SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 6772 words

COMMITTEE: SENATE BANKING, HOUSING & URBAN AFFAIRS

HEADLINE: PREDATORY MORTGAGE LENDING

TESTIMONY-BY: MIKE SHEA, EXECUTIVE DIRECTOR OF

AFFILIATION: ACORN HOUSING CORPORATION

BODY:
July 27, 2001

Hearing on

"Predatory Mortgage Lending: The Problem, Impact and Responses." Second Hearing in a Series

Prepared Testimony of Mr. Mike Shea Executive Director Of ACORN Housing Corporation

Good morning, Chairman Sarbanes and members of the Banking Committee. My name is Mike Shea, and I am executive director of ACORN Housing Corporation, which has worked for the past seventeen years to build equity through increased homeownership in low- and moderate-income communities and communities of color. We?ve been fighting to allow people in our neighborhoods to buy their own homes, and worked with some of the major banks to make that happen. AHC now has offices providing housing counseling in twenty seven cities across the country and last year alone helped 9,400 families close on home purchase loans. The subprime industry likes to claim credit for increasing homeownership among minorities and low- and moderate-income families, but the vast majority of their business is in refinancing loans and making second mortgages, not helping people buy homes. According to last year?s HUD/Treasury report, of first- lien mortgages made by subprime lenders, 82% were refinances.

The increased rates of homeownership among underserved populations over the last decade are due almost entirely to banks starting to live up to their obligations under the Community Reinvestment Act. That?s happening for a variety of reasons ? continued pressure from community organizations like ACORN, somewhat more effective monitoring of CRA preformance, and, most importantly, the banks? realization that they had been neglecting good business opportunities. Don?t get me wrong ? there?s a tremendous amount yet to be done and many banks that receive passing grades are not living up to their CRA obligations, but we have made progress and that needs to be recognized.

Increasingly, however, we?re finding that predatory lending abuses are threatening that progress. As soon as families in our communities start to build up some equity, they?re bombarded with offers to refinance their mortgages or take out additional debt ? receiving three or four letters a week and regular phone calls.

We know people have heard the numbers before, but we really need to seriously think through the consequences of more than half of refinance loans in communities of color being made by subprime lenders. Now not all subprime lending is predatory, but it?s a sad fact that abusive practices are running rampant in the subprime industry.

When you consider that number in combination with the observations that Fannie and Freddie and others have made about the market ? that 30%, 40% or more of borrowers in subprime loans could have qualified for ?A? loans, you are clearly talking about an incredible drain of equity from those communities which can least afford it. At a minimum, these numbers represent huge numbers of borrowers paying interest rates 2 to 3% higher than they would be if they instead had gotten an A loan. Over the life of a 30 year mortgage for $100,000, the difference in payments between interest rates of 8% and 10.5% is over $65,000.

Too often, however, predatory features make this bad situation even worse ? by stripping the equity from borrowers homes with high financed fees, prepayment penalties, and add-ons like financed single premium credit insurance. Borrowers are effectively trapped in unfair high rate loans by these features, or they lose tens of thousands of dollars of equity from the encounter. Sometimes, they even lose their homes entirely. The lender wins and wins, the borrower loses and loses.

There?s a desperate need for federal legislation to prevent the abuses, cut down on the stripping of equity, and help families keep their homes. While it?s impossible to prevent every bad loan, good legislation could solve a lot of the problems in the subprime industry and make a huge difference in protecting homeowners.

If we want a subprime market that works for consumers? interests, we cannot have huge fees financed into home loans ? six times what banks are charging for providing the same service. We cannot have long extended prepayment penalties for several thousand dollars that trap borrowers in high-cost loans. As more lenders are recognizing in response to public pressure, we can?t have single premium credit insurance policies that strip equity and tack on additional interest charges to an already overpriced product. If we want a market that works for borrowers, we can?t have loans being flipped over and over. That means taking away the current incentive for lenders to keep profiting from huge fees and other add-ons and make lenders? income streams more dependent on their loans actually being repaid.

In short, we?ve got to get rid of all the tricks and hidden practices that make it impossible for borrowers to know what kind of loan they?re getting into. What you?ve got now is a situation where it?s very difficult for even trained loan counselors sometimes to understand all the damaging bells and whistles in many subprime loans ? let alone a borrower trying to look for their own interests. That shouldn?t be how getting a home loans should work. It?s not what happens in the ?A? market. But that?s what happens every day in the subprime market. And despite the industry?s substantial public relations efforts, the market hasn?t taken care of it. We need a strong, clear set of rules that will allow homeowners to navigate the subprime market with some basic assurances of safety. Without such rules, large numbers of borrowers won?t stand a chance.

We hear the argument that we don?t need legislation, but just more education and financial literacy for borrowers. We certainly support financial literacy efforts ? in fact I would venture that we have in fact done more to inform people in lower-income and minority communities about these issues than most. Part of what we?ve learned from this experience, though is what the limits of this approach are. First, there?s the question of resources ? until we are ready to spend the 1.5 to 2 thousand dollars per borrower that lenders can spend hawking their products we will never catch up. And second, no advertisement, or bus billboard, or even workbook, is going to compete with the one-on-one sales pitch of a lender ? who still knows more about the process.

We have also heard the argument that all that?s needed is better enforcement of existing laws. We see a lot of borrowers in heartbreaking situations, and we have tried to use current law to help protect them, applying all the pressure we know how to get it enforced. But by and large, this has not worked. HOEPA covers only a tiny fraction of loans, and even there it mostly requires disclosures ? as long as the right paper was slipped somewhere into the pile, there is often little the borrower can do. Fraud and deceit are against the law, but they have also been extraordinarily difficult to prove. It turns into a matter of ?he said, she said? and when the lender knows more about the transaction, and has the paperwork, the borrower loses. And when we hear certain industry groups suggest the solution is better enforcement of current law, we?re left wondering how they expect that to happen if they routinely include mandatory arbitration clauses in their loans.

What we need are some basic rules covering a broader group of high cost loans that create a level playing field where a borrower in the subprime market, like a borrower in the A market, has a set of understandable options to choose between.

Buying or refinancing a home is a lot more like buying medicine than like buying a pair of shoes; if you are misled and buy the wrong one, the consequences are pretty serious. We don?t expect every patient to read the New England Journal of Medicine and evaluate for themselves which drugs are safe and which aren?t. Instead, the FDA makes some rules about whats too dangerous to be sold. And then inside that relatively safer space, patients still have plenty of work to do to figure out what?s best for them. We need to make some rules in the same way about home loans.

With regard to regulation, I should add that we were pleased that the Federal Reserve Board issued a proposed rule on HOEPA and one on HMDA. And that we are now growing extremely concerned about their silence since then. The Board needs to issue their rule, and they need to insist on the limited steps laid out in the proposed version ? like improving the collection of HMDA data to include APR information. That said, the proposed rules were silent on many crucial areas crying out for action, and which we need legislation to address.

In the spirit of comity, I will end on an issue of clear agreement with the lending industry. We share the industry?s belief that a variety of state and local anti-predatory lending legislation is not the ideal solution. We would like to see federal protections for all Americans, and that?s why we strongly support legislation the chairman will be introducing in the near future.

As long as there is not federal legislation, though, it?s clear to us that our members, and community residents and state and city officials around the country will not, and cannot, sit by idly while borrowers are so badly hurt by predatory loans. The list of states and localities where anti-predatory lending measures have been considered, or are presently being considered, include California, New York, Massachusetts, North Carolina, Philadelphia, Sacramento, DeKalb County (Georgia), and the list will keep growing. Just on Tuesday, the Oakland city council voted unanimously for a strong local ordinance restricting predatory lending practices, and there are many more like that to come. We?re going to keep pushing our senators and representatives to get on board, but we?re not going to wait for you. The stakes are too high.

Predatory Lending Stories

Margaret D - St. Louis, Missouri

Margaret D has lived in her home for nine years. She has very good credit (as indicated by her recent FICO score of 672) and had a 30-year mortgage from First Bank. After she refinanced a few years ago because of lower interest rates, she was paying an interest rate of 7.5% with monthly payments of $485.

By the summer of 2000, Ms. D had built up some other debts and was paying a total of $1,500 a month, including her house payment. She still owed about $38,000 on her home. Household began soliciting her to refinance her loans, and when she talked to the loan officer he said they could cut her payments in half to between $700 and $800. When she went into his office and talked to him, he changed that amount to lowering her payments by $300.

That August, Ms. D agreed to refinance her debts with Household. The company gave her both a first and second mortgage at the same time. The first mortgage, which did not provide any cash to Ms. D, had an interest rate of 12.5%, and she was charged an origination fee of $5,190.04. If she wants to refinance or sell her home within five years, she will have to pay Household a prepayment penalty of six months interest ? around $4,000. She was told she had to take out a single-premium credit life insurance policy in order to take out the loan, which cost $5,700. With ACORN?s assistance, she requested and received a $4,700 refund on this policy.

Her second mortgage is a revolving line of credit for $15,000, with that amount advanced to her in full, including a cash-out of $1,141. It contains an interest rate of 21.9%, and she was charged $750 and will be assessed further annual fees of $50. To refinance her loans, Ms. D was charged fees and credit insurance premiums totaling well over $12,000.

With much more debt now secured by her home, Ms. D?s total monthly payments have in fact gone up rather than down. Her total monthly payments to Household are slightly less than the $1,500 she was paying on all of her debts before. But unlike her previous mortgage, her Household loans do not pay for her annual taxes of $722 or the $460 annually for her insurance. Including these monthly costs brings her monthly total above its previous level, plus it is all now secured by her home, and all now streched out over 30 years. Between the two loans, she currently owes about $92,000, which is substantially more than her house?s appraised value of $66,000 in June 2000. Because of her high loan- to-value ratio, it will be extremely difficult for her to refinance into a loan at a better rate.

Mamie W - Los Angeles, California

Ms. W has lived in her Los Angeles home for over twenty years. She has a first mortgage with an interest rate of 7% from Ocwen. In October 1999, she responded to a solicitation from Beneficial and took out a second mortgage on her house. Although she was initially promised an interest rate of 16%, the interest rate on her loan ended up being 22.9%. She was charged an origination fee of $750, third party fees of $110, and a subsequent annual fee of $50. In addition, her loan included credit life and disability insurance policies, which she later cancelled.

Beneficial structured Ms. W?s loan as an open-end loan with a credit limit of $14,000 and an initial advance of $14,910. Beneficial repeatedly assured her that there would be no penalty if she paid off her loan but kept the credit line open. But when she later tried to do so, they charged her a penalty, pointing to the five-year prepayment penalty of six months? interest on all principal beyond 20% of the original loan amount that they had slipped into her paperwork.

For four months, Ms. W?s daughter called Household over and over and was shifted around repeatedly among employees who refused to address her concerns before a manager at the headquarters office in Illinois finally removed it. Throughout this time, Ms. W received dozens of harassing phone calls from Household employees.

Willie and Margaret B - Oakland, California

Mr. and Mrs. B have lived in their Oakland home for the past five years. They bought the house with a mortgage from Fleet Finance with monthly payments of $1,662 and a remaining balance of about $183,000. Their house has significantly increased in value and was recently appraised at $350,000. Mrs. B is on disability because she has leukemia, and Mr. B has been unable to keep working as a janitor since having neck surgery last year. He is now looking for a different line of work.

Last year, Household called Mr. and Mrs. B about taking out a personal loan to help pay some bills, which they did. With the couple?s medical problems, they were short on cash and were happy to get a call from Household offering a $25,000 loan. When they went down to the Household office in October 2000, they told the Household representative that they couldn?t afford payments higher than $200 or $300 a month. At present, their income is drawn from Mrs. B?s $600 disability check each month, whatever odd jobs Mr. B is able to find, and assistance from their relatives. Despite their limited income, the Bs have never been late on a single mortgage payment.

While the Household employee promised their monthly payments would be below $300, the first monthly deduction from the B?s checking account was for $645, primarily due to a 24% interest rate and monthly credit insurance charges of $75. Their loan was set up as an open-end second mortgage with a credit limit of $25,000 and an initial advance of $26,050. After fifteen years, Household is able to call in any remaining balance as a single balloon payment, which the Bs were never told. Also, the loan was supposed to pay off a car loan for $12,700, a previous Household loan, and provide a cash-out of $3,775, but the car loan was never paid off and the Bs are still making separate payments on that loan. Their loan amount also included an origination fee of $1,500, and they will assessed future annual fees of $50. In addition, the Bs were never told that their loan had a five-year prepayment penalty for six months? interest on all principal beyond 20% of the original loan amount ? around $2,400 ? if they were able to refinance to a lower rate.

INTRODUCTION

Mr. and Mrs. D. had paid off their mortgage in full and owned their house outright. They had a personal loan with Conseco with a balance of $1,500, when Conseco contacted them about taking out another loan to consolidate their other bills and get money for home improvements. They received a $61,715 loan from Conseco which included $10,913 in credit insurance, fees and closing costs - 18% of the loan. $7,715 of this went for credit insurance to Green Tree Agency, which is owned by Conseco. The Conseco representative told Mr. and Mrs. D. that they had to buy the credit insurance in order to get the loan. The fees and closing costs were financed into their 12.7% interest loan, which means that $125 of their monthly payment is from these fees alone and the $10,913 will actually cost them a total of $30,000 over the twenty year term of the loan. If they want to refinance, in order to get a better interest rate, during the first three years of the loan, they will have to pay approximately $4,000 to Conseco for a pre-payment penalty. Conseco also referred them to Wright Siding Company to do the work on their house. Conseco paid $14,800 directly to the siding company, which then did a shoddy job on the work, and, having already been paid in full, refused to even talk to Mr. and Mrs. D. about the problems.

Mrs. G. and her late husband had owned their home since the 1940's. She had a developmentally disabled 30 year old son, Steve, living with her and hoped to be able to leave the house to him so that he could always have a place to live after she died. Mrs. G. had a credit card from Associates with an unpaid balance of $1,000. Associates then sent her a check for $2,500 along with her monthly statement. When she cashed the check, she accepted a loan with Associates which had an APR of 37.71% and a monthly payment of $499. One month later, Associates solicited her for a new loan to refinance the existing mortgage on the house and consolidate other debts. The new loan was for $90,859, which included $6,730 in loan discount points and $1,740 for Credit Disability Insurance. The loan was at 13.49%, with monthly payments of $1,091.69. Eight months later, Associates persuaded her to refinance again and consolidate additional debts. This new loan was for $140,510, which included another $10,408 in discount points, $13,572 for Credit Life Insurance, $1,026 for Credit Accident Insurance, and $3,355 for Credit Unemployment Insurance. This loan had monthly payments of $1,298.90, not including taxes or homeowners insurance. This was more than Mrs. G and her son could afford on their combined monthly income of $2,200. A few months after this refinance, Ms. G. had heart surgery, which was followed by a stroke. After she died, it was clear that Steve would not be able to afford the monthly payment on his own, and the house was sold. After Associates received their money, including a prepayment penalty on the loan, and other family debts and medical bills were paid, Steve was left homeless and broke. He now rents a room in a barn and continues to work delivering pizzas.

The dramatic increase in subprime loan originations in the last decade and the concurrent rise in the incidence of abusive lending practices have created a crisis of epidemic proportions for and communities of color, elderly homeowners, and low-income neighborhoods ? the plague of predatory mortgage lending. The above stories are just two of the hundreds of thousands of unsuspecting homeowners and homebuyers who have been robbed by a predatory lender, and these modern day loan sharks continue to sink their teeth into new victims every day.

Nationally, the level of subprime lending has skyrocketed, growing 900% from just over 100,000 home purchase and refinance loans in 1993 to almost a million loans in 1999. During this same period, all other home purchase and refinance loans have declined 10%. The rise in subprime and predatory lending has been most dramatic in minority communities. Subprime lenders now account for half, 51 percent, of all refinance loans made in predominantly black neighborhoods, compared to just 9 percent of the refinance loans made in predominantly white neighborhoods. Subprime lending, with its higher prices and attendant abuses, is becoming the dominant form of lending in minority communities. At the same time, although minority communities suffer from an extreme concentration of higher cost, harmful loans, the problem should not be viewed as one that only affects minorities, for the vast majority of subprime borrowers, and thus predatory lending victims, are white.

As HUD and others have remarked, while not all subprime lenders are predatory, the overwhelming majority of predatory loans are subprime, and the subprime industry is a fertile breeding ground for predatory practices. Subprime loans are intended for people who are unable to obtain a conventional prime loan at the standard bank rate. The loans have higher interest rates to compensate for the potentially greater risk that these borrowers represent. There is a legitimate place for flexible loan products for those whose credit or other circumstances will not permit them to get loans on "A" terms. The problem arises when loan terms or conditions become abusive or when borrowers who would qualify for credit on better terms are targeted instead for higher cost loans. Unfortunately, these problems pervade too much of the subprime industry.

The Chairman of Fannie Mae recently estimated that as many as half of the borrowers who receive a high cost subprime loan could have instead qualified for a traditional mortgage at a lower interest rate. Other borrowers who are not in a position to qualify for an ?A? loan are also routinely overcharged in the subprime market, with rates and fees which reflect what a lender or broker thought they could get away with, rather than any careful assessment of the actual credit risk. Incentive systems which reward brokers and loan officers for charging more make this a widespread problem.

Other abusive loan practices include: making loans without regard to a borrower?s ability to repay; padding loans with exorbitant fees; requiring borrowers to purchase unnecessary credit insurance; using high-pressure tactics to encourage repeated refinancing by existing customers and tacking on extra fees each time, a practice known as ?flipping?; saddling borrowers in high cost loans with onerous terms such as balloon payments and prepayment penalties; obstructing customers from refinancing with other companies to gain better terms; and misrepresenting the specifics of the loan.

Predatory lending practices are even more insidious because they specifically target members of our society who can least afford to be stripped of their equity or life savings, and have the fewest resources to fight back when they have been cheated. As detailed in this report, subprime lending is disproportionately concentrated in minority and low-income communities. Predatory lenders seek to take advantage of homeowners who, after years of bank discrimination, may feel that they have no other options. The historical neglect by banks and Wall Street investment firms have effectively shut these communities out of the economic mainstream and created a credit void which is now too often being filled by unscrupulous, overpriced lending.

The statistics discussed in this report demonstrate that we are still very much a nation of two separate and very unequal financial systems: one for whites and one for minorities, one for the rich and one for the poor.

SUMMARY OF FINDINGS

Subprime Refinance Loans

The vast majority of subprime loans are for refinances, rather than purchases, and a significant number of predatory practices are linked to refinances.

? Minorities are much more likely than whites to receive a subprime loan when refinancing. In 1999, 45.1% of all conventional refinance loans, excluding loans for manufactured housing, received by African-Americans were from subprime lenders, as were 19.5% of the refinance loans received by Latinos, compared to just 12.1% of the refinance loans received by whites. In comparative terms, African-Americans were 3.7 times more likely to receive a subprime loan, and Latinos were 1.6 times more likely.

? The concentration of subprime loans is greatest among lower income minorities. Not including loans for manufactured hosing, two out of every three conventional refinance loans (61.3 percent) received by low-income African-Americans were from subprime lenders, and more than half (52.6 percent) of the conventional refinance loans received by moderate-income African- Americans were from subprime lenders. Almost one in three conventional refinance loans (30.3%) made to low-income Latinos were subprime.

? The racial disparity is still present when comparing minority borrowers with white borrowers of the same incomes, and it persists among higher income borrowers. 30.5% of the refinance loans received by upper-income African-Americans were from subprime lenders, as were 13.1% of the refinance loans received by upper-income Latinos. In contrast, only 8.2% of the refinance loans received by upper-income whites were from subprime lenders. In addition, upper-income African-Americans were even more likely than low-income whites to receive a subprime loan when refinancing.

? Subprime lenders also target lower income white homeowners. Subprime lenders made 24.4% of all conventional refinance loans, excluding loans for manufactured housing loans, received by low- income white homeowners, and 18.5% of all refinance loan received by moderate-income white homeowners. In contrast, subprime lenders made just 8.2% of the refinance loans to upper-income white homeowners.

? African-Americans Receive a Much Larger Share of Subprime Refinance Loans Than of Other Refinance Loans. In 1999, African- Americans received 13.8% of all the subprime refinance loans made in the United States, more than a 3 times larger share than the 4.3% they received of all other refinance loans. Latinos received roughly the same percentage of both subprime and other refinance loans. In contrast, whites received 43.5% of the subprime refinance loans, but 71.7% of all other loans.

? The share of subprime refinance loans received by both African- Americans and Latinos increased in from 1998 to 1999, while the share received by whites declined. The share received by African- Americans rose from 12.7% to 13.8%, and the share received by Latinos grew from 4.1% to 4.8%. The share received by whites fell from 47.4% to 43.5%.

? From 1993 to 1999, the rate of growth in the number of subprime refinance loans to minorities was larger than the growth to whites. The number of subprime refinance loans has risen 959% to African-American homeowners, 695% to Latino homeowners, and 569% to white homeowners, almost half of the African-American increase.

? The rate of growth in subprime refinance lending slowed from 1998 to 1999. The number of subprime refinance loans received by Latino homeowners rose 5.2%, while the number of subprime refinance loans received by African-American homeowners declined slightly, 3.1%, and the number received by white homeowners fell significantly more, 18.1%.

Subprime Purchase Loans

While refinance loans make up the greatest portion of subprime lending, subprime lenders have made a serious entry into the home purchase market. In 1993, subprime lenders made just 24,000 home purchase loans, which was 1% of all the conventional home purchase loans made in the country. In 1999, subprime lenders made over ten times more -- almost 250,000 home purchase loans, 6.6% of all the conventional home purchase loans.

As discussed in this report, there has been a rapid growth in subprime purchase loans to minorities. This is particularly alarming when viewed in comparison to changes in the number of prime loans issued to minorities. Although there was substantial growth in prime home purchase loans to minorities from 1993 to 1995, the level of prime loans then stagnated while the level of subprime purchase lending skyrocketed. There is reason for concern, rather than celebration, in the fact that the growth in lending to minority homebuyers in recent years has been overwhelmingly in the form of subprime loans. It demonstrates the failure by banks and traditional mortgage companies to make credit available equitably. As a result, minority homebuyers are disproportionately vulnerable to predatory practices.

? The rate of growth of subprime purchase loans to minorities has been substantially faster than the rate of growth of prime loans, especially since 1995. The number of subprime purchase loans to African-American homebuyers has risen 631% from 1995 to 1999, while the number of prime conventional purchase loans received by African-American homebuyers in 1999 was actually lower than in 1995. Subprime purchase loans increased 509% to Latino homebuyers during this time, while prime loans rose just 29%. White homebuyers also saw a larger percentage increase in subprime loans than in prime loans during this time, although the difference was not nearly as great ? a 285% increase in the number of subprime loans and a 22.0% increase in the number of prime loans.

? African-Americans were three times more likely than whites to use a subprime loan when buying a home, and Latino homebuyers were 1.7 times more likely than white homebuyers to receive a subprime loan. In 1999, subprime loans accounted for 10.9% of all purchase loans (conventional and government-backed) received by African-American homebuyers, 6.1% of the purchase loans received by Latino homebuyers, and 3.6% of the loans received by whites. This disparity has steadily risen since 1995.

? 1999 was the first year since 1995 when both African-American and Latino homebuyers had larger rates of increase than white homebuyers in the number of prime conventional purchase loans. The number of prime conventional rose 8.8% for African-Americans, 21.5% for Latinos, and 1.0% for whites. While this is an encouraging development, both African-American and Latino homebuyers had larger rates of increase in the number of subprime loans they received than in the number of prime loans received. In contrast, although white homebuyers had only minimal growth in prime loans from 1998 to 1999, they had a decrease in the number of subprime loans received.

? If we look at only conventional loans and exclude government loans and loans for manufactured housing, African-American homebuyers were 4.8 times more likely than white homebuyers to receive a subprime loan, and Latinos were 2.5 times more likely. In 1999, subprime loans made up 23.1% of conventional home purchase loans, excluding loans for manufactured housing, received by African-Americans, and 12.0% of the loans to Latinos, but just 4.8% of the loans to whites.

? Minorities Receive a Much Larger Share of Subprime Purchase Loans Than of Prime Conventional Loans. In 1999, African- Americans received 13.5% of all the subprime purchase loans made in the United States, a four times larger share than the 3.5% they received of prime purchase loans. Latinos received 8.5% of the subprime loans, almost double their 4.8% share of prime loans. In contrast, whites received 49.7% of the subprime purchase loans, but 75.4% of the prime loans.

Equity Strippers: The Impact of Subprime Lending in Philadelphia

A report by Pennsylvania ACORN May 18, 2000

Executive Summary

ACORN has been fighting for increased access to credit for lower- income and minority families for three decades. While this fight has concentrated on traditional bank lenders, a new form of lending is taking hold of our communities--predatory lending. Dorothy Smith is not alone in falling victim to predatory lenders. Where traditional lenders have left a void, subprime lenders have aggressively moved in. Too many of these lenders engage in predatory lending activities that line their pockets with money while stripping our communities of the equity they built in their homes.

ACORN members have become increasingly concerned about this problem in recent years, as it has wrought havoc on families and our communities. The neighborhoods hardest hit by the predatory lending plague are minority communities with a stable homeownership base. This study is an attempt to quantify the damage by looking at the effects on two census tracts in the Kingsessing Neighborhood in Southwest Philadelphia as an example of the impact of predatory lending. This neighborhood has had a stable African-American population since the 1950s. Homeowners include older families who purchased houses years ago and their children who have chosen to remain in the community. Findings include:

? Increased lending in the Kingsessing Neighborhood was accomplished primarily by subprime lenders. While all lending increased 400% from 1992 to 1998 in this neighborhood, conventional lending increased only 61% compared to a subprime lending increase of 4800%.

? In Kingsessing, subprime loans grew from only 5.3% of all loans originated in 1992 to 63% of all loans originated in 1998.

? Foreclosures have increased 93% since 1990 in this community. Of the foreclosures for which it was possible to identify the original lender, 79% were non-bank lenders.

Background: The Absence of Traditional Lenders

The absence of traditional bank lending in our communities creates the opportunity for predatory lenders to peddle their wares. Earlier ACORN studies document this absence in low- and moderate-income and minority neighborhoods in Philadelphia and the disproportionate role played by subprime lenders in these communities.

In the Philadelphia MSA, African-Americans were rejected 338% as frequently as white applicants when applying for conventional home purchase loans in 1998.

The share of conventional purchase loans received by African- Americans in Philadelphia has steadily decreased from a high of 7.9% in 1995 down to only 6% in 1998. African-Americans make up 19.1% of the population in the MSA.

The top subprime lenders in Philadelphia made 22% of their home purchase loans to African-American home buyers, compared to only 6% of the conventional home purchase loans made by all other Philadelphia lenders -- almost a 4 times greater percentage.

Low- and moderate-income neighborhoods received 29% of the conventional loans made by the top subprime lenders in Philadelphia, compared to only 8% of the loans made by all other lenders--nearly a four times greater percentage.

Although the top ten subprime lenders made only 6% of all refinance and home improvement loans originated in the Philadelphia MSA, these lenders made 31% of all the home improvement and refinance loans made in census tracts in which minority residents make up over 80% of the population.

A Closer Look at the Kingsessing Neighborhood

Our focus area includes the part of Kingsessing Neighborhood that is home to one of ACORN?s first chapters in Philadelphia, People?s Action Community Organization (PACO). The target area?s two census tracts are between Kingsessing Avenue and Woodland from 46th Street to 58th Street. According to the 1990 census, the homeownership rate is 58% in these two census tracts, lower than the metro-area homeownership rate of 74% in that year, yet higher than the average 54% homeownership rate for Philadelphia communities with a minority population of at least 80%. Many residents have lived in the community since the 1940?s; others were raised in the community and decided to remain. The average age of housing is only 60 years old but the number of vacant houses is on the rise.

Mortgage Lending in Kingsessing

Mortgage lending in our two census tracts in the Kingsessing Neighborhood grew 400%-- from 38 loans in 1992 to 156 loans 1998. While this would normally be cause for celebration, a closer look reveals that this increase is almost entirely due to growth in subprime lending. In 1992, subprime lenders originated only 2 loans, 5.3% of the total 38 loans in this neighborhood. In 1998, subprime lenders originated 98 loans, 63% of all loans originated. In fact, subprime lenders now originate 60% more loans than other lenders in this community.

Foreclosure Epidemic

One unfortunate result of the explosion in subprime lending, and the predatory practices, which are only too commonly a part of it, has been a parallel explosion in foreclosure filings. Once a loan is in default, the lender or its agent files for foreclosure at the Prothonotary office. These filings are the first step in taking the home. If arrangements fail to be made between the homeowner and the creditor, the end result is a judgement in favor of the creditor and the property is scheduled for sale through the sheriff?s department.

In 1995, there were 2347 foreclosure filings at Prothonotary Office for the City of Philadelphia, an average of 196 each month. By 1999, the number of foreclosure filings increased 125% to 5293 filings for the year at a monthly average of 441. The pace for 2000 of 495 each month indicates the increase will continue to almost 6000 foreclosures this year.

These increases in foreclosures are the result of practices common in the world of predatory lending like extending loans based on the value of a house, rather than a borrower?s ability to repay. A host of other deceptive and misleading sales practices lead borrowers into loans they did not understand and would not have chosen. Borrowers in foreclosure are also targets for other lenders to refinance, generally postponing the inevitable foreclosure, but with a different lender and more money paid for the loan. Officials at Philadelphia Sheriff?s Department have noticed many properties scheduled for sale are listed again merely one year later. The 1999 Sheriff Sale listings reveal the same--many properties taken off the sale at the last minute or "stayed" because the lender has accepted payment arrangements are again scheduled for sale 6-8 months later, indicating a new foreclosure on the same property.

Records of sheriff?s sales of mortgage foreclosures mirror the data on initial foreclosure filings. In 1990, sheriff sale listings for the city averaged 241 homes each month compared to the 1999 average of 491 each month. The attached map of sheriff sale listing in 1999 demonstrates that foreclosures are happening throughout the city but largely in minority homeowner communities like the Northwest and the Southwest sections of the city. Kingsessing is typical of neighborhoods hit by increasing foreclosure rates. In 1990, there were 15 sheriff?s sales compared to 29 in 1999, an increase of 93%.

Unfortunately, the property records which should tell us which lenders were involved in these loans are incomplete. Only 13 of the 29 sheriff?s sales in our target area were recorded in the property records. We believe this is a simple failure of the property record listings to keep up with the massive number of sales completed.

We have however, looked at 67 foreclosure sales from 1995 to 1999 for which complete information is available. Out of these 67, almost one third were made by government agencies: 11 were made by the U.S. Department of Housing or the Veteran?s Adminstration, nine by Fannie Mae or Freddie Mac. Out of 43 foreclosure sales where the original lender could be identified, 34 or 79% were non- bank lenders.

According to the 1990 census, there were 290 vacant houses in our target area of the Kingsessing Neighborhood. A recent neighborhood survey by ACORN members reveals an increase to 480 vacant houses, with an additional 100 vacant lots. Many of the vacant houses have been vacant for 10-20 years or more. Yet, some of the properties foreclosed on since 1995 have already been demolished. While predatory loans are not the only and perhaps not even the most frequent source of vacancy in this community, every possible home needs to be saved in order to save Philadelphia's communities.



LOAD-DATE: July 31, 2001