Building wealth through home ownership is a goal supported from the White House to local community development corporations. Great strides have been made in removing barriers and creating opportunities for home ownership. Unfortunately, this good work and the equity of thousands of homeowners are being stripped away through predatory lending practices. The wealth of low-income communities, in the form of home equity that homeowners have worked for years to build, is being siphoned off through unscrupulous lending practices that focus on moderate- to low-income and minority communities

Jeanette Bradley

Peter Skillern

English

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by Peter Skillern and Jeanette BradleyBuilding wealth through home ownership is agoal supported from the White House to localcommunity development corporations. Greatstrides have been made in removing barriersand creating opportunities for home ownership.U n f o r t u n a t e l y, this good work and the equity ofthousands of homeowners are being strippedaway through predatory lending practices. Thewealth of low-income communities, in the formof home equity that homeowners have workedfor years to build, is being siphoned off throughunscrupulous lending practices that focus onmoderate- to low-income and minority commu-nities. Predatory lending strips homeowner equity through illegal and unethical practices such asexcessively high fees and commissions, the misrepresentation of the mortgage’s terms andconditions, high interest rates, repeated financing of loans, balloon payments and thefinancing of high-cost credit insurance. While anyone may be a victim of predatory lending,“They did what a manwith a gun in a darkalley couldn’t do. Theystole my house.”— Victim of predatory lender in Senate testimony, March 1998Exposing the HiddenProblem of PredatoryL e n d i n gour evidence suggests that these practicesare more common in minority neighbor-hoods in and among minority and elderlyhouseholds. For example:The Alstons (not their real name), aminority family living in a moderate-income community in Durham County,North Carolina, were charged excessivefees on their mortgage when they refi-nanced to conduct some homeimprovements. These fees exceeded theconsumer protection laws in NorthCarolina. In addition, the terms andconditions of the mortgage were notfully disclosed. The Alstons were nottold that their mortgage was anadjustable rate until their interest ratejumped two percentage points at the endof the first year of payment. Learningthey would pay thousands of dollars inprepayment penalties to refinance withanother lender, the Alstons had fewoptions but to refinance with the samelender for a fixed-rate mortgage. Theywere charged excessive fees again,which were included in the refinancing. This process stripped away$10,000 in equity that the Alstons hadbuilt into their home. Though they feltwronged, they were unsure abouttheir rights or what choices they had.The predatory-lending example citedabove was uncovered when the Commu-nity Reinvestment Association of NorthCarolina (CRA*NC) conducted a study ofmortgage lending in 1996 in DurhamCounty. CRA*NC is a nonprofit agencywhose mission is to improve financial ser-vices to underserved communities. Thegoal of the study was to go beyond anec-dotal evidence of predatory lending, byquantifying the prevalence of predatoryand subprime lending in Durham County.CRA*NC also sought to develop a methodfor organizations in other states to do sim-ilar research.To determine the number and type ofloans that were being made in low-incomeand minority neighborhoods, CRA*NCentered all recorded deeds for DurhamCounty in 1996 into a database fromwhich lenders were identified by type. Theaddresses of all secured properties weremapped to determine their Census tracts.Using tax records, the researchers madecontact with borrowers and encouragedthem to share their loan documents andstories with the Durham AffordableHousing Coalition, a local nonprofithousing counseling agency. Uncovering UnreportedLending Much of what we know about the fair-ness of home mortgage lending in theUnited States comes from analyses of datacollected under the Home Mortgage Dis-closure Act (HMDA). Enacted in 1974,HMDA requires certain financial institu-tions to report their mortgage lendingpractices to federal regulators. They arerequired to report the race and incomelevel of each borrower, and the Censustract in which the loan was made. Institu-tions are required to comply with theHome Mortgage Disclosure Act if theymeet certain requirements of asset size,physical location of offices, and number ofloans made annually. Banks are held tomore stringent reporting standards than arenon-depository institutions. Non-deposi-tory institutions are not required to reportif they have an asset size of less than $10million, or made fewer than 100 loans in aparticular year.These requirements are significant,because of all lending in Durham Countyin 1996, 28.6 percent, or 2,451 loans, werenot reported in HMDA reports. In under-standing credit markets in minority andlow-income census tracts, an analysis ofHMDA data alone significantly underre-ports the effective demand for credit, thetype of loans being made and the institu-tions serving this market. For example, thestudy found that two out of every threeloans made by mortgage and finance com-Table 1: Market Share by Number of LoansLender Type HMDA Reporter StatusN o n - R e p o r t e r R e p o r t e r T o t a lm o r t g a g e / f i n a n c e 2 6 . 5 % 1 4 . 1 % 4 0 . 6 %( 2 , 2 7 0 ) ( 1 , 2 1 0 ) ( 3 , 4 8 0 )b a n k s 0 . 6 % 5 3 . 4 % 5 4 . 0 %( 5 0 ) ( 4 , 5 7 8 ) ( 4 , 6 2 8 )b u i l d e r s 1 . 1 % 1 . 1 %( 9 7 ) ( 9 7 )credit unions 0 . 4 % 3 . 8 % 4 . 2 %( 3 4 ) ( 3 2 8 ) ( 3 6 2 )t o t a l 2 8 . 6 % 7 1 . 4 % 1 0 0 %( 2 , 4 5 1 ) ( 6 , 1 1 6 ) ( 8 , 5 6 7 )(Raw numbers in parentheses)mortgage/financebanks74.9%banks2.0%builderscreditunions creditunions ReporterNon-Reporter29%Reportersmortgage/financeNon-ReportersTotal LoansDistribution of Loanspanies in Durham County in 1996 were notreported in Home Mortgage DisclosureAct (HMDA) data. Brokers Play A Large RoleMortgage and finance companies mademore than 92 percent of all the home mort-gage loans not reported under HMDA (atotal of 2,270 loans) in this study. InDurham County in 1996, 216 of the 374mortgage and finance companies that madeloans did not report them under HMDA.Because 78 percent of these companiesmade fewer than 20 loans and had no localoffice, we concluded that mortgage brokersand/or telemarketers play a large role in thetype, quality and location of these loans.This high level of activity is significantbecause regulatory oversight of mortgagebrokers and non-HMDA reporting lendersis significantly weaker than oversight oftraditional bank lenders. In North Carolina,oversight of mortgage brokers is limited toa yearly registration. Without adequate reg-ulation, consumer protection laws are morelikely to go unexamined and uncorrected. Disproportional Lending toMinority Census Tracts Durham County, North Carolina, has aracial distribution of 37 percent African-American, 60 percent white and 3 percentother minorities. The Hispanic populationis the fastest growing minority population.Residential segregation continues to beprevalent. In 1990, 28 percent of allAfrican-Americans lived in Census tractsthat were more than 90 percent African-American. The following chart shows that as a per-centage of their loan portfolios, mortgageand finance companies lent more of theirportfolio to low income and minorityCensus tracts than did banks. In fact, thoughthey had a smaller total market share, mort-gage and finance companies lent almosttwice the percentage of their loans tominority Census tracts than banks did.A statistical analysis found that as thepercentage of minority homeowners in aCensus tract increased, the number ofloans by mortgage and finance companiesincreased. This was not due to the incomelevel of the Census tracts. Black neighbor-hoods received more loans from mortgageand finance companies than white neigh-borhoods at the same income level.Bank Subsidiary LendingSeveral mortgage and finance companieslending in North Carolina are owned bylarger financial institutions that are coveredby the Community Reinvestment Act. Incompleting a fair share analysis of indi-vidual HMDA-reporting banks and theirsubsidiaries, we found the same pattern thatexisted for banks and mortgage and financecompanies as a whole. When compared tothe parent company, the subsidiary made agreater percentage of its portfolio of loansto minority communities. This pattern raises community reinvest-ment and fair housing concerns becausethese banks and their finance company sub-sidiaries appear to be segmenting the marketand targeting minority communities forhigher-priced, lower-quality credit products.If this is true, these companies may be inviolation of the Fair Housing Act.Defining Subprime andPredatory Lending The rationale for charging one loan cus-tomer a higher cost (fees and interest) for ahome loan than another customer is tocompensate for the different levels of risk,based upon the borrowers’ credit profiles.High-interest, high-fee loans are referred toas subprime mortgages. And the lenderswho specialize in this niche market arecalled subprime lenders. Subprime loans may or may not bepredatory loans, depending on their termsand on how and why they are offered toparticular borrowers. Mortgage andfinance companies are more likely to makesubprime loans. Nationally, subprime loanoriginations were estimated at $25 billionin 1994, growing to $160 billion in 1998.Predatory lenders are a subset of sub-prime lenders. Proving predatory lendingrequires examining borrower loan docu-ments and conducting interviews to deter-mine if there has been a violation of con-sumer laws. Our survey of borrowers waslimited to people who received loans fromsubsidiary companies of large banks. Alimited review of loan documents indi-cated some subprime mortgage andfinance companies in Durham Countymade predatory loans.Of approximately 53 borrowers from twoinstitutions, five borrowers responded.To estimate a minimum number of subprime loans in Durham County,researchers totaled the loans made by finance corporations and mortgagecompanies classified by HUD as subprime lenders. These 1,052 subprimeloans represent 16 percent of the Durham market. If it is assumed that non-HMDA reporting mortgage companies are also subprime lenders, then thenumber increases to 3,320 — 34 percent of the market. Even if only a por-tion of these loans is predatory, many Durham homeowners are beingstripped of their home equity50%40%30%20%10%0%15%8% 6%47%28%Greater than 50% Low-Income Moderate-Incomeminority homeownershipMortgage/financeCensus Tract TypePercent Portfolio by Census Tract Demographics6%The study found that twoout of every three loansmade by mortgage andfinance companies inDurham County in 1996were not reported inHome MortgageDisclosure Act Data.From this small sample, we found evidenceof several predatory lending practices.Lenders failed to disclose loan terms suchas the existence of prepayment penaltiesand that rates were adjustable. Borrowerswere routinely charged excessive fees; forexample a 10-point origination fee wascharged for a $24,000 first mortgage, in onecase. In another, the loan terms at closingwere different from those offered prior toclosing. One client had the loan closed witha secretary representing the attorney.Clients received repeated phone calls andletters from their lenders and from othersubprime lenders urging them to refinancetheir loans within a year of origination. ConclusionThe study provides a number of indica-tors that the problem of predatory lendingin minority and low-income communitiesis significant and worthy of furtherresearch and policy attention. 1) Two of every three loans made byfinance and mortgage companies arenot shown in HMDA reporting.2) A significant proportion of loans madeby finance and  mortgage companies aresubprime loans and are often made byunregulated brokers who stand to gainfrom high fees and repeated financing. 3) These subprime loans are made in a dis-proportionate number to minority andlow-income neighborhoods, raising fairhousing concerns of targeting highercost credit to legally protected classes.4) There are substantive cases of predatorylending that  raise the possibility of sys-temic predatory lending  practices bysome subprime lenders including thoseowned by banks regulated by the Com-munity Reinvestment Act.There is a need for stronger consumerprotection laws as well as enforcement ofthe existing laws in North Carolina tobetter protect consumers from high fees,flipping, equity stripping, and high-costcredit insurance. There is a need for betterHMDA data to determine the type andquality of lending occurring. Community groups and policy makersconcerned with wealth building for lower-income households and neighborhoodsshould be concerned about predatorylending practices that seem designed todeplete wealth from our communities. Leftu n c h e c k e d , the equity that homeowners havebuilt over a lifetime of hard work will con-tinue to be taken with the stroke of a pen. ■29 Indicators of a Predatory LenderM a r k e t i n g :1 . Aggressive solicitations to targeted neighborhoods2 . Home improvement scams3 . Kickbacks to mortgage brokers4 . Steering to high-rate lendersS a l e s :5 . Purposely structuring loans with payments the borrower cannot afford6 . Falsifying loan applications (particularly regarding income level)7 . Adding insincere co-signers8 . Making loans to mentally incapacitated homeowners9 . Forging signatures on loan documents (i.e., required disclosures)1 0 . Paying off lower-income mortgages1 1 . Shifting unsecured debt into mortgages1 2 . Loans in excess of 100% LTVThe loan itself:1 3 . High annual interest rates1 4 . High points or padded closing costs1 5 . Balloon payments 1 6 . Negative amortization1 7 . Inflated appraisal costs1 8 . Padded recording fees1 9 . Bogus broker fees2 0 . Unbundling (itemizing duplicative services and charging separately for them)2 1 . Required credit insurance2 2 . Falsely identifying loans as lines of credit or open-end mortgages2 3 . Force-placed homeowners insurance2 4 . Mandatory arbitration clausesAfter closing:2 5 . Flipping (repeated refinancing, often after high-pressure sales)2 6 . Daily interest when loan payments are late2 7 . Abusive collection practices2 8 . Excessive prepayment penalties2 9 . Foreclosure abusesSource: William J. Brennan Jr.’s statement to the U.S. Senate Special Committee on Aging,March 16, 1998.

Exposing Predatory Lending - Special Issue of NeighborWorks Journal

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Exposing Predatory Lending - Special Issue of NeighborWorks Journal

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