Killing Predatory Lending? What New Bill Means for Latinos, Blacks

By Yoji Cole
www.DiversityInc.com
October 24, 2007

A new bill that could stem the tide of subprime loans directed toward black and Latino homeowners is getting applause as foreclosures among subprime borrowers continue to rise.

Rep. Barney Frank, D-Mass., is in Congress today debating the legislation he proposed Tuesday, which would establish federal supervision of mortgage brokers. His proposal would restrict prepayment penalties and ban lenders from paying rewards to brokers for persuading borrowers to accept higher interest rates than the rate at which they qualified (Read more about the bill).

Black and Latino homeowners have been disproportionately impacted by subprime lending. As the Latino population surpasses the black population as the largest population of color, Latinos could benefit most from Frank's legislation.

"On the front end, [Frank's legislation] does a lot to address mortgage origination and sets a 'duty of care' saying that those loan originators have to put people in products that are in their best interest and that they have the ability to repay," says Brenda Muniz, legislative director for the Association of Community Organizations for Reform Now (ACORN). "Unfortunately, that was a simple concept ignored by brokers. So you had reckless underwriting taking place where people were set in loans that were going to become unaffordable in two to three years.

"The legislation basically tells brokers and loan originators that you have to make sure the consumer can pay back the loan throughout the life of the loan and not just the two-year window," adds Muniz. "If this policy were in place a few years ago, arguably a lot of people would not have been placed in bad loans."

The legislation would get the federal government up to speed with current methods of lending money for home buying. The federal government's guidelines date back to the 1970s when banks were the primary lenders.

Most private mortgage brokers package loans as investments. Frank's federal legislation would target companies that purchase loans from lenders who violate federal lending standards. It would require that states pass similar legislation to create a national licensing system that aims to prevent brokers and lenders caught violating federal lending standards from setting up shop in another state.

"Overall we're supportive of the legislation and it will prevent the reckless underwriting that put African-American and Latino homebuyers in these bad loans to begin with. But we would like to see the bill help borrowers who are currently in bad loans," says Muniz.

People of Color Disproportionately Targeted

Within the subprime-loan market, adjustable-rate mortgages (ARMs) have hurt Latinos and blacks the most. ARMs include no-document loans and other loan products that make it easier to qualify because they do not require a consideration of a borrower's long-term ability to pay off the loan.

ACORN's report, "The Impending Rate Shock," based on 2005 Home Mortgage Disclosure Act (HMDA) data, found that Latino and black families, regardless of income, disproportionately fall prey to the following predatory-lending practices:

* Although subprime loans are intended for people who are unable to obtain a prime loan at the standard bank rate, Fannie Mae and Freddie Mac have estimated that between one-third and one-half of all borrowers in subprime loans could have qualified for a lower-cost mortgage

* In 2006, ARMs made up 80 percent of all subprime loans, an increase from 1999 when half of all subprime mortgages were ARMs

* Nationally, black and Latino home purchasers were respectively 2.7 times and 2.3 times more likely to be issued a high-cost loan than white borrowers. Refinance loans followed suit with blacks and Latinos, 1.8 times more likely and 1.4 times more likely, respectively, to be issued a high-refinance-cost loan than white homeowners

These disparities persist for high-income black and Latino homebuyers, reports ACORN. Upper-income blacks and Latinos were three times more likely than upper-income whites to be issued a high-cost loan when purchasing a home. When refinancing in 2006, upper-income black and Latino homeowners were 1.7 times more likely than upper-income white homeowners to receive a high-cost refinance loan.