of state laws providing varying levels of consumer protections against prepayment penalties.  Despite the familiar industry claims that moving forward with a final rule would reduce access to credit, no evidence has been shown of any differences in loan volumes between states that have or do not have restrictions on prepayment penalties.  The state Attorney General’s settlement with Household also represented a major advance in requiring the country’s largest subprime lender at the time to limit all of its prepayment penalties to the loan’s first two years, both retroactively and prospectively.

Ms. G. bought her home in North Minneapolis in 1993 and had an 8.5% interest rate and a monthly payment of $682, including taxes and insurance.  In 2000, she wanted to do some home improvements and was contacted by a Household Finance representative who said that he could lower her interest rate and get hear a good deal. Instead, he gave her a 12.9% interest rate and charged her over $16,000 in closing costs and unnecessary credit insurance, making her new monthly payment $1,360, NOT including taxes and insurance.

She contacted ACORN Housing about refinancing her Household loan and based on her credit, could have qualified for a loan at a much lower rate. However, her loan included a prepayment penalty which required that Ms. G. pay Household a penalty of over $7,000 if she were to refinance during the first five years of the loan. Including the penalty in her new loan would make the new loan amount over 100% of the value of the house, preventing her from refinancing. 

After the Attorney General’s settlement reduced the prepayment penalty to just two years, ACORN Housing was able to help her refinance and receive a 5.6% interest rate, lowering her monthly payment to just $754.

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.  Especially when there is significant equity in a home, the lender can turn a profit by reselling the house after foreclosure. Until that happens, the borrower is stuck with exorbitant monthly payments.

In other cases, the opportunity to strip away huge amounts of home equity drives the origination of clearly unaffordable mortgages.  For mortgage brokers, the immediate opportunity to legally take away several thousand dollars of home equity more than offsets the eventual consequences of the loan, which will be dealt with by the holder on the secondary market.  Similarly, personal commissions may push loan officers at mortgage companies to make loans that cannot be repaid.

Ms. D was a 69 year-old African-American woman who has owned her home
in North Minneapolis since 1984. She received $961 a month from Social
Security. She had just about $30,000 left on her mortgage and a monthly payment
of $417,  including taxes and insurance.  In addition, she had a few smaller loans
which she had gotten through special home improvement programs and which
had below market interest rates.  She needed to make some additional
improvements, and Citywide Lending, a mortgage broker arranged for her to get a loan through First State Mortgage. The $82,500 loan included over $7,000 which she didn’t know about.  The loan was at 10.75% interest with a monthly payment of $777 –81% of her monthly income -- and this didn’t include taxes and insurance. 

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 than the lender would have given the borrower at their standard, or “par” rate.  Brokers usually receive this kickback on top of an already large compensation fee financed into the borrower’s loan.  While brokers typically try to create the impression with borrowers that they are trying so secure the best possible loan, yield spread premiums create an obvious financial incentive for brokers to increase the loan costs. In the text of a proposed rule that would change how the premiums are disclosed but would not alter their fundamentally abusive nature, HUD estimates that lenders annually pay brokers $15 billion to increase borrower’s interest rates – the same amount that borrowers pay in origination charges[31].

Yield spread premiums further harm borrowers in that the financial incentives often drive lenders to insist that the loans include prepayment penalties.  Since by definition a yield-spread premium pushes the borrower into an excessive interest rate, borrowers who later realized their actual interest rate are more likely to refinance out of the loan.  To reduce the likelihood that borrowers will refinance out and to ensure their profits even if they do, lenders often require brokers to also include a prepayment penalty when the interest rate is inflated due to a yield-spread premium.

Mr. and Mrs. M. purchased their home in 1987 and had a loan with an 8% fixed rate and a monthly payment of $738, which included the taxes and insurance.
A broker with All Fund Mortgage refinanced them into a loan with Wells Fargo Home Mortgage that had an adjustable interest rate that started at 12.25% and could go as high as 18.25%.  Their $109,200 loan included almost $10,000 in closing costs and fees, of which almost half went directly to All Fund.  In addition to these fees which were included in the loan, Wells Fargo Home Mortgage paid All Fund a $3,276 yield spread premium.

Single Premium Credit Insurance

Credit insurance is insurance linked to a specific debt or loan which will supposedly pay off that particular debt if the borrower loses the ability to pay either because of sickness (credit disability insurance), death (credit life insurance), or losing their job (credit unemployment insurance).

These policies have long been aggressively and deceptively sold in the sbuprime market while they have rarely been offered in the ‘A’ lending world.  Credit insurance policies are most destructive when the entire cost of the policy is put into a single premium – usually for several thousand dollars – and financed by the lender into the loan amount (in contrast to monthly-paid policies in which the borrower pays a premium each month for the coverage). The financing of these policies strips away equity, inflates origination fees, and racks up substantial extra interest charges on high-rate loans.  Because the financed policies produce such huge profits, loan officers often falsely tell borrowers that such policies are required in order to get the loan or that the policies last for the entire life of the loan when they might only cover the first five years, if they tell the borrower about the policy at all.

Given the prevalence of these financed policies in the subprime market and the damage they inflicted, community groups and other opponents of predatory lending made their elimination (and replacement by monthly-paid policies) a top priority. In 2000, the HUD-Treasury report on predatory lending recommended that such policies be prohibited on all home loans, which followed by announcements from Fannie Mae and Freddie Mac that they would no longer buy loans with single-premium credit insurance. In October 2002, the Federal Reserve implemented a regulatory change to the federal HOEPA law that greatly discourages the financing of such policies by counting them toward the calculation of “points and fees” for HOEPA purposes.  By that time, most lenders had bowed to public pressure and stopped financing such products, although Wells Fargo Financial kept packing them into loans until the rule change.

Mr. And Mrs. A. 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 homeowners a total of $348,880 over the course of the thirty-year loan term.  Of their $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).

Balloon Payments


Mortgages with balloon payments are arranged so that after making a certain number of regular payments (often five or seven years worth, sometimes fifteen), the borrower must pay off the remaining loan balance in its entirety, in one “balloon payment.”  About tne percent of subprime loans have balloon payments[32].


There are specific circumstances where balloon payments make sense for some borrowers in loans at “A” rates, but for most borrowers in subprime loans 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. 

In addition, many borrowers are unaware that their loan has a balloon payment, that their monthly payments are essentially only paying interest and not reducing their principal, and that the balloon will ultimately force them to refinance.

Ms. M. had owned her home since 1976 and had just three years left in paying off her mortgage.  Her home was in need of repairs, and she got a call from U.S. Mortgage Advisors who said they could refinance her mortgage and get her money for the repairs.  Ms. M. told him that she only wanted to refinance if: 1) the new monthly mortgage payment also included her taxes and insurance, as she had currently had it, and 2) that the new mortgage did not have a balloon payment.  (She had seen friends get into trouble with balloon mortgages). 

She received a $30,000 mortgage, which included $3,302 for broker fees and closing costs.  The mortgage was at 12% interest, and despite what he had told Ms. M., the loan had a balloon payment. After 15 years of paying $308 a month for a total of $55,440, Ms. Martin, at the age of 78, will have to pay off the balance of $26,022 on the loan. 

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 or other charges 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. 

Mr. And Mrs. O have owned their home for over thirty years.  They refinanced with TCF in 1995 and got a loan at 7.875% interest and a total monthly payment of $784 including taxes and insurance. In September 2001, they took out a $25,598 second mortgage with Wells Fargo Financial to consolidate their credit card debt.  The loan included $3,021 in fees and closing costs and $4,225 in credit insurance and had a14.1% interest rate. In March 2002, they refinanced the second mortgage again with Wells Fargo Financial. The new loan for $54,047 included $6,003 credit insurance in addition to over $6,000 in closing costs, and had an even higher interest rate, 14.69%.  Wells Fargo kept calling them about refinancing and in November 2002, Wells Fargo Financial refinanced both their first and second mortgages into a new loan for $162,651, which included $8,577 in closing costs and had an 11.98% interest rate.

Their new monthly payment jumped to $1,950.  The Os refinanced in June 2003 with the help of ACORN Housing and got a 7.25% rate, lowering their payment by $800 a month.  
RECOMMENDATIONS

For Lenders

All lenders that engage in subprime lending should pledge adherence to a meaningful ”Code of Conduct” that includes: fair pricing; limits on financed fees and interest rates to those consistent with the actual credit risk represented by the borrower; 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; a loan review system that rejects fraudulent or discriminatory loans; making no loans which clearly exceed a borrower’s ability to repay; 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. 

Lenders should stop using misleading scare tactics to fight anti-predatory lending  legislation and instead work with community and consumer groups to protect homeowners from abusive lenders and brokers that give the whole industry a bad name.  Prime lenders should especially be supportive of providing borrowers with protections on high-cost loans, since they have a direct interest in discouraging unscrupulous lenders and brokers from refinancing borrowers out of prime loans into mortgages with much higher costs.


Lenders that 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 the color of their skin. All “A” lenders should increase their outreach and loan volume in underserved communities for their prime loan products.

Lenders should fund nonprofit housing counseling agencies to work with low and moderate income borrowers in the subprime market.  Consumers need correct information to make informed loan decisions in the complex and often misleading subprime market transactions. Housing counselors are able to review income, credit, debts, and loan products to help the borrower find the best loan product for their needs and avoid predatory loan terms. Housing counseling agencies that provide one-on-one counseling and classroom education have been found to reduce ninety-day delinquency rates by 34 percent and 24 percent, respectively[33].

For Legislators and Regulators

Congress should not preempt the ability of state legislatures and local officials to protect their constituents from predatory lending abuses.  The measures enacted so far have not affected the prime market or restricted access to credit, while setting basic protections against some of the most common abuses that strip home equity, trap borrowers in excessive interest rates, and force families out of their homes.

Federal and state banking regulators should not exempt institutions they regulate from state or local anti-predatory lending laws.  Some of the examples of predatory lending in this report were made by national bank subsidiaries that the OCC has attempted to exempt from any state or local consumer protection laws.  A predatory loan’s impact on a homeowner is the same regardless of whether the source of that loan is an independent mortgage company or a national bank subsidiary; regulators should not compete for client institutions by letting them ignore consumer protection laws.

Congress, the Minnesota state legislature, and local cities should pass strong anti-predatory lending legislation that would protect consumers from abusive practices, which have been especially targeted at lower-income and minority communities. The legislation should follow the basic structure of S. 1298 – Senator Paul Sarbanes’ bill in the current 108th session of Congress – in strengthening the protections in the Home Ownership Equity Protection Act (HOEPA), extending those protections to more borrowers in high-cost home loans, and establishing penalties for violating the law that are more in line with the damage caused to borrowers.

Federal banking regulators should revise their proposed changes to the CRA regulations to ensure a real scrutiny of any bank’s involvement in predatory lending.  It is widely recognized that the terms of most predatory loans – while inflicting tremendous financial damage on borrowers – are legal under current law.  To provide a meaningful review of any involvement in predatory lending practices, regulators should examine whether a bank or its affiliate are making subrpime loans to ‘A’ borrowers or regularly charging excessive origination fees and/or prepayment penalties.

Congress should increase the funding level for HUD’s Housing Counseling Program well beyond the $40 million provided in FY 2003; it should be funded at least to $75 million this year to increase the availability of housing counseling for potential predatory lending victims.  To come closer to meeting the demand for such services, the annual funding level should be increased in future years to $100 million.  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.

Annual funding for HUD’s Fair Housing Initiatives Program (FHIP) should be increased from $20 million to at least $30 million, allowing the program to expand activities to combat housing discrimination through education, outreach, and enforcement.  Such efforts are desperately needed to respond to the tremendous extra costs current lending patterns impose on communities of color.  In addition, HUD and state and local agencies that enforce fair housing laws should more closely examine aggregate lending data when considering individual fair housing complaints.
Federal and State regulators should increase their scrutiny of predatory lending practices, including examining patterns of engaging in deceptive practices and the use of pricing systems like yield-spread premiums that inflate costs, as well as how these abuses are disproportionately aimed at protected classes. Federal and state authorities should devote the necessary resources to investigating and prosecuting lending abuses.

The federal banking regulators must not worsen the problematic impact of credit scoring by penalizing lenders for making ‘A’ loans to any borrower with a credit score below 660.  Unfortunately, the regulators are proposing higher capital requirements for lenders making such loans under a July 2002 proposed rule regarding data collection on subprime loans made or purchased by banks and thrifts.  Such a step could arbitrarily and unfairly exclude millions of consumers from the low rates and fees provided in the prime market, significantly raising the cost of homeownership for those families.  In the final rule, the regulators also should follow the industry practice of classifying loans as subprime or not based on the rates and fees, not on the borrower’s characteristics, and make public the data on subprime loan volume engaged in by banks and thrifts.







For Consumers

To Protect Yourself From Predatory Lenders


1- 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 at 800-569-4287 for a list of the certified counseling agencies nearest you.

2- 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.  Many of the borrowers who receive high cost loans could have qualified for a lower cost loan from a bank, even when refinancing.

3- 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.

4- 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.” 

5- Insist on getting a copy of your loan papers with the final loan terms and conditions in writing before closing, so you have enough time to examine them before you have to sign for the loan.  If what you are asked to sign at closing is different from what you reviewed or what you were promised, don’t sign!


Beware of loan terms and conditions that may mean higher costs for you:

High points and fees: On average banks charge1% of the loan amount for points and fees that go directly to them.  If you are being charged more, ask why, and find out if you can do better elsewhere.

Credit Insurance products: Some lenders may try to sell you insurance policies along with your loan.  Credit insurance policies are usually more expensive than other kinds of insurance, and seldom make financial sense.

•Prepayment Penalties: Many subprime loans include prepayment penalties, which require you to pay thousands of dollars extra if you decide to refinance your loan within the first several years of the loan, or if you sell your house during that period.  Make sure you know if the loan has a prepayment penalty or not, and how much it will cost.

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— Not all adjustable rates are bad, but adjustable rates can cause serious problems.  Some adjustable rates can only go up from the place they start, and never down.  Others are guaranteed to go up after some initial “introductory” period.  At times when interest rates are generally low, or if you have a fixed income, it almost never makes sense for you to get a variable rate loan.  Do no count on lender promises that you can refinance before an interest rate changes.

Mandatory Arbitration: Some lenders include mandatory arbitration clauses in their home loans. Signing one of these means that you give 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 Housing at (651) 203-0008 or e-mail us at ahcmnlcmsp@acorn.org.

Methodology


This study analyzes data released by the Federal Financial Institutions Examination Council (FFIEC) about the lending activity of institutions covered by the Home Mortgage Disclosure Act (HMDA). HMDA requires depository institutions with more than $32 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 distinguish between prime and subprime loans.  In order to analyze data on the subprime market, we used the of subprime lenders developed by the U.S. Department of Housing and Urban Development (HUD), and considered loans that were made by lenders on that list as subprime loans.  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.  In 2002, HUD identified 175 mortgage and finance companies as subprime lenders.

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 and 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. 
 








[1]  “Financial Services in Distressed Communities,” Fannie Mae Foundation, August 2001.

[2] “Automated Underwriting,” Freddie Mac, September 1996.

[3] “A Duel Turned Into a Deal,” South China Morning Post, Nov. 19, 2002, p. 1.

[4] “A Home Loan That Hurts Your Credit Score,” Dow Jones Newswires, by Kaja Whitehouse, December 5, 2003.

[5]  See testimony of Harvard Law School Prof. Howell E. Jackson to the Senate Banking Committee hearing on “Predatory Mortgage Lending Practices: Abusive Use of Yield Spread Premiums,” January 8, 2002.

[6] “We think [predatory lending is] at epidemic proportions, particularly in low-income, elderly and minority communities.”  Craig Nickerson, vice president of community development lending, Freddie Mac, as quoted in “Campaign to Help Buyers Avoid Predatory Loans,” Los Angeles Times, by Lee Romney, July 18, 2001, Business p. 1

[7] “Performance of Low-Income and Minority Mortgages,” by Robert Van Order and Peter Zorn, in Low-Income Homeownership:  Examining the Unexamined Goal, ed. Nicolas Retsinas and Eric Belsky, 2002, p. 324.

[8] “Financial Services in Distressed Communities,” Fannie Mae Foundation, August 2001. 

[9] Net Worth and Asset Ownership of Households: 1998 and 2000, U.S. Census Bureau, May 2003.

[10] “Out of Pocket”, Pioneer Press, January 30, 2004.

[11] In 2003 New Mexico and New Jersey enacted legislation to protect borrowers from high-cost home loans, similar to the strong legislation that had already been passed in North Carolina, and New York. More modest anti-predatory lending were enacted in 2003 in South Carolina, Arkansas, and Illinois.

[12] North Carolina’s Subprime Home Loan Market After Predatory Lending Reform, The Center for Responsible Lending, Durham, NC, August 13, 2002; The Impact of North Carolina’s Anti-Predatory Lending Law: A Descriptive Assessment, University of North Carolina Center for Community Capitalism, June 2003.

[13] 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.

[14] 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. 

[15] 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).

[16] “What We Know About Mortgage Lending Discrimination,” The Urban Institute, September 1999.

[17] “The Community Reinvestment Act After Financial Modernization: A Baseline Report,” U.S. Treasury Department, April 2000.

[18] Federal Reserve Board Summary of Consumer Finances.

[19] U.S. Treasury Department, April 2000.

[20] “Easy Money,” Business Week, April 24, 2000.

[21] The State, February 22, 2000.

[22] “The Broken Credit System”, National Community Reinvestment Coalition, 2003.

[23] Business Wire, “Fannie Mae has Played Critical Role in Expansion of Minority Homeownership Over Past Decade; March 2, 2000. 

[24] Inside B&C Lending, June 10, 1996.

[25] “Automated Underwriting,” Freddie Mac, September 1996.

[26] “Making Fair Lending a Reality in the New Millennium,” Fannie Mae Foundation, 2000.

[27] Jeffrey Zeltzer, Executive Director, National Home Equity Mortgage Association-NHEMA, 4/26/2000, addressing HUD-Treasury Task Force on Predatory Lending, Atlanta, GA)

[28] “Widow paying a price for high-cost loan” Kate Berry, Orange County Register, April 16, 2000.

[29] See Freddie Mac’s weekly mortgage market survey at http://www.freddiemac.com/learn/cgi-bin/dLink.cgi?jp=/PMMS/display/PMMSOutputYr.jsp&ENV=PROD.

[30] “Curbing Predatory Home Mortgage Lending: A Joint Report,” June 2000, U.S. Department of Treasury and U.S. Department of Housing and Development.

[31] Docket No. FR-4727-P-01, Federal Register,  July 29, 2002, p. 49170.

[32] U.S. Department of Treasury and U.S. Department of Housing and Development, June 2000.

[33] “Prepurchase Homeownership Counseling:  A Little Knowledge is a Good Thing,” by Abdighani Hirad and Peter Zorn, in Low-Income Homeownership: Examining the Unexamined Goal, ed. by Nicolas Retsinas and Eric Belsky, 2002, p. 147.