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
- Introduction
. . . . . P. 4
- Summary
of Findings . . . . . P. 9
- Findings
. . . . P. 13
- Metrowide
Trends . . . . . P.13
i. Low
and Moderate Income Neighborhoods
ii. Minority
Neighborhoods
iii. Low
and Moderate Income, White neighborhoods
- All
Cities in Hennepin County . . . . . P. 23
- Minneapolis
neighborhoods . . . . . P. 26
- The
exclusion of low and moderate income neighborhoods from the economic
mainstream . . . . . P. 30
- Half
of all subprime borrowers may have qualified for a better loan . . . . .
P. 32
- Predatory
Lending Practices . . . . . P. 33
- Recommendations
. . . . . P. 39
- Methodology
. . . . . P. 44
- 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.
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.
