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C Ch ha ap pt te er r 5 5 Predatory Lending and Race: A Case Study of a Washington, D.C. Lender DAVID H. KAPLAN INTRODUCTION AND BACKGROUND During the 1990s, the market and supply of subprime mortgage loans increased dramatically. Subprime loans are made to borrowers who do not meet the criteria for conventional loans and are offered at a higher price to account for the higher risk associated with the loan. As such, the marketing of subprime loans offers a service that enables individuals previously shut out of the mortgage market to qualify for a loan and buy a house. Not surprisingly, subprime lending is more prevalent among poorer individuals (who often have a more checkered credit history) and within poorer neighborhoods. Unfortunately, some lenders have developed mortgage terms that go beyond what is considered fair and reasonable. These lenders engage in a number of practices, including excessive fees, usurious interest rates, padding costs, and misrepresentation of terms of the loan, that inflate their profits at the expense of the borrowers. In worst cases, rather than building equity, these loans strip away equity, leaving borrowers with fewer assets and forcing foreclosures. These mortgages are considered “predatory” and have increased along with the expansion of subprime loans. Predatory lenders are especially likely to target certain populations, among them elderly, minority, and female. This paper reports on work done to determine whether a Washington-area lender (referred to here as The Lender) accused of making predatory loans was also targeting African American borrowers. This was part of a larger court case involving the lending company and a number of borrowers. As there was no information on the race of the clients, racial information was determined indirectly through the use of block level census geography . The racial geography of lending activity can also serve as a proxy for the race of the applicants and is useful when the race of such applicants is unknown. The use of census blocks, the smallest areal census unit and containing about 100 people, makes this substitution viable. This approach allowed us to determine whether or not race indeed was a factor in the pattern of predatory lending and whether The Lender was steering loan activity to predominantly African American clients. This analysis was to determine the geographical distribution of The Lender’s loans in relation to the racial composition of the areas in which the properties that secured those loans were located. The racial geography of lending activity is evidence of a lender’s targeting neighborhoods along racial lines for loans. For example, the racial geography of lending activity has been used to analyze possible redlining by banks and other lending institutions. In those cases, the issue is whether The Lender is avoiding or failing to serve the credit needs of minority neighborhoods. Racial geography of lending activity is also evidence of “reverse redlining” where the issue is whether the lender is targeting minority neighborhoods for predatory loans. 56 David H. Kaplan SUBPRIME LOANS AND METROPOLITAN GEOGRAPHY In 1995, there were approximately 21 subprime lenders making 24,000 loans (not including refinances). By 1998, some 256 subprime lenders were making 207,000 loans (Hong and Sommers, 2000). This rapid increase far outstripped the overall mortgage market, to the extent that subprime lending went from being a tiny fraction of the “prime” market—about one percent—to a substantial proportion that some estimate at ten percent (Engel and McCoy, 2001). Subprime loans are those loans made available to customers who do not enjoy the credit qualifications necessary to secure a “prime” mortgage loan. In mortgage lending terminology, prime borrowers are rated as “A.” This rating is determined largely on the basis of a credit score and entitles the borrower to the lowest rates and often fewer fees. It may be up to the borrower to pay additional points (each representing one percent of the total cost of the loan) but in return (s)he can expect even lower interest rates. Those borrowers that do not meet the credit criteria to secure a prime loan need to settle for a subprime loan. These borrowers are divided into categories of “A-,” “B,” “C,” and “D,” with nearly two-thirds falling within the “A-” rating and another one-quarter included as “B” (CRA-NC, 3). This has been a large potential market that became much more attractive in the 1990s for several reasons (Engel and McCoy, 2001). Most earlier studies have noted the extent to which mortgage lenders...

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