Who Really Gets Higher-Cost Home Loans?

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1 Who Really Gets Higher-Cost Home? Home Loan Disparities By Income, Race and Ethnicity of Borrowers and Neighborhoods in 12 California Communities in 2004 December 2005 California Reinvestment Coalition 474 Valencia Street, Suite 110 San Francisco, California (415) CRC is a nonprofit membership organization of more than two hundred (200) nonprofit organizations and public agencies across the state of California. We work with community-based organizations to promote the economic revitalization of California s low-income communities and communities of color. CRC promotes increased access to credit for affordable housing and community economic development, and to financial services for these communities. CRC promotes community reinvestment through negotiation with and regular monitoring of major California financial institutions, as well as through the provision of technical assistance to local communities in California. This report was researched and written by Kevin Stein. CRC wishes to thank Maeve Elise Brown (Housing and Economic Rights Advocates), Ilene Jacobs (California Rural Legal Assistance), Sharon Kinlaw (Fair Housing Council of the San Fernando Valley), Heidi Li (Housing and Economic Rights Advocates), and Caroline Peattie (Fair Housing of Marin) for their thoughtful comments on earlier drafts of this report. Jim Campen (Mauricio Gaston Institute for Latino Community Development and Public Policy) and Victoria Leon Guerrero (California Reinvestment Coalition) also provided helpful edits. 1

2 Executive Summary This report is CRC s twelfth annual analysis of federal Home Mortgage Disclosure Act (HMDA) data. This year represents the first in which the data include information about how much home loans actually cost consumers. This report looks at one window into the home loan market in California how much higher-cost lending is occurring here, and whether it appears targeted to certain borrowers and neighborhoods within the state based on race and ethnicity, and income. Whether a home loan is a higher-cost loan or not will have great impact on the borrower, and the borrower s community. The average interest rate on a 30-year fixed rate home loan in 2004 was 5.84%. In contrast, the average higher-cost home loan in California carried an Annual Percentage Rate (APR) of approximately 9.81%. In practical terms, the average higher-cost borrower in California paid $ more per month on her home loan. Who Really Makes Higher-cost Home? There were 264,348 higher-cost loans made to homeowners in California in These loans carried annual percentage rates of approximately 8% and higher. Many of these higher-cost loans were made by some of the largest banking and financial services companies in the world, including: General Electric, Countrywide, Lehman Brothers, Washington Mutual, HSBC, Wells Fargo, Citigroup, H&R Block, and Bank of America. Indeed, Citigroup, HSBC and Wells Fargo made hundreds of loans in the state with APRs of approximately 13% and higher. When extremely high-cost loans are sold in California, both homeowners and communities are greatly impacted. Homeowners who face a greater burden in making mortgage payments will have a greater likelihood of falling behind and possibly losing their homes to foreclosure. More money spent on housing costs means less money to meet basic necessities, provide routine home maintenance, and respond to emergencies that may arise. Communities are also adversely affected when homeowners have less money to support local businesses, make needed home repairs that uplift neighborhoods, and avoid the devastating ripple effect that comes with foreclosure. Who Really Gets Higher-Cost Home? As is the case every year, the HMDA data reveal that African American and Latino borrowers are paying more for their home loans, as are minority and low-income neighborhoods. Conservatively, people of color in California are paying nearly $50 million more per month than white borrowers as a result of higher-cost home loans. This figure most likely underestimates the added costs to people of color, since the HMDA data only capture a fraction of the subprime lending occurring in California. 2

3 African Americans pay more. Statewide, African American borrowers were more than twice as likely as White borrowers to have a higher-cost home purchase or refinance loan. Latinos pay more. Statewide, Latino borrowers were three times as likely as White non-hispanic borrowers to get a higher-cost home purchase loan, and Latino borrowers were twice as likely as White non-hispanic borrowers to get a higher-cost refinance loan. Minority neighborhoods pay more. Residents of minority neighborhoods were nearly four times as likely as those in White neighborhoods to get a higher-cost home purchase loan, and minority neighborhoods were more than three times as likely as white neighborhoods to get higher-cost refinance loans. Low-income neighborhoods pay more. Low-income neighborhoods were three times as likely as upper income neighborhoods to receive higher-cost home purchase and refinance loans. Who Really Regulates Higher-Cost Lenders? There are six regulatory agencies that have responsibility to ensure that their lenders are complying with fair lending and related laws: The Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board (FRB), Department of Housing and Urban Development (HUD), National Credit Union Administration (NCUA), Office of the Comptroller of the Currency (OCC), and Office of Thrift Supervision (OTS). These regulatory agencies must exercise their full authority to investigate illegal lending practices and to enforce fair lending and consumer protection laws. CRC analyzed the lending patterns of different lenders, separated out by regulator, and found: HUD-regulated lenders made, by far, the most higher-cost first lien home purchase and refinance loans in California, having originated 102,040 highercost loans. HUD regulates the largest number of lenders, more than 500 lenders in California alone, and these lenders include some of the largest subprime lenders in the nation, such as Ameriquest and New Century Mortgage. FDIC-regulated lenders had the largest percentage of higher-cost loans to underserved borrowers and communities. For example, 43.27% of all FDICregulated refinance lending to low-income neighborhoods was higher-cost lending. National banks regulated by the OCC displayed the greatest disparities. Of the eight categories of lending analyzed, the OCC-regulated lenders had the greatest disparities in five areas. Further, the national banks had the second highest disparities in two additional areas. For example, national banks were 4.15 times as likely to make higher-cost refinance loans to African Americans as they were to make higher-cost loans to white borrowers. 3

4 Savings associations regulated by the OTS exhibited the next largest disparities. OTS lenders had the highest disparities in three of the eight areas analyzed, and had the second highest disparity ratio in three additional areas. For example, OTS lenders in the aggregate were more than eight times as likely to make a higher-cost home purchase loan in minority neighborhoods as they were to make a higher-cost loan in predominantly white neighborhoods. Which Communities Are Most Impacted by Higher-Cost Lending? CRC analyzed higher-cost lending patterns in 12 California cities: Delano, El Centro, Fresno, Los Angeles, Modesto, Oakland, Oxnard, Sacramento, San Diego, San Francisco, Salinas, and Yuba City. This analysis focuses on high rate lending to African American and Latino borrowers, and to minority and low and moderate-income neighborhoods. In looking at the overall rate of higher-cost lending: Cities that can be characterized as rural had the greatest incidence of highercost lending, with Delano, El Centro, Fresno, Modesto, and Yuba City having 25% to 15% of all home loans coming at higher-cost. Despite relatively low rates of higher-cost lending in California, African Americans continued to receive a large share of higher-cost loans. o In Oxnard, 28.21% of home purchase loans made to African Americans were higher-cost. Rural areas saw the greatest rates of higher-cost lending to Latino borrowers, while urban areas exhibited greater disparities between Latino and White non- Hispanic borrowers. o San Francisco and Los Angeles had the largest disparities for higher-cost lending to Latinos as compared to White non-hispanics. In San Francisco, Latino borrowers were 6.42 times as likely as white borrowers to get a higher-cost home purchase loan, and 2.72 times as likely to get a higher-cost refinance loan. In Los Angeles, the figures were 4.28 and 2.63, respectively. Rural communities witnessed a high percentage of higher-cost lending in minority neighborhoods, while the cities saw the greatest disparities and the largest number of higher-cost loans. o Delano had the largest percentage of higher-cost loans in its minority neighborhoods, for both home purchase lending (17.37% of loans in these neighborhoods were higher-cost) and refinance lending (30.10% were higher-cost). 4

5 o There were 7,957 higher-cost refinance loans originated in minority neighborhoods within the city of Los Angeles alone. Higher-cost lending to low and moderate income neighborhoods was prevalent o The city of El Centro saw a very large percentage of loans in its lowmoderate income neighborhoods come with higher-costs. This was true for both home purchase (29.41%) and refinance (31.55%) loans. o El Centro also had the highest home purchase loan disparity, with low and moderate-income neighborhoods 4.27 times as likely as middle and upper-income neighborhoods to get higher-cost loans. Fringe Finance versus Access to Mainstream Credit Banks that avoid locating branches in certain neighborhoods may be missing significant business opportunity. They also are leaving those communities vulnerable to high cost check cashers and payday lenders. In looking at the 12 survey cities, disparities between check casher presence and bank presence are stark: The number of check cashers in eight cities equaled or exceeded the number of bank branches there. Oxnard had the greatest disparity, with nearly 3 times as many check cashers as banks. Los Angeles has an astounding 568 check cashers. San Diego has 224. The prevalence of check cashing establishments in survey cities suggests that access to mainstream banks and low cost credit are impaired. Check cashers have clearly found a niche, are serving a large number of consumers, and are making money doing so. Banks and prime mortgage lenders should actively compete for this market. Recommendations In order to address the higher-cost lending disparities highlighted in this report, CRC recommends: Ensuring that borrowers get the best loan. For those companies that have both prime and subprime lending channels, it is imperative that they offer all borrowers the best loan product for which they qualify, regardless of how they look or where they live. 5

6 Vigorously examining lending practices and enforcing anti discrimination laws. Federal and state regulators must more vigorously examine lending practices and enforce anti predatory, fair housing/fair lending, and consumer protection laws and regulations. Expanding branches and CRA requirements. Lending disparities are smaller where banks lend within their Community Reinvestment Act (CRA) assessment areas. Loopholes in the CRA must be closed so that banks like Countrywide Bank and the potential H&R Block Bank cannot take deposits and conduct banking nationally, while reinvesting only in a few local areas. Eliminating YSPs and discretionary pricing. Home loan sales where brokers or loan officers have discretion to charge different prices to different consumers is an invitation to discriminate. Yield Spread Premiums, which provide financial incentives for loan brokers to charge borrowers a higher rate than they deserve, should be eliminated. Providing more flexible products for immigrants and people of color, and better outreach in rural areas and minority urban neighborhoods for prime products. Lenders should develop more flexible lending products that meet the needs of immigrants and people of color, and should aggressively market to the rural and inner city urban areas that are prey to higher-cost lenders. Lenders must get beyond their over reliance on credit scores, and focus on a borrower s ability to repay the loan. Expanding HMDA reporting requirements. The Federal Reserve should expand HMDA data by requiring lenders to report the very information that lenders say is needed to assess whether discrimination is occurring. Such information should include credit score, debt-to-income ratios, loan-to-value ratios and points and fee data. Shedding light on lending patterns inevitably leads to better lending. 6

7 Introduction This report is CRC s twelfth annual analysis of federal Home Mortgage Disclosure Act (HMDA) data. HMDA data are important for several reasons, including: They speak to whether financial institutions are helping people obtain and maintain the largest asset most Americans may ever own a home. They represent one of the most detailed publicly available data sets concerning lending and banking practices. They have as one of their important stated purposes, the lofty goal of assisting in identifying possible discriminatory lending patterns. Over the years, CRC s analysis of the HMDA data has evolved as the home loan market and HMDA data have evolved. In the early years, the focus was on whether home loan applications to underserved borrowers were approved or denied. The main concern was that lenders were actively discriminating against African American, Latino and other minority borrowers, and refusing to lend to, or redlining, the neighborhoods in which these borrowers lived. While redlining remains a sad reality in our lending landscape, we have seen a shift from redlining to reverse redlining, where minority borrowers and neighborhoods are now targeted for higher-cost, or subprime, loans they can ill afford. Subprime lending refers to lending that is targeted to borrowers who have, or are perceived to have, blemishes on their credit reports. Subprime loans carry higher interest rates and fees, and more onerous loan terms. With the explosion of subprime lending, CRC has looked at whether loans to underserved borrowers and neighborhoods are coming from banks or higher-cost, subprime lenders. CRC has attempted in recent years to look at the relationship between higher-cost lenders and the mainstream banks that often own, or are affiliated with, these subprime lenders. This year represents the first in which the public has access to loan pricing data. Several excellent reports on the new data have already been issued since the data have been made public. 1 A major problem arises when subprime lending goes beyond fairly compensating the lender for taking on the added risk of lending to a person with a poor credit history. CRC, 1 ACORN Fair Housing, The High Cost of Credit: Disparities in High Priced Refinance to Minority Homeowners in 125 American Cities, September 27, 2005; Center for Responsible Lending (Ernst, Keith S, and Goldstein, Deborah N.) Comment on Federal Reserve Analysis of Home Mortgage Disclosure Act Data, September 14, 2005; Consumer Federation of America (Fishbein, Allen, and Woodall, Patrick) Subprime Cities: Patterns of Geographic Disparity in Subprime Lending, September 8, 2005; Greenlining Institute (Gee, Peter) The Price of Credit: Prime and Subprime Lending in California 2004; National Community Reinvestment Coalition, The 2004 Fair Lending Disparities: Stubborn and Persistent, April 2005; Woodstock Institute, New Mortgage Pricing Data Sheds Light on Subprime Market, Reinvestment Alert, May

8 Fannie Mae, and others have estimated that up to half of all borrowers with subprime loans could qualify for a lower cost prime loan. 2 Subprime loans are also more likely to include additional terms that are not in the borrower s interest, such as prepayment penalty provisions which trap borrowers into higher-cost loans, and mandatory arbitration provisions which deny borrowers equal access to the courts to seek redress for violations of law. The issue of subprime lending takes on added significance in California. The National Mortgage News has estimated that subprime lending accounted for more than $600 Billion in CRC believes that 25 to 50 percent of all subprime lending is occurring in California, based on reviews of SEC filings relating to subprime securities. California receives the largest share of higher-cost loans in the nation. 4 Further, CRC believes that the new HMDA loan pricing data are only capturing about 50% of the subprime loan market. Many loans are priced just under the thresholds. Brokers and lenders are aggressively marketing interest-only, option ARM (Adjustable Rate Mortgage) and other exotic loan products that have an artificially low introductory rate but that will inevitably rise. Next year, we may begin to see not only an increase in subprime loan reporting under HMDA, but also an increase in the number of foreclosures in California as interest rates rise and homeowners face mounting challenges in meeting their monthly payments obligations. This report looks at one window into the home loan market in California how much higher-cost lending 5 is occurring here, and whether it appears targeted to certain borrowers and neighborhoods within the state. Whether a home loan is a higher-cost loan or not will have great impact on the borrower, and the borrower s community. According to Freddie Mac, the average interest rate on a 30-year fixed rate loan in 2004 was 5.84%, and the average points and fees paid was.7%. 2 A poll of the 50 most active subprime lenders found that 50% of their clients could qualify for a conventional loan, according to Inside Mortgage Finance, a trade publication. (Paul D. Davies, Beg, Borrow, Besieged, Philadelphia Daily News, February 5, 2001.) A Freddie Mac publication cited the same poll, attributing it to Inside B&C Lending, and estimated based on its own findings that between 10% and 35% of subprime borrowers could qualify for prime loans (Freddie Mac, Automated Underwriting: Making Mortgage Lending Simpler and Fairer for America s Families, September 1996). 3 American Banker, Subprime Market Share Nears 25%, from National Mortgage News, Monday, February 28, Inside B&C Lending, Californians Get Most Rate-Spread, HMDA Show, estimating that California received $47.48 billion in Higher-cost loans, roughly 20% of the national market. 5 Higher-cost loans is defined in this report as those loans that were reported as rate spread loans under the new HMDA reporting requirements. More specifically, this includes first lien loans with Annual Percentage Rates (APRs) that exceed the rate on Treasury securities of comparable maturity by 3%, and second liens with APRs that exceed the rate on Treasury securities of comparable maturity by 5%. Using the Federal Financial Institutions Examination Council "Treasury Securities of Comparable Maturity under Regulation C" Table, CRC estimates that the average comparable Treasury rate for 2004 was 5%, and that higher-cost loans in 2004 therefore carried APRs of approximately 8% or higher for first lien loans, and 10% or higher for second lien loans. See, 8

9 In contrast, the average higher-cost home loan in California in 2004 carried an APR of 9.81%. 6 For a home loan borrower getting Freddie Mac s low cost prime rate on a $275,000 loan, the monthly payment would be approximately $ , and the interest payments over the life of the loan could reach $308, A borrower with the same $275,000 loan but with the average higher-cost APR of 9.81% would pay considerably more each month. Assuming a consumer s 9.81% APR translates into a higher-cost home loan with an interest rate of 9.5% 8, the monthly payment will rise to a much higher $2,312.34, and total interest payments that could reach $557, This means that a borrower with a higher-cost home loan will pay $ more per month, and a whopping $249, more in interest payments over the life of the loan, than the majority of borrowers who obtain a lower cost prime loan! Conservatively, people of color in California are paying $47.5 million more per month than white borrowers as a result of higher-cost home loans. 9 Who Really Makes Higher-Cost in California? Top Higher-Cost Lenders There were 264,348 higher-cost home loans made to homeowners in California in These loans carried annual percentage rates of approximately 8% and higher. 11 Many of these higher-cost loans were made by some of the largest banking and financial services companies in the world. The following chart depicts the lenders with the largest share of higher-cost loans in the state. 6 The average rate spread for higher cost loans in California in 2004 was 4.81%. A 4.81% average rate spread + 5% average comparable Treasury rate = 9.81% APR for the average higher cost home loan. 7 Payments were calculated using East West Mortgage Mortgage Payment Calculator, 8 The remainder of the APR (9.81% APR 9.5% interest rate) represents fees paid by the consumer. Here, CRC estimates that the consumer will pay slightly more than 2 points, or more than 2% of the loan amount, or more than $5,500 in points and fees. 9 Estimate based on the following: The average higher-cost APR to owner occupants in single family and manufactured homes in California in 2004 was roughly 9.81%. If American Indians, Pacific Islanders, African Americans, and Latino borrowers all were as likely to receive a higher-cost home loan as White non Hispanic borrowers, who saw a relatively low 8.59% of home loans come with higher-cost rates, nearly 70,000 additional residents of color would NOT be paying the increased monthly costs (an extra $691.76/month) that come with the average higher-cost loan. This would yield a monthly cost savings of $47,488, million to people of color and the communities in which they live in California. 10 The 264,348 loans were single-family and manufactured housing loans made to owner occupants that exceeded the new pricing thresholds. 11 See note 5, above. 9

10 Top Higher-Cost Lenders in California: 2004 Single Family and Manufactured Housing to Owner Occupants Market Share Report $ Amount Rank Lender # (+000) 1 Ameriquest Fremont Investment & Loan General Electric/WMC Mortgage Corp New Century Mortgage Corporation Countrywide Home Lehman Brothers Washington Mutual National City Bank, Indiana Encore Credit Corp Accredited Home Lenders, Inc HSBC MortgageIT, Inc Wells Fargo Citibank H&R Block Aames Funding Corporation First NLC Financial Services Fieldstone Mortgage Company Peoples Choice Home Loan Inc Bank of America This list includes some of the largest financial service corporations in the world, many of which own lenders that make higher-cost loans to minority borrowers and in minority neighborhoods. Ameriquest includes: Argent Mortgage Company, Ameriquest Mortgage Company, Olympus Mortgage Company, Town & Country Credit Corp, and Bedford Home, Inc. Countrywide includes: Countrywide Home, Treasury Bank, NA, and Countrywide Mtg. Ventures, LLC Lehman Brothers includes: Lehman Brothers Bank and Finance America, LLC Washington Mutual includes: Long Beach Mortgage and Washington Mutual Bank, FA H&R Block includes: Option One Mortgage Corp. and H&R Block Mortgage Corporation Wells Fargo includes: Wells Fargo Financial Services, California, Wells Fargo Bank, NA, and Wells Fargo Funding, Inc. HSBC includes: Decision One Mortgage, Beneficial and HFC Bank of America includes: OwnIt Mortgage Solutions, Inc. and Bank of America, N.A. Bank of America recently reported it has reduced its interest in OwnIt. 12 Citibank includes: Citifinancial Services, Inc., Citicorp Trust Bank, FSB, Citifinancial Mortgage Co, Inc., Washington Mutual Finance Corp (which Citi purchased), and Citimortgage, Inc. 12 In a recent filing regarding the proposed acquisition by Bank of America of MBNA, Bank of America asserts, as of March 2, 2005, Ownit is no longer an affiliate of Bank of America. Bank of America indirectly owns 24.9% of the voting common equity of Ownit, through a passive limited partnership interest in CIVC Fund IIIA, L.P. No Bank of America associates serve on Ownit s Board of Directors. 10

11 Top Higher Cost Lenders in CA Ameriquest Fremont Inv & Loan WMC Mortgage Corp New Century Mortgage Top Highest Cost Lenders Countrywide Home Lehman Brothers Washington Mutual National City Bank Encore Credit Corp. Accredited Home Lenders HSBC Mortgageit, Inc. Wells Fargo Citibank H&R Block Aames Funding Corp First NLC Fincl Serv Fieldstone Mortgage Peoples Choice Bank of America/OwnIt Beyond showing whether a loan was higher-cost or not, the new HMDA data for the first time revealed how much lenders actually charged borrowers. The highest category of loans is listed as having Annual Percentage Rates (APRs) that exceed the comparable Treasury Rate by 8 percentage points. The following 10 lenders had the largest share of loans made with the highest rates charged APRs that approximated 13% or higher in See footnote 7. classified as having a rate-spread of 8% or more over comparable Treasury are estimated to carry APRs of 13% and higher. 11

12 Top Highest Cost Lenders in CA: Single Family and Manufactured Home to Owner Occupants in American General Greenlight Financial Citibank HSBC Wells Fargo Fremont Inv & Loan 21st Mortgage U.S. Financial Mortgage NetBank/Meritage Accredited When such extremely high cost loans are charged in California, both homeowners and communities are greatly impacted. Homeowners who face a greater burden in making mortgage payments will have a greater likelihood of falling behind and possibly losing their homes to foreclosure. More money spent on housing costs means less money to meet basic necessities, provide routine home maintenance, and respond to any emergencies that may arise. Communities are also adversely affected when homeowners have less money to support local businesses, make needed home repairs that uplift neighborhoods, and avoid the devastating ripple effect that comes with foreclosure. Who Really Gets Higher-Cost in California? Community groups are most concerned when higher-cost loans are more prevalent in certain communities and with certain borrowers. As is the case every year, the HMDA data reveal lending disparities by race and income. One of the new additions to HMDA this year is the inclusion of data relating to ethnicity. For the first time, the data show disparities between Latino borrowers and White non-hispanic borrowers. The data also this year distinguish between first lien loans and junior or second lien loan. The ensuing analysis of lending disparities focuses only on first lien loans to owner occupants for both home purchases and refinances. Importantly, the Federal Reserve Board s own analysis confirms that lending disparities do exist, and that they cannot be fully explained by valid underwriting criteria Adjusting the HMDA data for borrower-related factors plus lender is insufficient to account fully for racial or ethnic differences in the incidence of higher-priced lending; significant differences remain unexplained. Avery, Robert B., and Canner, Glenn B., New Information Higher-Cost Under HMDA and Its Application in Fair Lending Enforcement, Federal Reserve Bulletin, Summer 2005, p

13 Home Purchase Loan Disparities by Race and Ethnicity of Borrower: Statewide, 7.52% of all first lien home purchase loans were higher-cost loans. For White borrowers statewide, 7.16% of home purchase loans were higher-cost. For African American borrowers, the figures were more than twice that for whites, with 16.29% of home purchase loans constituting higher-cost loans. The figures were also large for higher-cost home purchase lending to American Indians (12.39% of loans were higher-cost) and Pacific Islanders (10.84%). Looking at lending patterns relating to ethnicity, a mere 4.69% of home purchase loans to White non-hispanic borrowers were higher-cost. In comparison, 14.03% of home purchase loans to Latino borrowers were highercost, reflecting that Latino borrowers in California were roughly 3x as likely as White non Hispanic borrowers to get a higher-cost, first lien, home purchase loan. Higher Cost Lending by Race and Ethnicity of Borrowers: First Lien Home Purchase to Owner Occupants in California % 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% American Indian Asian African American Pacific Islander White Latino White Non Hispanic 13

14 Home Purchase Loan Disparities by Race and Income of Neighborhood: In addition to looking at which borrowers are more likely to receive higher-cost home loans, HMDA data also permit an analysis of which neighborhoods are more vulnerable to higher-cost lending. The analysis below compares lending to neighborhoods that are predominantly white (less than 10% minority) to neighborhoods that are predominantly of color (more than 80% minority). Similarly, lending in low-income neighborhoods (less than 50% of the area median income) is compared to lending in upper-income neighborhoods (more than 120% of area median income). A scant 3.51% of home purchase loans in neighborhoods characterized as predominantly white had higher-cost loans. Minority neighborhoods were nearly 4 times as likely to see home purchase loans coming with higher-cost rates (13.59% of loans to neighborhoods characterized as predominantly minority were higher-cost). Similarly, a low 4.41% of home purchase loans to upper-income neighborhoods were higher-cost. For low-income neighborhoods, the figure was 3 times as high % of home purchase loans to these neighborhoods were higher-cost. Higher Cost Lending by Race and Income of Neighborhood: First Lien Home Purchase to Owner Occupants in California % 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% <10% minority % minority Low Income Upper Income Refinance Loan Disparities by Race and Ethnicity of Borrower: 14

15 Statewide, 8.49% of all first lien refinance loans were higher-cost. For White borrowers statewide, 7.93% of refinance loans were higher-cost. For African American borrowers, the figures were more than twice that for whites, with 17.31% of refinance loans being higher-cost. The figures were also high for American Indians (14.24% of loans were highercost), and Pacific Islanders (11.74%). Looking at lending patterns relating to ethnicity, only 6.42% of refinance loans to White non-hispanic borrowers were higher-cost. In contrast, 12.95% of refinance loans to Latinos borrower were higher-cost, twice that for White non-hispanic borrowers. Higher Cost Lending by Race and Ethnicity of Borrower: First Lien Refinance to Owner Occupants in California % 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% American Indian Asian African American Pacific Islander White Latino White Non Hispanic 15

16 Refinance Loan Disparities by Race and Income of Neighborhood: Only 4.37% of home purchase loans in predominantly white neighborhoods had higher-costs. Minority neighborhoods were more than 3 times as likely to see home purchase loans coming with higher-cost rates (13.88% of loans to minority neighborhoods were higher-cost). Similarly, a low 5.01% of home purchase loans to upper-income neighborhoods were higher-cost For low-income neighborhoods, the figure was more than 3 times as high, as 16.51% of home purchase loans to these neighborhoods were higher-cost. Higher Cost Lending By Race and Income of Neighborhood: First Lien Refinance Lending to Owner Occupants in California % 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% <10% minority % minority Low Income Upper Income Who Really Regulates Higher-Cost Lenders in California? Mortgage lenders are primarily regulated by one of six regulatory agencies. Savings associations are regulated by the Office of Thrift Supervision (OTS). National Banks are regulated by the Office of the Comptroller of the Currency (OCC). Member banks and subsidiaries of bank holding companies are regulated by the Federal Reserve Board (FRB). Non-member, state chartered banks are regulated by the Federal Deposit Insurance Corporation (FDIC). Credit unions are regulated by the National Credit Union Administration (NCUA). 16

17 Mortgage companies are regulated by the Department of Housing and Urban Development (HUD). The regulatory agencies have tended to respond to concerns about predatory lending by asserting that the institutions they regulate are not the problem actors. CRC believes that each of the regulatory agencies must exercise its full authority to investigate illegal lending practices and to enforce fair lending and consumer protection laws. Indeed, HMDA data raise legal issues of compliance with fair lending laws. 15 Looking at first lien home purchase and first lien refinance lending, broken out by regulatory agency, CRC finds: HUD regulated lenders made, by far, the most higher-cost first lien home purchase and refinance loans, having originated 102,040 higher-cost loans. FDIC-regulated lenders originated the second highest total, at a much smaller 16,887 higher-cost loans. HUD regulates the largest number of lenders, more than 500 lenders in California alone, and these lenders include some of the largest subprime lenders in the nation, such as Ameriquest and New Century Mortgage. Total Higher Cost by Agency: First Lien Home Purchase and Refinance to Owner Occupants OCC FRB FDIC OTS NCUA HUD Of all the agencies, the FDIC regulates lenders that, in the aggregate, had the largest percentage of higher-cost loans to underserved borrowers and communities. FDIC lenders were much more likely than other lenders to make 15 Federal Reserve Governor Susan S. Bies, quoted by Reuters, Warning to Bankers on Real Estate, nytimes.com, October 13,

18 higher-cost loans for both home purchase and refinance to African American borrowers, Latino borrowers, minority neighborhoods and low-income neighborhoods. For example, 43.27% of all FDIC-regulated refinance lending to low-income neighborhoods was higher-cost lending. The next largest rate of higher-cost lending was by HUD lenders, with 25.52% of HUD regulated lending to lowincome neighborhoods consisting of higher-cost loans. It is important to note that the lending patterns of FDIC-regulated institutions were skewed substantially by Fremont Investment & Loan, which accounted for roughly 95% of the higher-cost lending at FDIC institutions. Percentage of First Lien Refinance to Owner Occupants in Low-Income Neighborhoods That Are Higher Cost: By Agency 50.00% 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% FDIC HUD FRB OTS OCC NCUA National banks regulated by the OCC displayed the greatest disparities. Of the eight categories of lending analyzed, the OCC-regulated lenders had the greatest disparities in five areas (home purchase lending to African Americans, refinance lending to African Americans, refinance lending to Latinos, refinance lending to minority neighborhoods, refinance lending to low-income neighborhoods). Further, the national banks had the second highest disparities in two additional areas (home purchase lending to Latinos, home purchase lending to low-income neighborhoods). For example, national banks were 4.15 times as likely to make higher-cost refinance loans to African Americans as they were to make higher-cost loans to white borrowers. This compares to the second place FDIC lenders that were 2.36 times as likely to make higher-cost loans to African American borrowers as they were to white borrowers. 18

19 Higher Cost Disparity Ratio by Agency: Greater Likelihood of Higher Cost Lending to African Americans OCC FDIC OTS FRB NCUA HUD Savings associations regulated by the OTS exhibited the next largest disparities, having the highest disparities in three of the eight areas analyzed (home purchase lending to Latinos, home purchase lending to minority neighborhoods, home purchase lending to low-income neighborhoods), and had the second highest disparity ratio in three additional areas (home purchase lending to African Americans, refinance lending to Latinos, refinance lending to low-income neighborhoods). For example, OTS lenders in the aggregate were more than eight times as likely to make a higher-cost home purchase loan in minority neighborhoods as they were to make a higher-cost loan in predominantly white neighborhoods. The next greatest disparity was with Federal Reserve regulated lenders, which were 5.32 times as likely to make a higher-cost loan in a minority neighborhood than they were to make such a loan in a white neighborhood. Higher Cost Disparity Ratio by Agency: First Liend Home Purchase Lending to Minority Neighborhoods OTS FRB FDIC OCC HUD NCUA 19

20 Which Communities Are Impacted by Higher-Cost Lending? CRC analyzed higher-cost lending patterns in 12 California cities: Delano, El Centro, Fresno, Los Angeles, Modesto, Oakland, Oxnard, Sacramento, San Diego, San Francisco, Salinas, and Yuba City. 16 This analysis focuses on high rate lending to African American and Latino borrowers, and to minority and low and moderate income (LMI) neighborhoods. 17 In looking at the overall rate of higher-cost lending: Cities that can be characterized as rural had the highest rates of higher-cost lending, with Delano, El Centro, Fresno, Modesto, and Yuba City having 25% to 15% of all home loans coming at higher-cost. Higher Cost Lending to Owner Occupants in 12 California Cities 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Delano El Centro Fresno Modesto Yuba City Sacramento Salinas Los Angeles Oxnard Oakland San Diego San Francisco Higher-Cost Lending to African American Borrowers in 12 Cities: Despite relatively low rates of higher-cost lending in California, African Americans continue to receive a large share of higher-cost loans. o In Oxnard, 28.21% of home purchase loans made to African Americans were higher-cost. 16 Tables with additional lending data, sorted by city, are located in the back of this report. 17 As the geographic area of analysis becomes much smaller, we consider neighborhoods with less than 20% minority concentration ( white ), and neighborhoods with more than 50% minority concentration ( minority ); and we look at middle and upper-income neighborhoods combined ( middle and upperincome ), and low and moderate-income neighborhoods combined ( LMI ). Without aggregating census tracts in this way, certain cities would yield no low-income, upper-income or white neighborhoods. 20

21 o Higher-cost refinance loans to African Americans exceeded 25% of lending to African Americans in Fresno (27.88%) and Modesto (25.07%). o In 11 out of 12 cities, African Americans were more likely to receive higher-cost home purchase loans than whites. San Francisco had the greatest disparity, with African Americans in that city nearly five times as likely as whites to receive a higher-cost loan. Higher Cost Home Purchase Loan Disparities: Lending to African Americans in 12 Cities San Francisco Oakland Oxnard Fresno Sacramento Los Angeles Salinas San Diego Yuba City Modesto Delano El Centro o In 10 of 12 cities, African Americans were more likely to receive highercost refinance loans than whites. San Francisco saw the greatest disparity, where African Americans were 3.78 times as likely to get a higher-cost loan. Higher-Cost Lending to Latino Borrowers in 12 Cities: Rural areas saw the greatest rates of higher-cost lending to Latino borrowers, while urban areas exhibited greater disparities between Latino and White non Hispanic borrowers. o Latino borrowers in Delano, Fresno, and Yuba City were most likely to have higher-cost loans. In Delano, 18.82% of home purchase loans and 25.64% of refinance loans to Latinos were higher-cost. 21

22 In Fresno, the figures were 17.13% and 23.36% respectively. In Yuba City, it was 17.06% and 18.37%. In El Centro, 25.13% of refinance loans to Latino borrowers were higher-cost. Higher Cost Refinance Lending to Latinos in 12 Cities 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Delano El Centro Fresno Yuba City Sacramento Modesto Los Angeles Oakland Salinas Oxnard San Diego San Francisco o San Francisco and Los Angeles had the largest disparities for higher-cost lending to Latinos as compared to White non Hispanics. In San Francisco, Latino borrowers were 6.42 times as likely as white borrowers to get a higher-cost home purchase loan, and 2.72 times as likely to get a higher-cost refinance loan. In Los Angeles, the figures were 4.28 and Higher-Cost Lending to Minority Neighborhoods in 12 Cities: Rural communities witnessed a high percentage of higher-cost lending in minority neighborhoods, while the cities saw the greatest disparities and the largest number of higher-cost loans. o Delano had the largest percentage of higher-cost loans in its minority neighborhoods, for both home purchase lending (17.37% of loans in these neighborhoods were higher-cost) and refinance lending (30.10% were higher-cost). o Fresno came in second in both categories, with 15.99% of home purchase loans carrying higher-cost rates, and 24.42% of refinance loans doing so. o The urban areas of Oakland, San Francisco, and Los Angeles had the largest higher-cost disparities for home purchase loans (10.89 times,

23 times, and 6.35 times, respectively) and refinance loans (4.96 times, 6.23 times, and 7.51 times, respectively) to minority neighborhoods. o No disparity ratio could be calculated for the communities of Delano, El Centro, Salinas and Yuba City, as no loans were made to white census tracts (less than 20% minority). o There were 7,957 higher-cost refinance loans originated in minority neighborhoods within the city of Los Angeles alone. Higher Cost Refinance Lending in Minority Neighborhoods Los Angeles Sacramento San Diego Fresno Oakland Modesto Oxnard Salinas San Francisco Delano El Centro Yuba City # high cost loans made Higher-Cost to Low-Moderate Income Neighborhoods in 12 Cities: Higher-cost lending to low and moderate-income neighborhoods was prevalent. o The city of El Centro had a very large percentage of loans in its low and moderate-income neighborhoods that came with higher-costs. This was true for both home purchase (29.41%) and refinance (31.55%) loans. o El Centro also had the highest home purchase loan disparity ratio, with low and moderate-income neighborhoods 4.27 times as likely as middle and upper-income neighborhoods to get higher-cost loans. 23

24 Higher Cost Home Purchase Disparity Ratio: Greater Likelihood that in LMI Neighborhoods Will Be High Cost El Centro Oakland Los Angeles Fresno San Diego Sacramento Modesto Oxnard Salinas San Francisco Yuba City Delano o Oakland and Los Angeles had the highest refinance loan disparity ratios, at 3.55 times and 2.59 times, respectively. Fringe Finance v. Mainstream Access Importantly, in its own analysis of the new HMDA data, the Federal Reserve noted that lending disparities are smaller around the assessment areas of banks. 18 This is an argument for a strong Community Reinvestment Act and for financial institutions to develop strong reinvestment programs in underserved areas. Banks that avoid locating branches in certain neighborhoods may be missing significant business opportunity. 19 They also leave those communities vulnerable to the high cost check cashers and payday lenders. In Where Are the Bank Branches in My Community? An Analysis of Branch Distribution in Low-Income Neighborhoods, CRC finds that the largest banks are not well serving low and moderate income areas However, whether the loan was originated by an institution in its CRA assessment area does matter. Differences across groups for lending within an assessment area are about one-third of those for lenders outside the assessment area. Moreover, for all racial and ethnic groups, lending within an assessment area exhibits a much lower incidence of higher priced lending, (Avery, Robert B., and Canner, Glenn B., New Information Higher-Cost Under HMDA and Its Application in Fair Lending Enforcement, Federal Reserve Bulletin, Summer 2005, p. 382). 19 A recently released report from the National Community Investment Fund notes, Banks looking for new customers and more deposits might be able to find them in low-income neighborhoods mostly served by check cashers, payday lenders, and other fringe financial institutions. (as reported by Ben Jackson in Study Argues for Prospecting in Poorer Markets, American Banker, December 6, 2005). 20 Serna, Rhea, California Reinvestment Coalition, Where Are the Bank Branches in My Community? An Analysis of Branch Distribution in Low-Income Neighborhoods (November 2005), available at 24

25 In looking at the 12 survey cities, disparities between check casher presence and bank presence are stark 21 : The number of check cashers in eight cities equaled or exceeded the number of bank branches there. Oxnard had the highest concentration of check cashers, with nearly 3 times as many check cashers as banks. Fringe v Mainstream Access Disparities: # of Check Cashers Compared to # Bank Branches in 12 Cities Oxnard Delano Fresno Los Angeles El Centro Sacramento Salinas San Diego Yuba City Modesto Oakland San Francisco Check Casher/Branch Disparity Oakland, with a relatively low ratio of check cashers (59) to banks (79) compared to other survey cities, addressed concerns about the prevalence of check cashers and the negative impacts they have on the community by passing a land use ordinance restricting the location of new check cashing establishments. Likewise in San Francisco, which has the lowest check casher/bank ratio of survey cities, more than one-third of the 98 check cashers in the city are located in the Mission District, the City s predominantly working class Latino 21 Branch data was obtained from fdic.gov website. Check casher data was obtained from the California Department of Corporations. Analysis reflects only those establishments that are identified as being located within 1 of the 12 survey cities. This analysis does not account for bank branches or check cashers that are identified by a different neighborhood name, though that neighborhood and that establishment may be included within the boundaries of 1 of the 12 survey cities. 25

26 neighborhood. San Francisco is also considering an ordinance to restrict the prevalence of check cashers in the community. While check cashers are a growing presence, banks are not keeping pace. The cities of Delano and El Centro each only have six bank branches in their midst, though Delano has eleven check cashers and El Centro eight check cashers. City # banks # check cashers fringe ratio Oxnard % Delano % Fresno % Los Angeles % El Centro % Sacramento % Salinas % San Diego % Yuba City % Modesto % Oakland % San Francisco % Los Angeles has an astounding 568 check cashers. San Diego has 224. Check Cashers in 12 Cities Oxnard Delano Fresno Los Angeles El Centro Sacramento Salinas San Diego Yuba City Modesto Oakland San Francisco The prevalence of check cashing establishments in survey cities suggests that access to mainstream banks and low cost credit are impaired. Check cashers have clearly found a niche, are serving a large number of consumers, and are making money doing so. Banks and prime mortgage lenders should actively compete for this market. 26

27 Recommendations In order to address the higher-cost lending disparities highlighted in this report, CRC recommends: Ensuring that borrowers get the best loan. Most of the top 20 lenders identified in the report offer both prime and subprime loans. The Federal Reserve has noted that much of the lending disparity by race and ethnicity can be explained by the fact that people of color are more likely to use a higher-cost subprime lender. 22 The Fed paper goes on to note that the greater use of higher-cost lenders by people of color may reflect that lower-cost prime lenders are not well serving these communities, or that these borrowers are being steering improperly into higher-cost loan products. For those companies that have both prime and subprime channels, it is imperative that they offer all borrowers the best loan product for which they qualify, regardless of how they look or where they live. Vigorously Examining Lending Practices and Enforcing Anti Discrimination Laws. Federal and state regulators must more vigorously examine lending practices and enforce anti predatory, fair housing/fair lending, and consumer protection laws and regulations. Banking regulators, like the OCC, should not be allowed to thwart the efforts of state officials seeking to investigate and enforce violations of fair housing or state consumer protection law. This is especially so where the regulators have not shown themselves ready to aggressively combat lending abuses. Additionally, HUD, as the regulator of the largest number of subprime lenders, as well as some of the largest subprime lenders, must develop a mechanism for systematically monitoring compliance of the companies it ostensibly regulates. HUD has made recent statements suggesting it may pursue a more robust approach to enforcement. 23 Additionally, the Department of Justice may be examining HMDA data in order to target enforcement action Most of the reduction in the difference in the incidence of higher-priced lending across groups comes from adding the control for lender to the control for borrower-related factors. Avery, Robert B., and Canner, Glenn B., New Information Higher-Cost Under HMDA and Its Application in Fair Lending Enforcement, Federal Reserve Bulletin, Summer 2005, p Zindler, Ethan, In Focus: 200 Facing Scrutiny of HMDA Data, citing Floyd O. May, HUD s head of the Office of Fair Housing and Equal Opportunity, as saying HUD was considering a full-scale investigation, American Banker, September 19, The Justice Department has asked a number of mortgage lenders for more information on how they priced loans to minorities, the agency said. Paletta, Damian, Justice Dept. Activates Its Own HMDA Data Probe, American Banker, November 30,