By Amy Wyeth
March 6, 2008
“High-risk” subprime lenders closed far more loans in minority and low-income neighborhoods in 2006 than in majority-white neighborhoods with higher median incomes, according to a report released Thursday by the Massachusetts Affordable Housing Alliance and six other fair lending advocacy groups across the country.

“What’s notable about this is that it covers seven cities,” said Jim Campen, a board member of MAHA and co-author of the study, “Paying More for the American Dream.”

All 33 lenders studied, or their subprime lending divisions, had gone out of business as of last September, Campen said.

The report, which relies on Home Mortgage Disclosure Act (HMDA) data that lenders provided to regulators for 2006 – the most recent year available – found that high-risk lenders made 20 percent of all loans in predominantly minority neighborhoods in Boston, New York City, Los Angeles, Chicago, Cleveland, Charlotte, N.C., and Rochester, N.Y., that year, compared to 4 percent of all loans in predominantly white neighborhoods in those cities.

The subprime lenders studied made 11 percent of all home loans in the cities studied.

In Boston, high-risk lenders’ presence was 4.2 times greater in “highly minority” neighborhoods than in white neighborhoods, the report found.
MAHA co-produced a “Paying More for the American Dream” report last year with the same coalition, which found that minorities throughout the United States got more than their share of higher-cost, often subprime, loans from the country’s largest lenders.

The current report finds that subprime lenders appeared to target minority and low-income neighborhoods.

“There’s no question that this is reverse redlining,” Campen said. Redlining is the name given to some lenders’ former practice of refusing to make loans in communities seen as presenting higher risks. The 1977 Community Reinvestment Act (CRA) attempted to stop the practice by requiring that banks make loans in all communities in which they accept deposits, including lower-income neighborhoods. Regulators grade banks on how well they comply with the law.

The non-bank lenders covered in the study “did very targeted marketing” in minority and lower-income neighborhoods, Campen said, through loan offices in the neighborhoods or local mortgage brokers.
The lenders, which included Ameriquest, New Century Mortgage Co., Fremont Investment & Loan and WMC Mortgage Co., were not subject to the CRA. But a Massachusetts law passed last November will impose a CRA-like requirement on most non-bank lenders once the state Division of Banks creates the regulation.

Campen said Wall Street investors’ willingness to purchase high-priced subprime loans in order to get the investment returns they generated fueled subprime loan production.
MAHA Executive Director Tom Callahan said the lenders likely targeted minority and lower-income neighborhoods because residents of those neighborhoods are less likely to have financial education, more likely to be first-generation homebuyers and more reluctant to go to banks.

The authors of “Paying More for the American Dream” make several policy recommendations they say will help reverse racial discrimination in lending and keep more people in their homes.

The suggested steps include expanding CRA obligations to cover more lenders, expanding enforcement of CRA and fair lending laws, allowing bankruptcy judges to modify loans on a primary residence as part of the bankruptcy process, and expanding data required in HMDA disclosures to include information on underwriting characteristics and loan terms.
A U.S. Senate bill that would have allowed bankruptcy judges to modify loans was defeated March 3, but Senate Majority Leader Harry Reid, D-Nevada, has promised to try again after the Senate’s March recess, Campen said.

A similar proposal passed the U.S. House Judiciary Committee last December

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