Predatory lenders often engage in “reverse redlining” – specifically targeting and aggressively soliciting homeowners in predominantly lower-income and minority communities who may lack sufficient access to mainstream sources of credit.
Predatory lenders often target people that are “house rich but cash poor,” usually the elderly. Elderly homeowners are likely to have built up significant equity in their homes, the values of which may have appreciated substantially over time. Some elderly homeowners living on fixed incomes need cash for medical and other expenses, but lack an adequate understanding of the complexities of financial transactions, the usual cost of home repairs, or their own credit-worthiness. Some elderly are widows who may have little or no experience with finances prior to the death of a spouse. In addition, some elderly borrowers suffer from medical problems, diminished faculties, and isolation that impair their ability to understand loan terms and/or make them especially vulnerable to aggressive sales tactics. Frequently unable to perform household repairs, some elderly appear to be specifically targeted by predatory lenders engaged in home improvement scams. Because of these particular vulnerabilities, predatory lenders may charge these homeowners rates that do not correspond to their levels of risk, or convince them to take out loans that are larger than necessary or inappropriate for their needs.
What is the Problem?
In some low-income and minority communities, especially where competition is limited, predatory lenders may make loans with interest rates and fees significantly higher than the prevailing market rates, unrelated to the credit risk posed by the borrower. Some consumer advocates allege that these predatory lenders are engaged in “steering” – the practice of directing consumers to high rate/high cost loans based simply on their race or economic status and their lack of information, rather than based on their credit histories or credit risks.
Some targeted predatory lending may violate the fair lending laws, which prohibit discrimination on the basis of, inter alia, race, gender, national origin, and, in the case of the Equal Credit Opportunity Act, age. Testimony at the forums strongly indicates that many predatory lenders may have engaged in reverse redlining, or targeting abusive practices to protected groups. There is also some evidence that predatory lenders may charge different fees based on race or gender. One highly publicized case, Delta, involved allegations that African-American women were being charged more than other white borrowers with similar credit histories. The Department of Justice, HUD, and the FTC, in March 2000, entered a consent decree with Delta Funding Corporation, under the Fair Housing Act and the Equal Credit Opportunity Act, for charging higher fees to African American females than charged to similar white males. The consent decree also addressed claims that Delta had violated RESPA for allowing unreasonable broker fees on loans, and the HOEPA, for engaging in asset-based lending. United States v. Delta Funding Corporation, CV00-1872, (E.D. N.Y. March 20, 2000)
One obstacle to identifying practices of this kind is that most non-depository institutions are not subject to regular examinations for compliance with consumer or civil rights laws. However, these lenders are subject to the Fair Housing Act and other Federal civil-rights and consumer-protection statutes, that – with respect to these types of lenders – are enforced at the federal level by the Federal Trade
Commission, the Department of Justice, and HUD.
Finally, the concentration of predatory loans in low-income and minority neighborhoods also means that the effects of predatory lending, such as increased foreclosures, and vacant properties that diminish neighborhood safety and property values, are concentrated in these neighborhoods.
Challenges for Reform
Products should be priced based upon the potential borrower’s individual credit and income
characteristics, rather than upon the borrower’s race, ethnicity, national origin, gender, age or residence in a minority neighborhood. Discriminatory pricing is already illegal under federal fair lending laws; however, these anti-discrimination cases can be complex and expensive, and as a result, are not frequently brought by individual borrowers or fair housing advocacy and civil rights groups with limited resources. Additional data and information is essential to assist the enforcement agencies in monitoring compliance with fair lending laws.
Policy Recommendations
a) Congress should increase funding for enforcement of federal fair lending laws – HUD’s office of Fair Housing and Equal Opportunity has an established network of agencies, which it funds to conduct private fair housing enforcement and education under its Fair Housing Initiatives Program (FHIP). FHIP-funded agencies have contributed successfully to highlighting the significant problem of predatory lending in minority communities. Funds for these organizations who perform this work are extremely limited, however. In FY 1999, over 50 organizations had to share a pool of
approximately $15 million. A set-aside of FHIP funds specifically to address predatory lending would help address the civil rights implications of minority neighborhoods targeted for these abusive lending practices.
b) The Federal Reserve Board should consider using its authority under HMDA to require additional data disclosure – Additional data would promote increased scrutiny of the kinds of loans being made, the kinds of borrowers receiving them, and any concentration of the loans in minority neighborhoods. See Section VI.D.1. The reporting of additional HMDA data elements as recommended in Section VI.D.1 would enhance the ability of HUD and other public and private fair housing groups to monitor mortgage lending to minorities and in low-income communities.