NCPA - National Center for Policy Analysis

Trying to Define "Predatory" Mortgage Practices

July 18, 2002

During the 1990s economic boom, credit increasingly became available to people whose low income and poor credit history had made borrowing for a mortgage difficult. Some black leaders charge that some loans made to minority borrowers were "predatory."

However, it is often difficult to differentiate between a loan that has reasonable terms and one that is predatory. Shouldn't the extra risk associated with a loan to someone with a troubled credit history be offset by higher rates, critics ask?

  • During the period 1996-2001, homeownership among blacks surged 9.3 percent -- compared to 3.6 percent for whites.
  • Foreclosure rates for borrowers of subprime loans -- those with higher interest rates and fees -- vary greatly from city to city.
  • In African-American neighborhoods in Baltimore, for example, they run as high as 57 percent -- versus 45 percent for all neighborhoods in that city.
  • But in Boston, the foreclosure rate on subprime loans in minority neighborhoods is only 15 percent -- compared to 11 percent for all neighborhoods there.

Figures confirm that residents of minority neighborhood are more likely to wind up with subprime loans than those in other areas. In Atlanta, for example, 31 percent of loans in African-American neighborhoods are subprime, compared to 12 percent of all mortgage loans.

The Federal Reserve has approved new regulations designed to curb predatory lending -- including a prohibition on refinancing certain high-cost loans within the first year.

Also, the Federal Trade Commission has joined some state attorneys general in suing some major financial firms over the practice.

Source: Kelly K. Spors and John Harwood, "Seeking a Spotlight on Minority Borrowers," Wall Street Journal, July 18, 2002.


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