Realty Times: Subprime Lending Disparity Nearly Doubles

November 27, 2002

Subprime Lending Disparity Nearly Doubles
by Broderick Perkins

Despite court suits, new legislation and other legal attempts to end problems in the subprime mortgage lending market, minorities and low-income borrowers continue to receive a disproportionate number of subprime loans, and in some cases the disparity has increased dramatically.

In 2000 African-American homeowners who refinanced were 2.8 times as likely to receive a subprime loan as whites, 4.4 times as likely in 2001. Latinos in 2000 were 1.5 times as likely to receive a subprime loan, but in 2001, 2.2 times as likely, according to the latest "Separate and Unequal: Predatory Lending in America," report from ACORN, (the Association of Community Organizations for Reform Now) the nation's largest community organization of low- and moderate-income families. The confrontational association based in Washington, D.C. represents more than 120,000 member families organized into 600 neighborhood chapters in 45 cities nationwide.

"Part of our goal is to make subprime loans into a good thing. But we are complaining because some people are disproportionately much more likely to get subprime loans and so many of (those loans) are predatory," said David Swanson, ACORN spokesman.

"We are beginning to change that in scattered states and cities, Georgia, North Carolina, California, New York and Massachusetts. There are some new laws in place but all people are not getting the same access to prime credit," Swanson added.

Subprime loans are designed for borrowers who may have less than perfect credit. To protect lenders' extra risk, subprime loans carry higher rates and fees than prime loans. The loans can be valuable for home buyers and borrowers who could not otherwise borrow money to buy a home or refinance their existing loan.

Unfortunately, the subprime market has spawned "predatory lending" -- exorbitantly high costs, penalties and other financially abusive features in loans directed at specific groups including minorities, older, low-income borrowers and others who can least afford the cost.

Even without predatory loans, directing subprime loans at consumers when they can qualify for for prime loans is an unnecessarily costly propopsition.

"One third to one half of the subprime loans were going to borrowers who could have qualified for prime loans. And there are reports that show low-income borrowers are no greater risk of defaulting on the loan than upper income borrowers," Swanson said.

ACORN's study analyzes data released by the Federal Financial Institutions Examination Council (FFIEC) about the lending activity of more than 7,800 institutions covered by the Home Mortgage Disclosure Act (HMDA). The report examined figures for the nation as a whole, as well as for 68 individual metropolitan areas.

It found that while the percentage of loans that were prime increased for all groups in 2001, due to a rush of low-rate refinancings, minorities benefited less than whites.

The number of subprime purchase loans to African-American home buyers has risen 686 percent from 1995 to 2000, while the number of prime conventional purchase loans received by African-American home buyers in 2000 decreased 6 percent during the same period. Subprime purchase loans increased 882 percent to Latino home buyers, while prime loans rose 65 percent. White home buyers also saw a larger percentage increase in subprime loans than in prime loans -- a 415 percent increase, compared to a 7.8 percent increase in the number of prime loans.

In 2001, more than one out of four, 27.76 percent of all conventional refinance loans received by African-American home owners were from subprime lenders, as were 13.60 percent of the refinance loans received by Latino homeowners, compared to 6.32 percent of the refinance loans received by white home owners.

Subprime lenders accounted for 41.74 percent of the refinance loans made to low-income African-American homeowners and 33.95 percent of the refinance loans made to moderate- income African-American homeowners.

Subprime lenders accounted for 17.97 percent of the refinance loans made to low- income Latino homeowners and 17.06 percent of the refinance loans made to moderate income Latino homeowners.

Among upper-income African Americans, 18.05 percent of conventional refinance loans received were from subprime lenders, for Latino home owners it was 10.06 and for upper-income white home owns it was only 4.81 percent. Upper-income African American home owners were more likely than low-income white home owners to receive a subprime loan while refinancing.

"It's not just minorities, it's also all lower-income white Americans who are targeted," said Swanson.

In 2000, low-income whites who refinanced were 2.0 times as likely to receive a subprime loan as upper-income whites. In 2001, they were 2.4 times as likely.

Subprime lenders made 11.76 percent of all conventional refinance loans received by low- income white homeowners and 8.98 percent of all refinance loan received by moderate- income white homeowners. In contrast, subprime lenders made just 4.81 percent of the refinance loans to upper-income white homeowners.

Subprime purchase lending is also problematic among racial and income lines.

Of the conventional prime and subprime purchase loans originated in 2000, subprime loans made up 25.49 percent of the loans received by African-Americans and 14.55 percent of the loans to Latinos, but just 7.14 percent of the loans to whites.

In 2000, African-Americans received 12.21 percent of all the subprime purchase loans made in the United States, a 3.5 times larger share than the 3.51 percent they received of prime purchase loans. Latinos received 11.51 percent of the subprime loans, 1.7 times their 6.6 percent share of prime loans. In contrast, whites received slightly more than half, 55.80 percent, of the subprime purchase loans, but nearly three quarters, 71.36 percent, of the prime loans.

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