Subprime lenders offer mortgages and refinancing to people with credit problems who don't qualify for a traditional loan. Not all subprime lenders are exploitative, though lending abuses tend to fall within this market.
The study, titled "Risk or Race? Racial Disparities and the Subprime Lending Market," found that minority borrowers were more likely to enter into high-cost loans, and that this racial disparity existed even for minorities who qualify for a traditional loan. Thirty percent of home loans in New Orleans are subprime, according to the report, and African Americans in New Orleans are more than three times as likely as white borrowers to get a high interest-rate loan.
As Gambit Weekly has reported ("Shark Bites," March 26), predatory lenders engage in dubious -- albeit usually legal -- sales tactics that can result in financial obligations that borrowers can't meet. In the most egregious cases, predatory lenders identify homeowners who are equity-rich but cash-poor and sucker them into a loan or series of loans designed to strip them of their equity. Such lenders aggressively target minority and low-income communities, especially elderly residents.
This legal con game is accelerating all over the country because of the proliferation of "subprime lenders." Because few "prime" lenders are willing to work with poor credit risks, some subprime lenders serve a legitimate purpose by offering credit to high-risk borrowers who otherwise wouldn't qualify for a home loan. But it's often difficult for homeowners to distinguish between legitimate and unsavory lenders.
Legislators and lenders alike are acknowledging the problem of predatory lending -- but they aren't going far enough. Last week, shareholders of the Illinois-based subprime lending corporation Household International Inc. -- sued earlier this month by the national advocacy group Association of Community Organizations for Reform Now (ACORN) for allegedly making unfair and misleading loans -- again rejected a self-regulating resolution for the company to prevent predatory lending.
The resolution would have linked executive salaries to measures aimed at halting predatory lending practices, required Household officials to meet with fair-housing groups, and made the company take measures to reduce the number of predatory-lending complaints filed against it. The measure failed, but 27 percent of shareholders backed it -- a big jump from last year's vote of 5 percent. ACORN officials call that leap a small victory.
ACORN and other community organizations also are campaigning for prime lenders to initiate home-buying programs for poor credit risks, and some are responding. Last year, the Greater New Orleans Fair Housing Action Center (FHAC), Hibernia National Bank, the federal mortgage financier Fannie Mae, and the local group Neighborhood Housing Services launched the Anti-Predatory Lending Initiative, a $2 million fund established to refinance onerous loans taken out by the victims of predatory lenders.
Relief from predatory lending can also come from local, state and federal governments. Several states, including Louisiana, have passed legislation to regulate lending practices more closely. Still, these laws often don't go far enough. Although some cities have adopted ordinances aimed at curbing predatory lending, New Orleans has not.
Things are looking more promising in Congress. Sen. Paul Sarbanes, D-Md., introduced legislation this month to provide stricter federal regulation of subprime loans. An already-existing federal lending law, Home Ownership and Equity Protection Act of 1994 (HOEPA), stipulates that when a loan meets a certain cost threshold, it triggers protections such as restrictions on the financing of points and fees, and prohibitions on balloon payments. Critics say HOEPA contains too many loopholes and thresholds that are too high. Sarbanes' bill would resolve those issues, provide for stricter penalties against violators of federal lending laws, and require more disclosure to borrowers about the risks of entering into a high-cost loan.
We urge Louisiana's congressional delegation to support Sarbanes' bill, and we hope that Louisiana lawmakers consider authoring and passing similar legislation to expand state lending laws already in place. In light of New Orleans' standing in the national report by the Center for Community Change, we likewise encourage City Council members to introduce and support local ordinances that would more strictly regulate subprime lenders.
We also recommend that homeowners and homebuyers educate themselves on lending laws and practices before entering into loan agreements. Prospective homebuyers and homeowners who want to refinance should consider attending loan counseling programs, such as those offered by the local chapter of ACORN (943-0044) and FHAC (596-2100). Consumers who believe they may have been victimized by an exploitative lender should also contact those agencies.
For a con game to succeed, there has to be a con artist and a victim. We urge our elected officials and the lending industry to take care of the con artists, and the potential victims to learn to take care of themselves.