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Stealing the American Dream
Executive Summary

A Report on Predatory Lending in the State of Oklahoma
by Community Action Project of Tulsa County
May 2003

Community Action Project of Tulsa County, a Tulsa, Oklahoma NeighborWorks^® organization, is playing an active role in the predatory lending issue in Oklahoma. A link to the entire report as well as an article about the report, are available below.

Predatory lending refers to a combination of practices used by unscrupulous lenders that strip homeowners of their equity and often leads them into a spiral of increasing debt that can culminate in foreclosure or bankruptcy. Most predatory lending occurs in the "subprime" mortgage market, which involves loans made to borrowers with imperfect credit scores. In Oklahoma, the 1990’s saw an explosion of subprime lending, which grew from a $35 million market in 1994 to a $220 million market in 2002. While subprime loans are inherently riskier for lenders, which often justifies higher interest rates and fees than those found in traditional prime loans, some unscrupulous lenders have preyed on vulnerable segments of the population by trapping them in excessively costly subprime loans with abusive terms and conditions. The problem of predatory lending has been calculated to cost borrowers an estimated $9.1 billion annually nationwide and $55.8 million annually in Oklahoma.

A wide range of government agencies, consumer advocates and mortgage industry representatives have recognized predatory lending as a substantive and growing problem and endorsed recommendations for reforming practices in the subprime lending market. A major study by the U.S. Treasury and Department of Housing and Urban Development (HUD) recognized that "too many families are suffering today because of a growing incidence of abusive practices in a segment of the mortgage lending market" and called for a series of reforms. Responding to the weakness of federal law in this area, several states, including Arkansas and New Mexico, have taken the initiative and adopted tough anti-predatory lending laws to better regulate their subprime mortgage markets. States have also pursued legal action to control the abusive practices of several prominent subprime lenders. For instance, in 2002, the largest and most controversial national subprime lender, Household International, agreed in a settlement decree with 44 states, including Oklahoma, to adopt industry best practices by limiting the points and fees they charge for loans and forsaking several questionable practices. Household’s settlement is expected to affect more than 7,000 Oklahomans.

Key Findings

This report begins by defining predatory lending practices and then explores the scope and nature of the problem within Oklahoma. By looking at data reported under the Home Mortgage Disclosure Act (HMDA) for Oklahoma from 1996-2001, we discovered:

An explosive 376% growth in subprime lending dollar volumes during the late 1990’s.
The majority of subprime loans were refinance mortgages, making up 69% of all subprime loans. In contrast, only 43% of prime loans were refinance mortgages. Predatory refinance mortgages are particularly dangerous to borrowers because of the risk of equity loss.
Subprime lending disproportionately impacts minorities and borrowers with lower incomes. Such borrowers are consistently more likely to own subprime loans than are whites and borrowers with higher incomes.
Subprime lenders were more than twice as likely as prime lenders to report their borrowers as being of an unknown race, suggesting they are systematically underreporting the actual amount of subprime lending being done to minorities.
Using HUD/Treasury, Standard & Poor’s, and Freddie Mac estimates, we were able to approximate the number of subprime loans issued in Oklahoma that contain certain selected predatory elements. We conclude that from 2000-2001, more than 20,000 subprime loans were issued in Oklahoma with prepayment penalties, 8,900 subprime loans were issued to borrowers who could have qualified for less expensive prime loans, and 2,500 subprime loans were issued with balloon terms. The Center for Responsible Lending estimates that these and other predatory practices cost Oklahomans an estimated $55.8 million annually.

Recommendations

To address this growing problem, Oklahoma would be well advised to follow the lead of neighboring states such as Arkansas and New Mexico by adopting a tough but fair anti-predatory lending law modeled after the best practices of some members of the industry. Such a law should:

Lower the points and fees threshold for defining a mortgage refinance loan as high-cost to 5%, with higher thresholds for loans below a certain size;
Limit prepayment penalties;
Prohibit loan flipping, by requiring refinancing to provide a tangible benefit to the borrower;
Prohibit making high-cost loans without regard to the borrower’s ability to repay;
More closely regulate balloon payments on high cost loans;
Prohibit mandatory arbitration clauses on high cost loans;
To protect against high-pressure tactics on ill-informed, vulnerable homeowners, require mortgage counseling as a condition of entering into a high cost loan.

View Full Report Stealing the American Dream [PDF, 697KB]

Article:

Advocacy Groups Criticize Home-Loan Practices in State

May 7, 2003
By Don Mecoy
The Oklahoman

Dennis Rainez wanted to help his fiancee buy the Tulsa County home she grew up in. He ended up selling his Harley to pay fees on a new mortgage they can't afford.

"What are you going to do? You don't want to lose your home," Rainez said Tuesday.

Rainez and his fiancee are victims of predatory home mortgage lending, say consumer advocates who issued a report Tuesday that estimates that such loans cost Oklahomans about $55.8 million each year and often lead to foreclosure or bankruptcy.

The report, issued by the Tulsa- based Community Action Project and the Oklahoma AARP, claims that unregulated, out-of-state firms have reaped big profits by targeting vulnerable state homeowners and luring them into high-interest loans with punitive terms and exorbitant fees.

The report estimates that thousands of Oklahomans have signed up for mortgages that included predatory terms, said Stephen Dow, executive director of Community Action Project, an anti-poverty group. Most predatory lending occurs in the "subprime" mortgage market to borrowers who have credit problems, Dow said.

"The American dream of home ownership is being transformed into an Oklahoma nightmare," Dow said during a news conference at the state Capitol.

Dow said predatory lending is widespread in Oklahoma, and legal. The advocacy agencies are calling for legislation that restricts loan fees, prepayment penalties, repeated refinancing, unnecessary insurance, balloon payments and high-pressure tactics.
State Rep. Opio Toure, whose bills limiting such lending practices have been killed in committee during the last two legislative sessions, said serious reforms are needed to protect the old, poor and minority Oklahomans who are most frequently victimized by predatory lenders.

"It's very disheartening to tell a citizen who's actually been robbed that there's nothing that I can do as a lawyer because the law allows this to happen," said Toure, D-Oklahoma City.

Toure and Dow criticized regulated financial service companies -- banks, credit unions and savings and loans -- for opposing restrictive legislation, even though those companies don't engage in predatory lending. Toure said he's hopeful that negotiations can produce an effective law, but industry-sponsored measures have been patterned after a weak federal law.

"Unfortunately some of the lenders in Oklahoma give assistance to those folks by not helping us pass this strong reform that we need," Toure said.

Roger Beverage, president of the Oklahoma Bankers Association, said his organization has worked hard to help draft tougher rules, and he doesn't appreciate the name-calling.

"To dismiss this effort that the industry has worked tirelessly to put together and at the same time claim predatory lending is rampant in Oklahoma is nonsense," Beverage said.

"Those restrictions apply to us as well," Beverage said. "There are reasons to have prepayment penalties in some instances. There are reasons to have people refinance. There are reasons to make loans to help people with a higher rate because there is a higher risk that they won't pay the loan back."

Beverage said new predatory lending laws passed in other states have made it more difficult for regulated financial institutions to help those with poor credit.

In a letter published this month in Oklahoma Banker, Beverage said he doesn't expect negotiations on new rules will be successful "in the near future, or maybe ever."

The advocacy group's report estimated that the subprime lending market in Oklahoma grew from $160.8 million in 1996 to $765.8 million in 2001, with most of that growth in rural areas. Minorities and lower-income borrowers were much more likely to secure subprime loans, and most of those loans were refinance mortgages, the report estimated.

Rainez just wants a chance to allow his fiancee to keep the modest home she treasures.

"I've never dealt with something like this," he said. "Now we're in the process of maybe losing the home that she had grown up in, and these folks just don't care."