The Leadership Conference on Civil and Human Rights

The CIVIL RIGHTS MONITOR is a quarterly publication that reports on civil rights issues pending before the three branches of government. The Monitor also provides a historical context within which to assess current civil rights issues. Back issues of the Monitor are available through this site. Browse or search the archives

Civil Rights Organizations Call for

Anti-Predatory Lending Legislation

Predatory lending, a term used to describe an abusive set of home lending practices that deprive homeowners of equity, has been estimated by the Center for Responsible Lending to cost U.S. consumers $9.1 billion each year.

A broad coalition of civil rights, housing rights, and responsible lending organizations called upon Congress this term to enact anti-predatory lending legislation providing stronger protections for underserved or vulnerable populations looking to apply for a home purchase loan.

The groups’ concerns stem from data released pursuant to the Home Mortgage Disclosure Act of 2004, which for the first time required lenders to report the details on the cost of subprime loans. Subprime loans are higher-rate loans and are usually given to borrowers with shaky credit histories or other high-risk profiles. The data showed that minority borrowers in this category received a disproportionately high percentage of the most expensive subprime loans when compared to whites who had similar risk characteristics.

While not all subprime loans are predatory, the abusive practices cited by the groups – including excessive fees (often equal to 5 percent or more of the loan amount, or five times the typical fee on a competitive, prime, loan); excessive prepayment penalties for paying off a loan early; loan “flipping” (refinancing a loan without any net tangible benefit to the borrower); yield spread premiums (the rebates mortgage brokers get from lenders for steering a borrower into a home loan with a higher interest rate); and mandatory arbitration requirements that bar victims of abusive lending practices from seeking redress in court – take place largely in the subprime market. With homeownership the predominant wealth-generating asset in the U.S., predatory lending poses a threat to African-Americans, Latinos, Native Americans, immigrants, the elderly, women, people with disabilities, and individuals who live in poor and underserved neighborhoods – all of whom are often the targets of abusive lending tactics.

In an April 24, 2006 letter, the Leadership Conference on Civil Rights, joined by 43 other organizations, urged Congress to enact legislation that will “address the needs of our communities.” The letter referred to predatory lending as “an unethical practice that threatens decades of work by the civil rights community to increase minority homeownership and build wealth in disadvantaged communities.” For example, though the African-American community has made significant gains in homeownership in the past decade, more and more have fallen victim to foreclosure as a result of the increased use of high-rate subprime loans. African-American homeownership fell for the first time in 2005, and similar problems have plagued many other minority communities.

According to the groups, a proposed bill, H.R. 1182, the “Prohibit Predatory Lending Act,” introduced by Reps. Brad Miller, D. N.C., Melvin Watt, D. N.C., and Barney Frank, D. Mass., would tighten existing loopholes and provide stronger protections for homeowners who are vulnerable to predatory lenders, as well as preserve the ability of states to address predatory lending issues at the local level. The bill draws on North Carolina’s anti-predatory lending law to amend existing federal law, and includes prohibitions against excessive fees and prepayment penalties, loan flipping, and mandatory arbitration clauses on home loans, among other protections.

Though no action has been taken on H.R. 1182 since the summer of 2005, the recent release of a study done by the Center for Responsible Lending (CRL) in May 2006 may help put the debate back on the table.

The report, titled Unfair Lending: the Effect of Race and Ethnicity on the Price of Subprime Mortgages, was the first of its kind and dealt with the newly released data collected under the Home Mortgage Disclosure Act of 2004 (HMDA).

The report substantiated what many already believed to be true: minorities received a disproportionate share of the most expensive subprime loans, even when compared to white borrowers with similar qualifications. CRL’s study of 50,000 subprime mortgages was designed to test the claim of representatives of the lending industry that this anomaly was an unfortunate byproduct of market forces. It compared African-American and Latino borrowers to whites with identical risk characteristics, including income, and found that African Americans and Latinos were still 30 percent more likely to receive a more expensive loan.

The study concludes that racial disparities in lending practices exist and are neither market byproducts nor false perceptions.

CRL senior researcher Debbie Bocian said of their findings, “The study we’re releasing today breaks new ground. It moves the debate over HMDA forward because we now know that there is not a simple market explanation for the large racial and ethnic disparities in the subprime mortgage market.”

The study’s findings prompted civil rights, legal aid, fair lending, and fair housing organizations to call for more federal and state protection for those at risk of being targets for abusive lending practices. The organizations say that the study confirms HMDA’s important role in providing critical oversight and transparency.

According to the CRL study, “Latino borrowers purchasing homes were 29 to 142 percent more likely to receive a higher rate loan than if they had been non-Latino and white, depending on the type of interest rate and whether the loan contained a pre-payment penalty,” and that “African-American borrowers with pre-payment penalties on their subprime home loans were 6 to 34 percent more likely to receive a higher-rate loan than if they had been white borrowers with similar qualifications.”

In testimony presented to the House Subcommittee on Financial Institutions and Consumer Credit, CRL senior policy counsel Keith Ernst discussed the findings of the study, its implications for HMDA, and the necessity for governmental protections for borrowers. Ernst emphasized while the CRL study does show that there is significant bias against borrowers of color, it is “important to understand that the pricing disparities identified in our research have important implications for all families who received subprime mortgages. Efficient financial markets should provide similarly situated borrowers with equally competitive prices on subprime home loans.” CRL’s recommendations, in light of its findings, call for controls on the practice of yield spread premiums, the fees lenders pay to brokers and that rise with the interest rate of the mortgage; requiring mortgage brokers to act in the best interests of their customers, which the federal government does not now require them to do; early and clear disclosures to borrowers that they are being charged a higher interest rate than they qualify for – and how much the broker is being paid for this; and giving government the laws and the funding to enforce these rules effectively.