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Programmatic and Policy Responses to Steering and Abusive Lending

When any group of borrowers receives a disproportionate amount of high-cost lending, that group of borrowers is more likely to experience price discrimination and an array of other abuses. Standard antitrust theory suggests that exploitative behavior is more prevalent when relatively few companies dominate a market to a group of consumers. In the case of the lending marketplace, this research concludes, as does other research, that minorities, even MUI minorities, are more likely to receive high-cost lending. Minorities, therefore, are more likely to experience equity stripping and other abuses. A number of programmatic and policy steps are needed to combat the imbalance in the marketplace experienced by minorities.

On the programmatic side, an increase in homeownership and foreclosure prevention counseling is needed. On the front end, homeownership counseling assists borrowers as they are shopping for homes to find loans that are appropriately priced and that they can afford. On the back end, foreclosure prevention counseling assists borrowers who are in danger of defaulting on their loans due to a temporary crisis such as unemployment or due to predatory lending. Because steering and predatory lending practices remain an ugly reality in the marketplace, more resources for counseling are urgently needed. Unfortunately, however, counseling will be unable to reach all the borrowers in need, particularly when abuses are widespread in the market as a whole or to certain groups of borrowers and neighborhoods. Accordingly, policy reforms are also needed to eliminate certain systematic abuses.

NCRC's Consumer Rescue Fund

Mechanics of the CRF Fund

Through the national antipredatory lending Consumer Rescue Fund (CRF), NCRC works with victims of predatory lending so their mortgage payments become more affordable and foreclosures can be avoided. NCRC's member groups and their communities are an integral part of this program. CRF identifies consumers who are in predatory mortgages and fixes the mortgages through mediation with lenders or by arranging for refinance loans.[1] Consumers contact NCRC member organizations participating in CRF. In a number of instances, the NCRC members in CRF are counseling agencies assisting consumers experiencing delinquency and default on their loans. To date, over 5,000 consumers have been helped through the CRF's alternative dispute resolution, mediation, consumer counseling, and financial education.

CRF has a nationwide reach, serving consumers in seventeen states. NCRC member organizations (counseling agencies, community development corporations, and others) identify families facing foreclosure and/or bankruptcy as a result of problematic loans. Fair lending specialists at NCRC then review loan documents, including the Good Faith Estimate, income verification statements, and other forms to determine if the loans are in fact predatory. If NCRC staff conclude that the loans are predatory, NCRC staff pursue a number of options. CRF intervenes in the following manners to turnaround a predatory lending situation:

Mediation and Loan Modification: NCRC will engage in mediation with the lender or servicer to have abusive terms eliminated and to delay or stop foreclosure proceedings. Mediation is an effective means of assisting consumers because it is less time consuming and resource intensive than refinancing a problematic loan.

An Affordable Refinance Loan: NCRC has partnered with HSBC North America, which refinances the loans of predatory lending victims. The predatory loans are replaced with market-rate or below-market-rate loans. The new loans also do not contain prepayment penalties, balloon payments, or credit insurance.

Litigation: If NCRC discovers a pattern and practice of abusive lending or servicing on the part of a financial institution, NCRC will pursue legal redress when necessary. NCRC has filed complaints with the Department of Housing and Urban Development (HUD) arising from systematic abuses uncovered by the CRF program. The complaint process often ends before a formal trial when a lender makes a commitment to change an underwriting or marketing practice.

Another critical component of CRF is financial education and counseling that occurs over a period of several months. NCRC staff and member organizations counsel CRF borrowers through the remediation process and coach them on how to avoid predatory lending situations in the future. The counseling occurs before the loan modification or refinance and continues after an intervention to make sure borrowers can succeed in their new loan.

CRF's Success: At Least $500 Million in Equity Saved

The refinance loans of CRF have saved borrowers and their communities millions of dollars. In a sample of 112 cases, the median principal amount of the loans was approximately $157,000. As Table 8.1 shows, the mortgage rates of the previous predatory loans ranged between 5.5 percent and 17 percent. The median prior mortgage rate was 9.38 percent.

The interest rates of the refinance loans were considerably lower than the rates of the previous predatory loans. The new loans had interest rates ranging between 1 percent and 8 percent. The median rate of the new refinance loans rate was 6 percent. The difference between the median rate of the previous loans (9.38 percent) and the new loan (6 percent) was 3.38 percentage points, which results in a substantial amount of equity saved over the life of a loan.

CRF customers have been able to save millions of dollars of wealth by refinancing out of abusive loans. The average monthly payment was $ 1,198 for the abusive loans. For the new refinance loans, the average monthly payment was only $922. As a result of the refinancing, the average monthly savings was $276.50, which equates to $3,318 annually. Assuming a thirty-year loan term, the total savings on

Table 8.1. Analysis of Loan Terms Before and After Refinance

Principal

Amount

Prior New Mortgage Mortgage Rate Rate

% Points Difference

Old Monthly Payment

New

'Monthly Payment

$ Savings

Average

Median

$156,986.2

$161,280.4

9.58%

9.38%

5.74%

6.00%

3.84%

3.38%

$1,198.4

$1,165.8

$922.0

$941.7

$276.5

$224.1

an average loan would be $100,000. Given that CRF has assisted at least 1,000 victims through either refinancing or loan modifications, the program has saved borrowers approximately $500 million in equity.

Minority and Working-Class Americans Are Targeted with Loans Having Multiple Abuses

An NCRC review of CRF cases indicates that abusive lenders are targeting minority and LMI borrowers and communities with high-cost and exotic mortgages (for more details on CRF, see NCRC and Woodstock Institute 2006). A disproportionate number of CRF customers have modest incomes. About 77 percent of borrowers were African American, 3 percent Hispanic, and 3 percent Caribbean. Almost half (47 percent) resided in LMI neighborhoods, and 83.6 percent of the borrowers had incomes below $45,000.

The finding that CRF customers were mostly minority and LMI earners is consistent with NCRC's research and other studies documenting that a disproportionate amount of high-cost lending is directed toward minority and working-class communities. Traditionally underserved communities suffer from less product choice and consequently are more susceptible to abusive high-cost and exotic mortgage lending.

Multiple Abuses in Exotic and High-Cost Loans in CRF Sample

CRF cases also reveal that predatory loans do not usually contain just one or two abusive terms and conditions. More often, a toxic loan in CRF contains abusive features including adjustable rate mortgage (ARM) loans with lax underwriting considering only the initial rates, exaggerated borrower incomes, payments that borrowers cannot afford, exorbitant fees and yield spread premiums, piggyback lending adding excessive debt, and abusive servicing.

While some abuses, such as prepaid credit insurance, have declined in recent years, most loans in the CRF program have multiple abuses confronting borrowers with loans that they can no longer afford and loan terms they can no longer negotiate. If the loans had just one or two abuses, it would be easier for the borrower to either afford the loan or succeed in modifying the loan with the lender. The multiple nature of the abuses, however, suggests that the predatory lender or broker maximized profit by designing a loan that was destined to fail or to be flipped.

Abuses revealed by CRF are summarized in Table 8.2. The sum total of the abuses equals loans that are considerably beyond borrower repayment ability. A sample of sixty-nine CRF cases included calculations of the monthly housing payment-to-income ratio (front-end ratio) and the monthly total debt-to-income ratio (back-end ratio). The front-end and back-end ratios of the predatory loans in the sample were considerably higher than common limits in standard underwriting guidelines. The median front-end ratio was 35.4 percent. The median backend ratio was about 50 percent, as shown in Table 8.3. Standard front-end and back-end ratios for prime loans are 28 percent and 36 percent respectively. The considerably higher ratios of the predatory loans in the sample suggest that the loans were beyond the consumers' abilities to repay, leading to financial distress and/or bankruptcy and foreclosure.

Compounding the high front- and back-end ratios, most of the loans in the CRF sample did not have escrows covering property tax payments and hazard insurance. Two-thirds of the borrowers in the CRF sample did not have escrow accounts. On top of housing payments and debt levels that were unsustainable, a number of the CRF borrowers experienced payment shock when they discovered that they had thousands of additional dollars in taxes and hazard insurance payments that were not covered by the loans.

  • [1] HSBC North America provides refinance loans for CRF and supports counseling. Other sponsors include Select Portfolio Servicing, Inc., Ford Foundation, Freddie Mac, Fannie Mae Foundation, Fannie Mae, JPMorgan Chase Foundation, and Heron Foundation.
 
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