RESEARCH General Home & Garden

REAL ESTATE
Study of Illinois county indicates deceptive home-loan practices

Melissa Mitchell, News Editor
(217) 333-5491; melissa@uiuc.edu

9/1/03

CHAMPAIGN, Ill. — Since the early 1990s, an increasing number of Americans have bought into the American dream of home ownership. But the price can be steep, especially for minority and low-income homebuyers with poor credit histories, according to a University of Illinois at Urbana-Champaign housing expert and author of a report that examines predatory lending practices in one Illinois county.

Lynne Dearborn, an architecture professor affiliated with Illinois’ East St. Louis Action Research Project, will present the report at a "Forum on Fair Lending" co-sponsored by the St. Louis Federal Reserve Board and Land of Lincoln Legal Assistance Foundation on Sept. 11 in Collinsville, Ill. The report was commissioned by St. Clair County and funded as part of an $85,000 Fair Housing Grant from the U.S. Department of Housing and Urban Development. Dearborn characterized St. Clair County as "an area with some of the most distressed communities in the state," and said county officials commissioned the study because they were concerned that people involved in real estate transactions there may be engaging in unscrupulous or illegal practices, resulting in a high rate of mortgage foreclosures. The study – based in part on data such as loan terms and property assessments drawn from a random 20 percent sample of about 2,170 foreclosure-complaint files – revealed county officials’ suspicions were warranted.

"The report finds evidence that foreclosures and judgments to foreclose in St. Clair County increased from 1996-2000 and disproportionately affected geographic areas with concentrations of minority and low-income individuals, a pattern that hampers community redevelopment efforts in areas where these borrowers reside," Dearborn noted. Further, the report’s qualitative data – based on interviews with service providers and people who experienced attempted foreclosures – suggest that "specific loans and practices in the lending process are designed to prey on minority and low-income borrowers."

African-American women with children were especially vulnerable to tactics employed by some brokers offering subprime loans. Such loans have higher-than-average interest rates but are legitimate tools for providing people access to capital even if they have poor credit histories.

"Subprime lending provides an important service to distressed communities, but is also a breeding ground for predatory lenders," Dearborn said. "No real definition of predatory lending exists, making it difficult to define and regulate the abusive practices." Because of limited regulation, "predatory lenders can engage in deception or fraud to take advantage of borrowers," particularly those with little knowledge of the homebuying process. Among the "abusive" loan terms uncovered by Dearborn and a team of graduate student assistants: excessive fees and prepayment penalties; adjustable rates; and negative amortization, where the loan’s principal balance keeps increasing. They also found evidence of fraudulent practices, such as deceptive or high-pressure sales tactics; discouraging borrowers from seeking lower-cost loans; and high loan-to-value ratios, which result in mortgage debt substantially greater than the property’s resale value.