Race and ethnicity play key factor in sale of high-cost refinance loans in Texas (Nov. 2002).

Blacks and Hispanics targeted by high-cost lenders; Texas' midsize cities top list

Rob Schneider, Senior Staff Attorney with Consumers Union's Southwest Regional Office

Black and Hispanic families who refinance their homes in Texas are finding out that race still matters, according to a Consumers Union study released Oct. 28. The study shows that Black borrowers are 3.9 times as likely to end up with a refinance loan from a high-cost "subprime" lender than whites, while Hispanics are 1.6 times as likely, even after factoring out income and the loan-to-income ratio.

(See attached story on similar findings for women and the elderly.)

"In general, borrowers who refinance their homes using subprime loans pay almost $2,000 more per year in interest alone," said Rob Schneider, senior staff attorney for CU's Southwest Regional Office.

"Subprime lenders target African-Americans and Hispanics in Austin by zip codes," said Mary Daniels Dulan, Director of the Austin Tenants Council's Fair Housing Program. "Each day homeowners in predominantly minority areas receive offers for home purchase or refinance loans from subprime lenders who saturate them with 'no hassle' loans regardless of no credit, bad credit or bankruptcy."

"The problem is compounded by the fact that traditionally, many minorities shy away from banks and mortgage companies, fearing rejection," Dulan said.

Among borrowers earning more than $60,000 annually and borrowing less than 2.5 times their reported income, 16.7 percent of Whites refinanced using a high-cost subprime company, 30.9 percent of Hispanics and 46.9 percent of Blacks. Consumers Union found very high subprime penetration rates (exceeding 40 percent) among upper income Black borrowers refinancing homes in predominantly Black neighborhoods.

The Consumers Union study used four years of data (1997-2000) to ensure a large number of minority refinance loans at every income level and in every neighborhood. It used data from the Home Mortgage Disclosure Act, cross-referenced with 2000 census information. Subprime loans are typically set at a higher price and are designed for persons unable to qualify for prime mortgage loans. However, some people who pay subprime rates actually have prime -- or first class -- credit.

The American Association of Retired Persons (AARP) recently reported that Texas and New York have the top two subprime loan penetration rates in the U.S.. The Consumers Union study found that subprime penetration ranked highest in Texas' medium size cities, particularly in the Gulf Coast and Rio Grande Valley region. In many of these, the disparity ratios between minority borrowers and White borrowers was more pronounced than in large cities like Houston and Dallas.

"Most of the cities in Texas with the highest rate of high-cost subprime borrowing are predominantly populated by Hispanic," said Ana Yánez-Correa, LULAC Texas policy director. "Through sacrifice and hard work, Hispanic families have tried to build up equity in their homes. Ultimately, they want to pass their homes onto their children. Instead, it appears they are refinancing at sometimes very high rates and giving their hard earned equity directly over to the high cost lenders."

The highest subprime penetration in Texas over the four-year period was in Beaumont-Port Arthur, followed closely by El Paso and McAllen/Edinburg/Mission.

Subprime refinance loan disparities between Whites and Blacks were most noticeable in:

• Tyler (6.5 percent for Whites; 45.3 percent for Blacks = disparity ratio of 6.99)
• Bryan-College Station (4.7 percent for Whites; 23.1 percent for Blacks = disparity ratio of 4.93)
• San Angelo (7.5 percent for Whites; 35.9 percent for Blacks = disparity ratio of 4.76)
• Longview/Marshall (6.5 percent for Whites; 30.6 percent for Blacks = disparity ratio of 4.70)

Subprime refinance loan disparities between Whites and Hispanics were most noticeable in:

• Lubbock (9.0 percent for Whites; 37.3 percent for Hispanics = disparity ratio of 4.16)
• Bryan/College Station (4.7 percent for Whites; 16.1 percent for Hispanics = disparity ratio of 3.44)
• Victoria (8.2 percent for Whites; 27.8 percent for Hispanics = disparity ratio of 3.40)

CU's Schneider said that borrowers who take out high-cost refinance loans often fall into a spiral where they are unable to keep up with payments and their credit suffers. "We count on our home equity as a way to develop family wealth over the long run, but high-cost subprime loans eat away at hard-earned equity, meaning money is paid in interest that could otherwise go to pay for an education, start a business, or pay for a home repair."
The report recommends the Texas Legislature:

• Prohibit the financing of fees, closing costs or other lender charges (including "prepaid" points) if the fees rise above 3 percent of the loan amount;
• Require loan counseling for borrowers getting high cost loans during the existing 12-day waiting period before closing;
• Prohibit lending without due regard to repayment ability; and
• Limit "discount points" to legitimate charges that actually provide a substantial benefit to consumers.

Earlier CU studies found similar disparities in subprime refinance lending to women and elderly Texans.

Consumers Union's Tips for Consumers to Avoid High-Cost Loans

Loans backed by your home are complicated transactions and many Texans end up paying far too much. According to our studies, women, the elderly, and minorities get a disproportionate share of higher-cost "subprime" refinance and home equity loans. Paying more eats away at the equity you build up in your home. It pays to be smart and avoid high-cost subprime loans.

In October 2002, rates for 30-year fixed loans were less than six percent, and rates for home equity loans were around seven percent. If you have good or excellent credit, you can expect a low interest rate at this time. Therefore the first question to ask yourself is, "How good is my credit?"

• Get your credit score at www.myfico.com or contact one of the three primary credit bureaus:
  Equifax 800-685-1111
  Experian 888-397-3742
  Trans Union 800-916-8800
• Address errors or disputes in your credit history before you start looking for a loan. Most people have credit scores that qualify them for the best interest rates (credit scores of 700 or above) or close to the best rates (credit scores between 650 - 699). About 25 percent of people have less than ideal credit. If your credit score is above 650, you should expect to pay, at most, only a percentage point or two above the best "prime" rates. If your score is above 700, you should not pay more than the prime rates, though other factors may affect what you pay.
• Once you know your credit score, shop around. Contact both mortgage brokers and lenders who offer credit directly. Tell them your score and ask for an interest rate, along with an estimate of all the fees you might be charged including lender "points." Many lenders will fax, e-mail or mail a Good Faith Estimate form with all this information. Remember, high fees mean you turn a substantial part of your home equity into cash and pay it directly to the lender at closing.
• Don't deal with brokers or lenders who require you to pay an application fee before they will estimate your rate and fees. Application fees tend to lock consumers into a relationship, sometimes before they have finished shopping around.
• Once you have selected a lender based on the interest rate and closing charges, you will likely pay a fee (for application, credit report, inspection, or other fee), complete the process and go to closing. Be sure to examine the papers at closing carefully. Do not rush. Be prepared to walk away if the fees and interest on the final disclosures at closing are higher than you expected.
• If you complete the closing but you are uncomfortable with a home equity or refinance loan, you have three days after you close to rescind your loan without a penalty. Check the APR (the "Annual Percentage Rate") disclosure on your loan documents to see what your rate is, if it is out of line, you may rescind the loan within that period. If you don't understand your documents, or a lender's explanation, find a friend, a credit counselor, or other person to look the papers over for you.

Remember:

• Ask questions.
• Don't take the first offer.
• Look at the TOTAL finance charge, not just the payment.
• Never sign a blank document or leave blanks to fill in later.
• Beware of promises to refinance at a lower rate later
• Be suspicious of ads promising "No Credit? No Problem!"
• Ignore high-pressure sales tactics.