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High price for money
High-interest mortgage lenders, also known as subprime lenders, were the primary source of home loans to minorities and low-income people in the Detroit area in 1998, according to a report released last week by Association of Community Organizations for Reform Now (ACORN) in Washington, D.C.
The ACORN study, "Stripping the Wealth," which covers 22 U.S. cities, compares the lending patterns of Detroits top 10 subprime mortgage companies to all other Detroit-area lenders. The report points out that subprime lenders did a much better job of providing loans to minority and low-income communities than other lenders, but those loans came at a hefty price.
During the study period, subprime lenders provided loans at interest rates of at least 9.5 percent, about 1.5 percent higher than the rates offered by other lenders.
Furthermore, according to the study, that 9.5 percent rate was for people with "perfect credit," meaning the rates charged were often much higher. Also, what ACORN termed "predatory lenders" are taking even more money from borrowers by charging high closing costs in the form of duplicate fees, inflated brokers fees or similar costs.
"Often closing costs are 8 percent to 15 percent of the loan amount, significantly higher than the average of 3 percent to 5 percent for the same work performed at bank closings," according to the report.
The study is based on information lenders reported to federal regulators last year. The Detroit portion of the study includes Wayne, Oakland, Macomb, Washtenaw and parts of St. Clair and Monroe counties.
Among the findings:
- Some 22 percent of the loans provided by subprime lenders surveyed went to African-Americans, compared with 7.5 percent for conventional lenders.
- Low-income neighborhoods received 10.5 percent of all conventional purchase, refinance and home improvement loans from the top 10 subprime lenders compared with 2.2 percent received from all other lenders.
- Though the 10 subprime lenders made only 10.3 percent of all conventional purchase, refinance and home improvement loans in the Detroit area, they represent 30 percent of the loans made in neighborhoods where minorities make up more than 80 percent of the population, and 34 percent of the loans in low-income neighborhoods.
"We are finding similar trends in other major cities," says Valerie Coffin, an ACORN researcher who helped compile the report.
The problem, she explains, is that banks are not as aggressive in reaching low-income and minority customers, which leaves them to subprime lenders.
According to the report, between 1993 and 1998, subprime loans to home buyers increased 56.3 percent nationally, compared with an increase of 16.4 percent for conventional products.
ACORN will continue to push banks to court potential low-income and minority customers and to ask subprime lenders to adhere to a "code of conduct." The code includes lowering homebuyers interest rates as their credit improves, disclosing loan costs and conditions, and refraining from charging fees unrelated to servicing the loans.
Coffin says many lenders gouge customers by charging exorbitant fees and not disclosing loan terms. She also notes that subprime mortgage interest rates are as high as 16 percent (These issues were explored in "Mortgaged to the hilt," MT, Feb. 10-16.)
Tom Kelly, spokesperson for Banc One Financial Services, listed as one of the top 10 subprime lenders in the Detroit area, says that interest rates are based on customer credit. The poorer the credit history, the higher the interest rate.
"It is a risk-based world. If someone is more likely to not pay you back then (they) will probably be charged more," says Kelly.
Rock Financial, which was also listed as a top subprime lender in the Detroit area, declined a Metro Times request to comment on the report.
Rob Silverstein is the chief operating officer at World Wide Financial, which also was listed as a top subprime lender in the Detroit area. In a written statement, Silverstein says that the company always discloses loan costs, terms and conditions of loans. He also writes that World Wide denies loans to those who do not have the means to repay them and when it does not make sense for clients financial well-being.
Coffin says that "higher interest rates are warranted in some cases, but we are seeing a lot of cases when it is not." She says that one study shows that 20 percent to 30 percent of those getting subprime loans qualify for low-interest loans.
"We are sending reports to senators and legislators and to agencies and regulators," says Richard Winslow, executive director of Michigan ACORN.
A public hearing is to be held before Detroit City Council.
For more information about the study, contact Michigan ACORN at 313-963-1840.