LITTLE ROCK, AK -- In what's being labeled "financial apartheid," a disproportionate number of minorities and low-income home owners are often steered to more expensive sub-prime mortgages, even when they can qualify for cheaper financing.
Released Nov. 14, "Separate and Unequal: Predatory Lending in America" comes on the heels of a related report "The Great Divide: An Analysis of Racial and Economic Disparities in Home Purchase Mortgage Lending", which shows similar inequities in approval rates for cheaper conventional prime mortgages.
Both reports were conducted by the Association of Community Organizations for Reform Now (ACORN) a non-profit national community organization of low- and moderate-income families. Both reports analyzed the year 2000 loan data for dozens of metropolitan areas, using purchase and refinance loan statistics released by the Federal Financial Institutions Examination Council (FFIEC) on the lending activity of more than 7,800 institutions covered by the Home Mortgage Disclosure Act (HMDA).
"While minority borrowers continue to be rejected more often for loans on fair terms, our neighborhoods are in danger of drowning in overpriced predatory loans," said ACORN's Maude Hurd, president of the 100,000-member group which is organized into 500 neighborhood chapters in 40 cities throughout the country.
"It's a kind of financial apartheid, where minority and low-income borrowers pay more, even when they have good credit. We have been working for years for expanded access to the dream of home ownership; now we have to keep fighting to make sure that predatory loans don't turn that dream into a nightmare. Our families cannot afford to lose equity and lose resources in this way," she added.
Subprime loans carry higher rates and fees than prime loans and, in numerous documented cases, come with other exorbitantly high costs, penalties and other financially abusive features. When such loans are directed at specific groups, minorities, older, low-income borrowers and others who can least afford the cost, the loans are deemed "predatory."
Subprime lending is intended for borrowers who pose a greater risk, usually because of the lack of credit or previous credit problems. And most observers, ACORN included, believe there is a legitimate place for products for people whose circumstances prevent them from obtaining "A" loans at the lowest possible rates.
But in its new report, "Separate and Unequal," ACORN describes subprime lending as "a prime breeding ground" for "modern-day loan sharks to seek their teeth into new prey every day."
"While not all subprime lenders are predatory," the report says, "just about all predatory loans are subprime."
The vast majority of subprime loans are used to refinance an existing loan rather than to buy a home. But more often than not, they're used for debt consolidation or get money for home improvements than to obtain a lower rate and switch to a fixed-rate mortgage.
And "too often," says ACORN, unsuspecting home owners with significant amounts of equity are convinced to refinance under conditions that are not in their best interests. Sometimes, end up paying a higher rate just to get a few thousand dollars in cash. Other times, they pay for unnecessary fees and costly credit insurance.
According to ACORN, subprime lenders intentionally target minorities and low-income families by "bombarding" them with offers than sound good but aren't. "Subprime lending...is becoming the dominant form of lending in minority communities," the report said.
"Separate and Unequal" found the highest level of subprime loans for African Americans in Milwaukee, San Francisco and Chicago. For Latinos it was in the California cities of San Jose, Fresno and San Francisco.
"This is not terribly surprising, in that we have seen dozens of cases in cities where we work with people getting wrongfully rejected when applying for prime loans as well as people not bothering to apply for prime loans when they could have," said David Swanson, an ACORN spokesman.
"But I think it might be terribly surprising to readers because so much attention has been given to predatory lending and the halfway steps toward solving the problem aren't working. It is getting worse," he added.
Among ACORN's "Separate and Unequal" findings:
- 49.9 percent of all conventional refinance loans received by African-American home owners were from subprime lenders, compared to 26.2 percent received by Latino home owners, and 18.0 percent for white home owners.
- African-Americans were 2.8 times more likely than white borrowers to receive a subprime loan. Latinos were 1.5 times more likely.
- Subprime lenders made 36.47 percent of all conventional refinance loans received by low-income home owners in 2000, and 25.5 percent of all conventional refinance loans received by low-income white home owners.
- Subprime lenders accounted for 57.5 percent of the refinance loans made to low-income African-American home owners and 54.3 percent of the refinance loans made to moderate-income African-American home owners.
- Subprime lenders accounted for 31.1 percent of the refinance loans made to low-income Latino home owners and 33.5 percent of the refinance loans made to moderate income Latino home owners.
- 36.5 percent of the conventional refinance loans received by upper-income African-American home owners were from subprime lenders, as were 17.2 percent of the refinance loans received by upper-income Latino home owners.
- 12.4 percent of the refinance loans received by upper-income white home owners were from subprime lenders.
- The number of subprime purchase loans to African-American home buyers has risen 714 percent from 1995 to 2000, while the number of prime conventional purchase loans received by African-American home buyers in 2000 was actually lower than in 1995.
- African-American home buyers were 4 times more likely than white home buyers to receive a subprime loan, and Latinos were twice as likely.
"Predatory loans do tremendous damage both to individual borrowers and their families, as well as to entire communities. They rob borrowers of the equity in their homes and their peace of mind as they struggle to pay unaffordable mortgages or face the loss of their homes, and in the worst cases lead to forced sales or to foreclosure," ACORN reported.
According to findings in "The Great Divide":
- Half of all African-American applicants and more than one-third of Latino applicants for conventional mortgages were rejected in 2000.
- African-American applicants were more than twice as likely to be turned down for a mortgage as white applicants, and Latinos were rejected almost one and a half times more often than white applicants.
- Some areas demonstrate an especially alarming disparity in lending habits. In Milwaukee and Chicago, for instance, African-Americans were more than four times more likely to be denied for a conventional loan than whites were.
- Such disparity is evident even when comparing minority applicants with white applicants of the same income and even more pronounced at the higher income levels. Upper-income African-Americans were turned down almost three times more often than upper-income whites.
- Upper income African-Americans were rejected more frequently than moderate income whites whose incomes were only about half as much as that of the African-American applicants.
ACORN's "Separate and Unequal" called for sweeping reforms from federal, state and local legislators and regulators to pass strong anti-predatory lending legislation to protect all consumers from abusive practices.
It also advised mortgage consumers to seek assistance from U.S. Department of Housing and Urban Development-approved non-profit, loan counseling agencies.
"You need to have a counselor looking at everything with you. If a loan paper's numbers change from what it was a day ago, don't sign it. Have someone look at it again," Swanson said.
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