Predatory Lending
Presentation by National Community Reinvestment Coalition
June 12, 2007
Bridgeport, CT
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
Difference between Prime, Subprime & Predatory Lending
Prime Lending – loans at competitive market rates to borrowers with good credit
Subprime Lending – a loan to a borrower with less than perfect credit; Subprime loans have higher interest rates to compensate the lender for the added risk
Predatory Lending – an unsuitable loan designed to exploit vulnerable and unsophisticated borrowers. Predatory loans are a subset of subprime and prime loans and have one or more of the following features: 1) Charges more in interest and fees than is required to cover the added risk of lending to borrowers with credit imperfections; 2) Contains abusive terms & conditions that trap borrowers and lead to increase indebtedness; 3) Does not take into account the borrower’s ability to repay the loan; and 4) Violates fair lending laws by targeting women, minorities & communities of color.
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
Difference between Prime, Subprime & Predatory Lending
Other common abuses associated with predatory lending include, but are not limited to:
Fee Packing - Predatory lenders will pack loans with unnecessary or junk fees. Flipping - Flipping refers to the practice of repeated loan refinancings with little or no benefit to the borrower. Stiff Prepayment Penalties - A lender assesses prepayment penalties when a borrower either pays the remaining loan balance before the end of the loan term or refinances with another bank. In the case of predatory loans, prepayment penalties become a trap since borrowers cannot afford the thousands of dollars of penalties before they can refinance with other lenders.
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
Abuses in Non-Traditional Loans
• Interest only and Option ARMs – Negative amortization, payment shock • Hybrid Subprime ARMs – 2/28 and 3/27 – underwriting at initial rate, prepay penalties beyond initial rate • Low documentation loans – fraud in estimating borrower incomes
National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
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Avoiding Deceptive & Predatory Lending
Identifying Aggressive Marketing Techniques:
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Targeting mailings to low-income or minority neighborhoods
• Home improvement scams • Racial steering to high-rate lenders • Kickbacks to mortgage brokers (Yield Spread Premiums)
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
Avoiding Deceptive & Predatory Lending
Common Tactics/Sales:
• • • • • • • • • • • • Structuring loans with payments the borrower can not afford Inflated appraised value of home Falsifying loan applications Adding insincere co-signers Forging signatures on loan documents Requesting signatures on blank signature pages that can be linked to other documents Paying off low income or subsidized mortgages Changing loan terms at closing Shifting unsecured short term debt into mortgages Property flipping Selling substandard or uninhabitable properties at inflated prices Promises of an approval of a lower rate in the future
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
Avoiding Deceptive & Predatory Lending
Common Tactics/Loan Terms:
• • • • • • • • • • • • Unjustified high interest rates Unjustified high points or padded costs High interest balloon loans Unnecessary broker fees Required credit insurance/ financing single premium insurance Loans in excess of 100% LTV Falsely identifying loans as lines or credit or open-end mortgages Request to sign blank or unfinished documents No collection of insurance and property tax escrow Mandatory arbitration clauses Unjustified and excessive prepayment penalties Adjustable rate loans with high interest rates and high minimum floor rates
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
Avoiding Deceptive & Predatory Lending
Common Tactics at or After Closing:
• • • • • • • • • • • Loan flipping (repeated refinancing, often after high pressure sales) No receipt of closing documents Padded recording and settlement fees Daily interest when loan payments are late Unnecessary forced placed homeowners insurance policies Abusive collection/ servicing practices ( misapplied payments-unapplied payments, etc.) Unaffordable forbearance or modification agreements Foreclosure abuses Failure to report good payment history Failure to provide accurate loan balance and timely payoff amount Failure to respond to request for account information
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
Non-Traditional and High Cost Lending
in the nation and in YOUR community…
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
National Trends
• Almost 2 million ARM loans will have interest rates re-setting in 2007 and 08 • MBA – 39% of loans were interest only or option ARM in 2006; 2% in 2000 • 43% of brokers using low-doc say borrowers could not qualify under standard debt-to-income ratios • Delinquent subprime loans – 10% in fall 2006 as opposed to 5.4% in spring 2005
National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
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Subprime Delinquency in CT
• Bridgeport – 10.4% in 2007; 5.7% in 2005 • New Haven-Meriden – 11.4%; 6.1% • Worcester, MA-CT – 18.3%; 7.9% Source: Joint Economic Committee, April 2007
National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
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Market Share Analysis, by Race of Borrower
Bridgeport, CT
African American borrowers received the highest percent of subprime loans and Asian borrowers received the lowest.
Loans to African Americans Count 1,458 1,152 2,610 % 55.9% 44.1% 100.0% Loans to Hispanics Count 2,300 1,372 3,672 % 62.6% 37.4% 100.0%
Loans to Whites Count Prime Subprime Total 23,216 3,940 27,156 % 85.5% 14.5% 100.0%
Loans to Asians Count 866 132 998 % 86.8% 13.2% 100.0%
Home Lending Analysis, by Borrower Race Bridgeport, CT 2005
100%
Percent of Market Share
85.5%
86.8% 62.6% 44.1% 37.4% 13.2%
80% 60% 40% 20% 0% White African American Prime Lending Asian Hispanic 14.5% 55.9%
Subprime Lending
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
Market Share Analysis, by Income of Borrower
Bridgeport, CT
The percent of subprime loans received by LMI borrowers was higher than for MUI borrowers.
Loans to LMI Count Prime Subprime Total 7,250 2,829 10,079 % 71.9% 28.1% 100.0% Loans to MUI Count 21,003 3,707 24,710 % 85.0% 15.0% 100.0%
Home Lending Analysis, by Borrower Income Bridgeport, CT 2005
100%
Percent of Market Share
85.0% 80% 60% 40% 20% 0% LMI Prime Lending MUI Subprime Lending 28.1% 15.0% 71.9%
• LMI = low- and moderate-income, or those with under 80% of median MSA income • MUI = middle- and upper-income, or those with over 80% of median MSA income
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
Market Share Analysis, by Gender
Bridgeport, CT Females received the highest percent of subprime loans, joint applicants – the lowest.
Loans to Female Count Prime Subprime Total 6,519 2,093 8,612 % 75.7% 24.3% 100.0%
Loans to Male Count 8,235 2,568 10,803 % 76.2% 23.8% 100.0%
Loans to Joint Count 13,341 1,660 15,001 % 88.9% 11.1% 100.0%
Home Lending Analysis, by Gender Bridgeport, CT 2005
100% 88.9% 75.7% 76.2%
Percent of Market Share
80% 60% 40%
24.3% 20% 0% Female Prime Lending
23.8% 11.1%
Male Subprime Lending
Joint
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
Market Share Analysis, by Race of Neighborhood
Bridgeport, CT
Residents of minority neighborhoods were more likely to receive subprime loans than residents of white neighborhoods.
Loans to Minority Neighborhoods Count Prime Subprime Total 3,731 2,756 6,487 % 57.5% 42.5% 100.0% Loans to White Neighborhoods Count 26,445 3,930 30,375 % 87.1% 12.9% 100.0%
Home Lending Analysis, by Race of Neighborhood Bridgeport, CT 2005
100% 87.1%
Percent of Market Share
• Minority neighborhoods = census tracts with over 50% minority residents • White neighborhoods = census tracts with under 50% minority residents
80% 60% 40% 20% 0% Minority Neighborhoods Prime Lending White Neighborhoods Subprime Lending 12.9% 57.5% 42.5%
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
Market Share Analysis, by Income of Neighborhood
Bridgeport, CT The percent of subprime loans was higher for residents from LMI neighborhoods than for residents from MUI neighborhoods.
Loans to LMI Neighborhoods Count Prime Subprime Total 6,859 3,976 10,835 % 63.3% 36.7% 100.0% Loans to MUI Neighborhoods Count 23,317 2,710 26,027 % 89.6% 10.4% 100.0%
Home Lending Analysis, by Income of Neighborhood Bridgeport, CT
100% 89.6%
Percent of Market Share
80% 63.3% 60% 40% 20% 0% LMI Prime Lending MUI Subprime Lending 36.7%
10.4%
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
Subprime Loans by Minority Level of Tract
Bridgeport, CT MSA, 2005
LEGEND 0-49% MINORITY
50-100% MINORITY EACH DOT REPRESENTS FOUR LOANS.
National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
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How Can We Stop Predatory Lending in our Communities?
• NCRC’s National Consumer Rescue Fund (CRF)
• Strong National Anti-Predatory Lending Bill
• Support the Community Reinvestment Act (CRA)
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
Consumer Rescue Fund (CRF)
NCRC’s National Anti-Predatory Lending Consumer Rescue Fund (CRF) was designed in October 2001 to help refinance predatory or problematic loans.
The CRF Program operates in Alabama, Arizona, California, Florida, Georgia, Indiana, Illinois, Maryland, Massachusetts, Nevada, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Texas and Wisconsin, and is looking to expand into other states as well. The CRF targets consumers who are in "high risk" mortgages and who have made good faith efforts to pay their loans but are unable to do so due to a change in financial circumstances and senior citizens who have recently refinanced their homes and have loans at high parameters.
The program is made possible by a funding and underwriting commitment from lender partners.
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
Consumer Rescue Fund (CRF)
The program includes five components necessary to a lasting beneficial effect for the homeowner: 1) Default counseling and financial education 2) Intervention and mitigation with lender/ servicer as necessary to assist homeowners with principal reduction, elimination of abusive note terms in payoff and delay or elimination of foreclosure proceedings 3) Providing an affordable mortgage refinance
4) Provide a write-down of the interest rate to assist eligible borrowers in achieving an affordable mortgage or assist in mitigating an inflated appraisal where intervention has not been achieved in a reduction from the lender
5) Assist member organizations with private enforcement of consumers’ rights and responsibilities.
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
Support a Strong National Anti-Predatory Lending Bill
Currently there are 7 states with comprehensive anti-predatory lending bill, hence need strong national law.
NCRC endorses S. 1299, Borrowers Protection Act of 2007 (Schumer, Brown, Casey): * Broker – fiduciary relationship with consumer; good faith and fair dealing for originators * Ability to pay standard (PITI); maximum allowable interest rate 1st 7 years for ARMS Verification of income required; escrow required for high-cost loans; steering prohibited; fair dealing requirement for appraisers and no lender influencing of appraisals; lender liability for broker misdeeds involving high-cost loans
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
Funding for Counseling
• Schumer proposes $300 million in funding for counseling efforts • Foreclosures cost society $80,000; counseling about $1,000 per family assisted • Proposed funding level could help 300,000 to 900,000 families
National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
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Protect the Community Reinvestment Act (CRA)
Passed in 1977 by Congress, the Community Reinvestment Act (CRA) imposes an affirmative and continuing obligation on banks to serve the credit needs of all communities, including lowand moderate-income neighborhoods. Federal examiners issue a publicly available rating to banks with assets over $250 million based on how many loans, investments, and services they make to low- and moderate-income neighborhoods. The CRA exam has been instrumental in increasing access to loans, investments, and services for residents in low- and moderate-income communities. Harvard University, the Treasury Department, and Federal Reserve economists all conclude that CRA as applied to banks has increased lending to low- and moderate-income communities and that this lending is profitable.
In a September 2005 report on Community Reinvestment Act (CRA) agreements, NCRC found that $4.2 trillion dollars have been infused into minority and lower income neighborhoods since CRA passed in 1977. In this report, NCRC documents the 430 CRA agreements made by banks, instituting multi-year programs covering loans, investments and banking services to communities in need.
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
Protect the Community Reinvestment Act (CRA)
CRA has been shown by the Federal Reserve Board to reduce the incidence of high-cost lending
Regulators must strengthen CRA exams and hold lenders accountable to communities. In order to increase prime lending for minority borrowers and reduce lending disparities, CRA exams must evaluate the banks’ records of lending to minority borrowers and neighborhoods as well as scrutinizing banks’ performance in reaching low- and moderate-income borrowers and neighborhoods.
Support the CRA Modernization Act of 2007 (HR 1289) – would strengthen CRA as applied to banks and apply CRA to non-bank financial institutions including mortgage companies.
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866
Thank you!
For more information, please contact NCRC at (202) 628-8866 and check out our web page of http://www.ncrc.org
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National Community Reinvestment Coalition * http://www.ncrc.org * 202-628-8866