Predatory Mortgage Lending

For most Americans, homeownership represents the best and most realistic path to building assets and wealth. Homeowners can use the equity in their homes to finance an education, make home improvements in order to increase the value of their home and pass on wealth to children who will then be able to buy their own homes and build their own wealth.

Yet for many, homeownership remains a distant dream because they cannot get a home loan. For others fortunate enough to attain homeownership, the dream becomes a nightmare of unreasonably high fees and interest rates that lead to wealth stripping and foreclosure.

For years, communities of color have struggled to obtain loans to buy homes or tap into accumulated home equity. Now, traditionally underserved communities are being flooded with loan opportunities, but it is for higher cost, subprime credit that they can ill afford and do not deserve.

Prime v. subprime. Prime lending is home mortgage lending that comes with low interest rates, low fees and reasonable loan terms. Subprime lending refers to lending that is allegedly targeted to borrowers with blemishes on their credit reports. Legitimate and fairly priced subprime lending can enable some families who would not qualify for a bank loan to purchase a house or access home equity.

Potential for subprime to turn predatory. Subprime lending is also ripe for abuse. Subprime lenders generally charge borrowers more money in the form of higher interest rates, and higher up-front points and fees. A major problem arises when subprime lending goes beyond fairly compensating the lender for taking on the added risk of lending to a person with a poor credit history. CRC, Fannie Mae and others have estimated that up to half of all borrowers with higher cost subprime loans could qualify for a lower-cost prime loan.

Predatory mortgage lending. Predatory lending is abusive home lending that includes one or more of the following:
•    Excessively high-priced home lending, with high interest rates, points and fees;
•    Targeted to low-income people, the elderly and people of color; 
•    Made through the use of aggressive and misleading sales tactics;
•    Includes burdensome terms, like exploding adjustable interest rates that rise quickly, prepayment penalties that lock borrowers into bad loans or force them to pay thousands of dollars to get out from under them and mandatory arbitration, which quietly denies subprime borrowers equal access to the court system. 

For borrowers with credit blemishes, it is unclear that their credit risk warrants the much-higher rates and fees that they pay, even using the conservative standards employed by the lending industry. For example, loans with APRs over 15% cannot be justified in a very low interest rate environment, where prime rates are below 6%.

Civil Rights implications. This is all the more troubling, as African American and Latino borrowers are over-represented in the subprime market. As subprime lending disproportionately impacts borrowers and communities-of-color, the California Reinvestment Coalition views this as a civil rights, fair lending and economic justice issue. How much you pay for a loan should not depend on where you live or what you look like.

CRC fights predatory lending through direct negotiation with lenders, protests of bank mergers that involve predatory lending, action research, technical assistance to local coalitions fighting predatory lending, advocacy for more responsible lending practices by banks and Wall Street firms and support for legislative and regulatory solutions.