Often perceived as an urban problem of low-income and minority borrowers, predatory lending is alive and well in rural America.

Rural borrowers are 20 percent more likely than their urban counterparts to receive a prepayment penalty that remains effective for five years or more on subprime mortgage loans, according to a recent study by the Center For Responsible Lending.

The Center's "Rural Borrowers More Likely to be Penalized for Refinancing Subprime Home Loans" says, what's worse is that the disparity has been growing over time. In 2000, rural subprime homeowners were only eight percent more likely than similar urban borrowers to receive a prepayment penalty with a term of at least five years. Now it's 20 percent.

Prepayment penalties -- a fee charged by a lender when a borrower pays a designated amount of mortgage debt prior to the due date -- are an effort by lenders to retain customers and stem the tide of repetitive refinancing that costs them money but it can also be a hallmark of predatory lending practices, especially when that fee is exorbitant and extended over time.

Predatory loans are a malignant outgrowth of the otherwise useful subprime residential mortgage sector. Subprime loans are generally more expensive than prime loans, but they are intended for borrowers who pose a greater risk to lenders, typically because of the lack of credit or previous credit problems. Without the subprime segment, some borrowers would be locked out of the American Dream.

Unfortunately, in numerous documented class action suits, state-filed cases and other complaints, subprime loans became predatory with exorbitantly high costs, penalties and other financially abusive features often directed at specific groups, including minorities, older, low-income borrowers and others who can least afford the added cost.

Prepayment penalties of five years or longer are of particular note because they have been often cited as inflicting the greatest financial harm on borrowers.

The Center says that's because prepayment penalties:

• Drain equity. Many subprime homeowners have worked hard for years to accumulate equity in their homes. A prepayment penalty, often amounting to thousands of dollars, directly drains home equity when a borrower refinances.

• Create a high-cost trap. Sometimes borrowers simply cannot afford the cost of the prepayment penalty. In such cases, they may be forced to keep a high-cost mortgage when they could otherwise refinance and qualify for a cheaper more affordable loan and, perhaps, take cash out from growing equity.

• Provide an incentive for kickbacks. When brokers deliver loans at a higher interest rate than the lender requires, the lender sometimes pays the broker a kickback, known as a "yield spread premium." Because lenders are more willing to pay yield spread premiums on loans that include prepayment penalties, the inclusion of a prepayment penalty indirectly facilitates higher interest rates for borrowers, the Center said.

The Center reported the study did not examine why rural homeowners have a higher incidence of prepayment penalties but found that rural populations are characterized by lower than average incomes, but home ownership is high. It also found that rural ZIP codes with higher concentrations of minorities were also especially hard hit with penalties.

Published: September 23, 2004

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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.