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C Ch ha ap pt te er r 9 9 Concentrated Poverty, Race, and Mortgage Lending: Implications for Anti-Predatory Lending Legislation JOE T. DARDEN AND LOUISE JEZIERSKI INTRODUCTION The differential access to mortgage loans based on race, class, and residential location of population groups is a serious public policy issue. It appears from reports that populations that are black or Hispanic and reside in areas of concentrated poverty are more likely to be denied prime loans and forced to obtain subprime loans (U.S. Department of Housing and Urban Development, 2000 and 2002). While prime loans are made to borrowers at the prevailing interest rates, subprime loans have interest rates that are less favorable. Indeed, some community groups consider interest rates of many subprime loans so unfavorable to the borrower that they have been called “predatory” (see National Community Reinvestment Coalition, 2002). Although the concepts of subprime and predatory lending are related, there are some slight differences. A subprime loan is made to a borrower with less than perfect credit. In order to compensate for the additional perceived risk associated with subprime loans, some lending institutions charge excessively high interest rates. Such excessively high interest rates make the loan a predatory loan. THE CONCEPT OF A PREDATORY LOAN A predatory loan is an unsuitable loan designed to exploit vulnerable and unsophisticated borrowers. Predatory loans are a subset of subprime loans. Thus, predatory loans are subprime, but not all subprime loans are predatory. A predatory loan has one or more of the following features: (1) charges more in interest and fees than is required to cover the added risk of lending to borrowers with credit imperfections, (2) contains abusive terms and conditions that trap borrowers and lead to increased indebtedness, (3) does not take into account the borrower’s ability to repay the loan, and (4) often violates fair lending laws by targeting women, minorities, and communities of color (National Community Reinvestment Coalition, 2002, p. 4). Targeted Groups by Subprime and Predatory Lenders African Americans, Hispanics, and low-income residents in concentrated poverty neighborhoods are disproportionately targeted by subprime lenders in the home mortgage market. High levels of subprime mortgage lending indicate markets where borrowers are paying unusually high costs for credit. While some subprime lenders may perform a useful service by making credit available to high risk borrowers who could not otherwise borrow money, other lenders seem to be exploiting uninformed borrowers and borrowers who could otherwise qualify for conventional loans (ACORN, 2003). 112 Joe T. Darden and Louise Jezierski Exploitation can occur in one of three ways: (1) equity stripping, i.e., charging borrowers exorbitant fees that are routinely financed into the loan, (2) rate-risk disparities, i.e., charging borrowers a higher rate of interest than their credit histories would indicate is justified, or (3) excessive foreclosures, i.e., making loans without regard to a borrower’s ability to pay (Immergluck and Wiles, 1999). Some states have tried to address this practice through “anti-predatory lending” legislation. As of March 2003, eleven states had passed anti-predatory lending legislation. Thirty-two states had introduced legislation, and seven states had not taken action to address the problem. This chapter: (1) determines the variation in subprime lending, and (2) explores the factors that may be related to the passage of antipredatory lending legislation. DATA AND METHODS OF ANALYSIS Data from the 2000 U.S. Census on population by race, loan data from the Center for Community Change (Bradford, 2002), and information on state anti-predatory lending legislation were analyzed as follows. Metropolitan areas were divided into: (1) states that have passed anti-predatory lending legislation, (2) states that have introduced anti-predatory lending legislation, and (3) states that had not introduced such legislation as of March 2003. Variation in subprime lending was analyzed by computing the mean percent of subprime loans received by blacks, Hispanics, and Asians and the loan disparity ratio by race. Only refinance loans, which are prevalent in the subprime market, were used. Certain demographic and political variables were examined to determine which factors might have contributed to state variations in the passage of anti-predatory lending legislation . CONCEPTUAL FRAMEWORK It is hypothesized that predatory lending is inherently a problem of geography in terms of neighborhood characteristics by race and class. Thus, predatory lending follows other patterns in American society, such as residential segregation. Residential segregation among America’s 330 metropolitan areas reveals a pattern of racial stratification. Blacks are the group most residentially segregated from...

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