Texas women and elderly pay more for refinance and home equity loans (Oct. 2002).

Women and the elderly appear to be disproportionately targeted by high-cost subprime lenders since the inception of home equity lending in Texas, according to two Consumers Union studies released Oct. 10.

The studies, results of an analysis of four years of Texas data, document refinance loan market growth and present convincing evidence that subprime lenders have increasingly focused on demographic areas more susceptible to predatory practices. Predatory practices may result in low-income families and elderly persons accepting mortgage loans they are unable to repay.

Subprime loans — designed for persons unable to qualify for prime mortgage loans — now account for more than one-third of refinance lending in Texas. Although not all subprime borrowers pay high rates, most pay higher than prime rates. Using average rates reported by lenders to their investors, Consumers Union estimates that subprime borrowers pay nearly $2,000 in additional interest annually over prime borrowers.

"Unscrupulous subprime lenders in Texas are targeting older homeowners, particularly women, with overpriced loans that drain away their equity," says Luis Wilmot, AARP/Texas State Director. "It's happening to thousands across the state and the results are often foreclosure and financial ruin. 'They didn't tell me I could lose my home,' is their all too frequent cry. Texas needs stronger laws that will protect homeowners of all ages from the potentially devastating financial effects of predatory lending."

The studies used data from the Home Mortgage Disclosure Act and cross referenced the 2000 census statistics on age. Subprime penetration rates are higher among women, even after factoring in income, and in areas with a high concentration of people over age 65.

Almost 40 percent of single women borrowers got their refinance or home equity loans from high-cost subprime lenders, compared to one-third of men, and, in certain parts of the state, women took subprime loans at a 2-to-1 ratio over men. Even at higher income levels, women were more likely to get loans from subprime lenders than high-income men.

"Women often have to overcome difficult obstacles to be able to provide a safe and stable home for their families, especially when they are the survivors of domestic violence," said Sheryl Cates, Executive Director of the Texas Council on Family Violence. "Having to deal with a high-cost subprime loan makes it that much more difficult to attain independence."

Similar incongruities are evident in the elderly lending study. The study finds that for every one percent increase in a neighborhood's concentration of people over age 65, the likelihood a borrower will get a refinance or equity loan from a subprime lender grows by 1.3 percent. The analysis also showed that borrowers in neighborhoods with a high concentration of elderly people - regardless of the racial makeup of that area - took higher-cost subprime loans.

By using data from every "metropolitan statistical area" (MSA) in Texas, Consumers Union found that discrepancies exist to varying degrees throughout the Lone Star State. In Bryan-College Station, for example, 29.6 percent of women took subprime refinance loans in 2000 compared to 13.6 percent of men.

"The results are more than mere numbers -- they show an effect on peoples lives," says Rob Schneider, a senior staff attorney with Consumers Union. "Subprime refinance borrowers pay more to the lender for their home loan, often in the form of high lender closing fees, leaving them with higher payments and less equity. Texas women and the elderly appear to be more vulnerable to these companies. High closing fees and untenable loan terms often make predatory practices especially effective for lenders, but the unethical techniques are detrimental to borrowers."

The practices not only negatively impact the borrowers, they affect communities and the state as a whole. "As equity is unnecessarily stripped from individual's homes, it is not available for investment in home improvement, education for children or grandchildren, or to start businesses," Schneider adds.

The two studies have prompted key recommendations to the Texas Legislature. Among the recommendations:

• Prohibit the financing of fees, points, closing costs or other lender charges if the fees rise above three percent of the loan amount.
  
• Require loan counseling for any borrower getting a high-cost loan (for equity loans this can be done during the existing 12-day waiting period before the loan closes.)
  
• Prohibit lending without due regard to repayment ability.
  
• Limit "discount points" to legitimate charges that actually provide a substantial benefit to consumers and implement standards of "Bona Fide Discount Points" created by AARP, the Self Help Credit Union and the National Consumer Law center.
  
• Retain existing waiting periods and right of recision so that buyers can get out of a bad loan after they've seen and digested the final terms and conditions presented at closing.

"In order for women and the elderly to get a fair shot when refinancing their homes or getting equity loans, we need to set standards for the companies that lend to them," Schneider says. "It's particularly problematic that the subprime companies are capitalizing on the people who most need fair and practical lending to maintain their homes and lives."

The studies are the first of a four-part series in which Consumers Union examines subprime lending to women, the elderly and minority borrowers. A final report will outline weaknesses in Texas consumer protections that leave these groups vulnerable to predatory practices.

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.