FAIR FINANCE RESEARCH AND EMERGING CRA COALITION ISSUES

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FAIR FINANCE RESEARCH AND EMERGING CRA
COALITION ISSUES
WOODSTOCK INSTITUTE CONVENOR OF THE CRA COALITION

• Housing Action Illinois
• Presentation
• September 7, 2006

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What is Fair Finance and How Does Finance Affect
Communities?

Woodstock Institute
CRA Coalition

Applied Research Policy Development Product
Innovation Technical Assistance
A Project of Woodstock Institute Bank
Meetings Organizing/Information
Events Negotiating CRA Agreements
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What is Fair Finance and How Does Finance Affect
Communities?

Fair Price
Fair Collateral

Fair Chance to Use Debt to Build Assets
Fair Terms
Fair Access
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What is Fair Finance and How Does Finance Affect
Communities?

Community Effects
Individual Effects

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Analyzing Bank Branch Distribution Across a
Metropolitan Region

Change in Chicago Six-County Areas Full Service
Bank Offices by Income Level of Zip Code
2000-2004
Increase in Bank Branches Report

Bank Branches in 2000 Bank Branches in 2004
Source Reinvestment Alert 27 - Increase in Bank
Branches Shortchanges Lower-Income and Minority
Communities . 2004 Woodstock Institute
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Protecting Borrowers from Predatory Payday Loans

The Monsignor John Egan Campaign for Payday Loan
Reform Makes Payday Loans Safer

• Loan fee limited to 15.50 per 100
• Principal indexed to income
• 7 day recovery period
• Fee-free repayment plan
• Limit of two loans not to exceed 45 days

Source Payday Lending Under the Illinois Payday
Loan Reform Act. 2005 Woodstock Institute
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Payday Lenders Put Costly New Spin on Old Product

Touting look alike loans to consumers to dodge
state consumer protections
Source Comparing the Cost of Credit Before and
After the Monsignor John Egan Payday Loan Reform
Act. 2006 Woodstock Institute
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Refund Anticipation Loan Rates Negatively Impact
EITC
New report details total cost of RALs to Illinois
communities
Source Refund Anticipation Loan Usage Rates
Negatively Impact the Asset Building Potential of
the Earned Income Tax Credit. 2006 Woodstock
Institute
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Misleading Credit Card Terms Have a Deceptive
Effect

Banking on Bounced Checks

• 25 to 35 per overdraft plus daily fee
• Overdraft privilege included in balance
• Multiple fees for multiple bounced checks
• Cost for a 200 14 day loan
• Average Fee 29
• Average total fees for 5 debits 186
• Effective APR 2,424 percent

Source Banking on Bounced Checks Federal
Proposal on Bounce Protection Still Exposes
Consumers to Hidden Fees. 2004 Woodstock
Institute
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Misleading Credit Card Terms Have a Deceptive
Effect

Blindfolded into Debt

• 75 percent of Americans qualify
• Misleading terms and fees
• Universal Default
• Only the rate range is advertised
• Convenience checks have different rates

Source Blindfolded into Debt A Comparison of
Credit Card Costs and Conditions of Banks and
Credit Unions. 2005 Woodstock Institute
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Subprime Lenders Concentrated in Minority
Communities

Two Steps Back
Prime Lender Subprime or High Cost Lender
Source Two Steps Back The Dual Mortgage
Market, Predatory Lending, and the Undoing of
Community Development. 1999 Woodstock Institute
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Subprime or High Cost Loans Predict
Foreclosures in Study Area

Expected Foreclosures per 100 loans
Risky Business
Prime Loan Subprime or High Cost Loan
Source Risky Business An Economic Analysis of
the Relationship Between Subprime Lending and
Neighborhood Foreclosures. 2004 Woodstock
Institute
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Neighborhood Foreclosures Impact Property Values

There Goes the Neighborhood
3,750 foreclosures in 1997 and 1998 are estimated
to reduce nearby property values by more than
598 million average cumulative single-family
property value effect of 159,000 per foreclosure
1.44 percent decline in property values for
each foreclosure within one-eighth of a mile of a
house in a low- or moderate-income census tract.
Given the 111,002 for properties in low- and
moderate-income tracts, this amounts to a loss of
nearly 1,600 per foreclosure for the average
property
Source There Goes the Neighborhood The Effect
of Single-Family Mortgage Foreclosures on
Property Values. 2005 Woodstock Institute
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What is Fair Finance and How Does Finance Affect
Communities?

Fair Price
Fair Collateral

Fair Chance to Use Debt to Build Assets
Fair Terms
Fair Access
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WORKING WITH HOME MORTGAGE DISCLOSURE ACT DATA
Housing Action Illinois September 7, 2006
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How does Woodstock Institute and CRA Coalition
use HMDA?

• Chicago-based non-profit research and policy
  organization working locally and nationally to
  promote economic development in lower-income and
  minority communities
• Work with financial institutions, policy makers,
  and community organizations to promote access to
  affordable mortgage products, small business
  loans, and other financial services in
  underserved communities
• Work with HMDA data to
• Monitor agreements and analyze specific lenders
• Identify gaps in access to mortgage credit
• Enhance understanding of prime and subprime
  mortgage lending markets
• Analyze trends in the Chicago housing market

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Background on the Home Mortgage Disclosure Act

• Home Mortgage Disclosure Act (HMDA) was enacted
  by Congress in 1975
• Requires most mortgage lenders to report and make
  public data on their mortgage lending activity
• Intent of data collection
• Insure that mortgage lenders are adequately
  serving housing needs of all communities
• Aid in enforcing fair lending laws
• Provide information on needs and market
  opportunities for public and private sectors
• Periodic updates to reporting requirements have
  included
• Requiring lenders to report the disposition of
  applications
• Borrower characteristics
• Increase in number of lenders covered
• Loan pricing information

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What Data Are Reported Pre 2004

• Application
• Type of Loan Conventional, FHA, and VA
• Purpose of Loan Home Purchase, Home
  Improvement, Refinance
• Action Taken Originated, Approved not accepted,
  Denied, Withdrawn, Incomplete, Purchased
• Borrower
• Race/Ethnicity
• Gender
• Income

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What Data Are Reported Cont.

• Property
• Census Tract
• Owner-occupancy
• Other Data
• Purchaser Fannie Mae, Freddie Mac, Commercial
  Bank, etc.
• Denial Reason (optional) Debt-to-income, credit
  history, employment history, etc.

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2004 Changes to HMDA Regulation

• Evolution of mortgage lending necessitates
  collection of new data
• Growth of subprime lending industry shifts fair
  lending concerns from access to credit to access
  to fairly priced credit
• Gain more complete understanding of high cost
  mortgage market
• Modernize definitions
• In 2002, Federal Reserve Board revises HMDA.
• Most changes go into effect in 2004

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New HMDA Data Collected

• Rate spread Difference between APR and rate for
  treasury securities of comparable maturity
• Data only reported on originated loans
• First liens with rate spread greater than 3
  points
• Junior liens with rate spread greater than 5
  points
• Lien Status First lien, junior lien, unsecured
• Property Type single-family, manufactured,
  multi-family
• HOEPA Status
• Request for Preapproval

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Implications of Inappropriate Pricing

• 100,000, 30 yr fixed rate mortgage
• 10 Interest Rate
• Monthly payments 877.75
• Total interest paid over life of loan 215,925
• 7 Interest Rate
• Monthly payments 665.30
• Total interest paid over life of loan 139,508
• Higher rate borrower could pay
• 212.45 per month extra
• Additional 76,417 in interest over life of loan
• Example considers change in interest rate, not
  other fees included in APR calculation

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Other Changes to HMDA in 2004

• Race and Ethnicity now reported separately
• Modified Definitions
• Home Improvement Loans Any dwelling secured
  loan for home improvement and unsecured loans
  that lender classifies as home improvement
• Refinance Loans New loan satisfies and replaces
  existing loan where both existing loan and new
  loan are secured by lien on dwelling
• Changes to MSA definitions
• Many large MSAs now broken into metropolitan
  divisions (MDs)

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Working With 2004 HMDA Data

• Examining Access to Credit
• Monitoring Specific Lenders
• Understanding Subprime Market
• Analyzing Housing Market Activity

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Are Minority Neighborhoods More Likely to
Receive High Cost Loans?

• In 2004, 26 percent of the St. Louis areas
  subprime loans were in neighborhoods that were
  over 50 percent minority
• Roughly 6 percent of the areas prime loans were
  in these communities
• Over 41 percent of loans in middle-income
  neighborhoods over 50 percent minority were
  subprime
• On average, less than 19 percent of loans to
  middle-income areas were subprime

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2004 Distribution of High Cost Lending in the
St. Louis Area
Share of Conventional Single-Family Loans that
are High Cost, 2004
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Are Minority Neighborhoods More Likely to
Receive High Cost Loans?

• In the St. Louis area, analysis of 2004
  conventional single-family loan data shows
• African Americans and Hispanics much more likely
  to receive high cost loans than white borrowers
• Highest income borrowers have greatest disparity

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Federal Reserve Study

• Pricing gaps between white and minority borrowers
  reduced after controlling for relative income,
  property location, and lender characteristics
• Controlling for lender accounts for much of the
  difference in high cost lending across groups
• Loans originated in an institutions CRA
  assessment area less is likely to be high rate
• Origination channel
• Findings continue to raise questions about prime
  lenders serving minority borrowers and
  communities

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Who Makes Subprime Loans?

• Many large lenders have multiple lending
  affiliates who may specialize in either prime and
  subprime lending
• Often very little overlap in products offered
• Borrower with good credit who enters through a
  subprime channel may have difficulty getting
  prime loan

Chicago Subprime Lending by Affiliate for Large
Lender, 2004
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Monitoring Lenders Market Share Ratio

• Market Share Ratio (MSR) Compares lenders
  share of two markets
• Low- and Moderate-Income MS / Middle- and
  Upper-Income MS
• African American MS / White MS
• Controls for differences in market size
• MSR near 1.0 indicates equal presence in both
  markets
• MSR well above 1.0 indicates targeting a
  particular market
• MSR well below 1.0 indicates exclusion of one
  market

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Market Share Ratio Example
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Comparing Lending to African American and White
Borrowers

• Market Share Ratio 3.86 / 4.8 .80
• Lenders presence in African American home
  purchase market is 80 that of its presence in
  white market
• Indicates lender is not bad, but could do better

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2004 Community Lending Fact Book

• Largest Illinois Metro Areas outside of Chicago
• Tables Included
• Housing Characteristics
• High Cost Lending
• General Lending Trends
• Income Levels of Home Buyers
• Top Lenders
• Maps
• Data CD

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2004 Illinois Community Lending Fact Book Sample
Pages
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Resources

• Federal Financial Institutions Examination
  Council www.ffiec.gov
• FDIC www.FDIC.gov
• Other Bank Regualtors
• HUD
• Woodstock Institute www.woodstockinst.org
• National Community Reinvestment Coalition
  www.ncrc.org