NeighborWorks

For Immediate Release

March 28, 2005

Contact: Becky Fleischauer, 202-220-2360; bfleischauer@nw.org

New Mortgage Data Sheds Light in Dark Corners

(Washington, DC) – New data on home mortgage lending practices to be made public March 31 are expected to shed light in dark corners, revealing a disturbing increase in loans with very high interest rates being sold to low-income and minority consumers. Neighborhood Reinvestment Corporation CEO Kenneth D. Wade said the new reporting requirements are a step in the right direction to expose disparities in lending practices, but called for better data and more consumer education to improve fairness and transparency in lending. Neighborhood Reinvestment Corporation founded and supports NeighborWorks® network of more than 237 community development organizations.

New data required by the Home Mortgage Disclosure Act shows a disturbing correlation between race and income and higher-priced loans. The numbers tend to confirm a troubling trend we’ve seen over the past 10 years with the growth of so-called "risk-based pricing" for loans that create an array of rates and fees that are supposed to match a borrower’s financial condition and bill-paying history. The strategy is designed to enable banks to cost-effectively serve borrowers who can’t qualify for prime rates because of blemishes on their credit history.

Wade warned that under the new rules, there is no way to distinguish between a bank that refuses to lend to low-income and minority residents and another that may take on increased risks to reach an underserved area at a slightly higher cost, and still others that are predatory lenders, abusing customer trust and financial circumstances. “Information is only as good as the positive changes it can produce for consumers,” said Wade. “Consumers with good credit scores and solid financial standing should not be saddled with inappropriately high rates. We need to shed more light on these practices, while encouraging banks to serve new markets without gouging customers.”

In addition to calling for more and better data, Wade encouraged consumers to know their credit scores and seek unbiased education and counseling. “As many as 50 percent of borrowers charged higher than average rates, could have qualified for a better loan. Without information and guidance, many consumers miss opportunities to get the most of their investment or worse, fall into mortgage traps that eventually lead to foreclosure and financial ruin,” said Wade.

Wade is striving to create an environment where discerning loan shopping practices become as common as the critical eye most Americans cast on grocery items. “Americans have made great strides in learning to read food labels and applying the information to their own diet and exercise needs, but they're not accustomed to being discriminating loan shoppers. Just as an Olympic long distance runner and an out-of-shape person with no exercise history require very different diet and exercise programs, a person with a credit score of 500 and another with a 700 will likely require vastly different loans. When consumers understand their own financial health needs and know how to ‘read the loan labels,’ they make better decisions.”

Credit scores are the ratings lenders use to judge a borrower’s history of repaying debt on time. Scores above 700 (on a scale that ranges from 300 to 850) represent reliable bill payers and those with a lower debt-to-income ratio. People with scores below 650 are considered higher-risk borrowers with a troubled bill-paying history and/or a very high debt-to-income ratio. Borrowers with low credit scores typically cannot qualify for prime conventional loans that offer the most attractive rates and turn to subprime lenders who charge considerably more. “The goal for subprime borrowers should be to accept loan terms that help put them in good credit standing, so they can eventually qualify for a conventional loan at better rates,” said Wade.

The kind of loan a consumer gets can make a big difference in what they end up paying for their home. For example, a house listed for $175,000, with a 5 percent down payment, would cost a borrower with a good credit rating about $350,000 over the life of a 30-year loan at 5.5 percent. A borrower with a subprime loan at 8.5 percent would pay nearly a half-million dollars over the same period.

To reduce the number of consumers getting burned, NeighborWorks created a force of certified counselors, who have to date served more than 500,000 people with pre- and post-purchase guidance and education. Wade set a goal to increase national capacity to serve more than two million individuals each year by 2007. For those receiving high-quality education and counseling, delinquent payments at the 90-day mark are cut by a third. And a recent study found that borrowers who received counseling have half the default risk as those who did not. Despite its proven advantages, only 15 percent of current first-time homebuyers receive adequate counseling and education.

As the first African American CEO of Neighborhood Reinvestment Corporation, Wade is committed to closing the persistent gaps in homeownership and wealth that exist between whites and nonwhites. When comparing total lending activity, the NeighborWorks network serves four times as many minorities as conventional lenders and twice as many as served by government agencies.

About Neighborhood Reinvestment Corporation
Neighborhood Reinvestment Corporation provides financial support, technical assistance and training for communities across the nation, including the NeighborWorks network -- a nationwide network of more than 235 community development organizations working in nearly 2,700 urban, suburban and rural communities across America. These organizations engage in revitalization strategies that strengthen communities and transform lives. In the last five years alone, NeighborWorks organizations have generated more than $8.5 billion in reinvestment and helped more than 500,000 families of modest means purchase or improve their homes or secure safe, decent rental or mutual housing.