California has been socked with yet another predatory loan study that says predatory loan abuse in the sub-prime lending industry is more widespread than previously thought.

More than a third of the sub-prime loans surveyed -- 36 percent -- contained at least two predatory terms, among them final terms different from those initially discusses, exorbitantly high interest rates and prepayment penalties, balloon payments and other conditions, according to "Stolen Wealth: Inequities in California's Sub-prime Mortgage Market" by the California Reinvestment Committee. CRC is a nonprofit organization of hundreds of California's nonprofit organizations and public agencies working to promote economic revitalization for the state's low-income and minority communities.

It surveyed 125 sub-prime loans in San Diego, Los Angeles, Sacramento and Oakland during the past year and found that prime lenders are not adequately serving minority and low-income communities, but sub-prime lenders -- some of them subdivisions of the very same major prime lenders -- are targeting elderly and minority borrowers.

"I think it shows there are worse problems and practices in the sub-prime market than people think," said Kevin Stein, a CRC associate director and co-author of the study.

Sub-prime lending is intended for borrowers who pose a greater risk, usually because of the lack of credit or previous credit problems. Most observers believe there is a legitimate place for sub-prime products with borrowers whose circumstances prevent them from obtaining "A" or "prime" loans at the lowest possible rates.

However, sub-prime loans carry higher rates and fees than prime loans and, in numerous documented cases, are regarded as "predatory" when they come with exorbitantly high costs, unfair penalties and other financially abusive features.

It's "financial apartheid," according to Maude Hurd, president of the Association of Community Organizations for Reform Now (ACORN), a 100,000-member group of 500 neighborhood chapters low- and moderate-income families in 40 cities.

ACORN recently found a disproportionate number of minorities and low-income home owners being steered to more expensive sub-prime mortgages, even when they could qualify for cheaper financing.

"Separate and Unequal: Predatory Lending in America" came 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.

"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 Hurd.

"It's a kind of financial apartheid, where minority and low-income borrowers pay more, even when they have good credit. Our families cannot afford to lose equity and lose resources in this way," she added.

California has been particularly hard hit by predatory lending and the state and the city of Oakland have both passed stiff predatory lending laws. ACORN's report showed particularly high levels of predatory lending in major California cities including San Jose (Silicon Valley), Oakland and San Francisco.

California's Department of Corporations, in a major test regarding what lenders can charge or not charge, has filed a $8.5 million civil suit alleging that the Household Finance Corp. and Beneficial, Inc. ignored the department's demands to stop charging excessive administrative fees. Household, a sub-prime lender, has denied the allegations.

Among the California Reinvestment Committee's findings:

• Banks are not accessible. Nearly three-fourths of all borrowers surveyed did not approach a bank or thrift for their loan, CRC says, because banks, thrifts, and prime lenders do a poor job making loans in vulnerable communities, when many residents can actually qualify for a prime loan.

• Older consumers, minorities are targeted. More than 33 percent of the study participants reported they got the idea to get a home loan because of aggressive target marketing efforts from sub-prime lenders. Women, 55 years or older, were most susceptible to the marketing.

• Lenders bait and lenders switch. Almost 70 percent of those responding to the survey said key loan terms changed for the worse, often suddenly at closing.

• Predators set prepayment traps. African-American and Latino respondents were roughly two times as likely as whites to have prepayment penalty provisions in their loans.

• Excessive loan costs are common. Half of all borrowers said their points and fees exceeded 5 percent of the loan amount.

CSC recommends:

1. If federal and state legislation and other efforts aren't strong enough to stop predatory lending, cities should enact their own laws to protect home owners and buyers.

2. Banks and thrifts must conduct more ambitious outreach efforts to serve low income, minority and older borrowers with prime loans.

3. All lenders should agree to CRC's "Fair Lending Principles," which call for:

   -- An end to targeting minorities, low income, and elderly borrowers.

   -- Eliminating abusive loan provisions.

   -- Reigning in unscrupulous mortgage brokers who arrange predatory loans

   -- Offering all loan applicants the best and least costly loan for which they qualify through the lender and the lender's affiliated banks and thrifts.

   -- End the secondary market purchasing of and investment in predatory loans, which effectively finances the detrimental practice.

For more articles by Broderick Perkins, please press here.

Published: December 13, 2001

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.