Equity-stripping in Indian country

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Predatory lending has come to Indian country, according to Home Mortgage Disclosure Act numbers. National Mortgage News reports that more than $750 million in home mortgage loans were made to Indians in year 2000 by lenders considered "abusive" at best by industry observers. Because HMDA numbers ultimately derive from census tracts in mostly metropolitan areas, it is hard to know how much of this mortgage lending was done on reservations. Any veteran of the reservations knows that abusive lending, a garden variety of predatory lending, has gone on there for years, usually in the variable interest rates on installment loans extended to Indian people by border town bankers and merchants.

A home or trailer home, however, offers a standing temptation for abusive lending to become a full-blown predatory practice. How and why that happens can be a bit of a long story. But as our ancestors knew, the long way around is sometimes the surest way home. To make sense of predatory lending, we have to begin with subprime lending.

Subprime lending derives its name from the prime rate. Prime rate is the interest rate banks charge on loans to their most creditworthy borrowers. These "blue chippers" get the best deal the bank has to offer because the bank sees them as little to no risk. The bank believes these borrowers will pay their money back, on time and at the agreed-upon interest rate. Prime borrowers typically pay only one percent of a loan's value in fees, and they pay the lowest interest rate available.

Subprime lending is for borrowers a bank considers questionably creditworthy ? they have not paid every bill on time, they have not repaid every loan on the original terms, they may have missed payments or defaulted on loans, or perhaps they are already carrying a level of debt that is dangerously high compared with their overall income. For whatever reason, these are blemishes on their credit report. To a bank, these blemishes on a credit record translate into a risk factor. This perceived risk of not getting a loan back, on time and at the agreed-upon terms, means the bank will charge these subprime borrowers a higher rate of interest than prime borrowers. The higher rate of interest is the bank's compensation for putting its money more at risk.

For several reasons, including the withdrawal of banks from low-income neighborhoods and the refinement of "computer scoring" software that quickly translates credit records into numerical assessments of risk, subprime lending has exploded in the past decade. This is especially so in the home-purchase mortgage market, where socioeconomic pressures and political developments have led lenders to broaden credit standards so as to get more and more families into homes of their own. Between 1993 and 1999, federal statistics show that subprime mortgage lending jumped from one percent of the national market to six percent. In the same period, subprime home refinancings soared from one percent to 19 percent of all home refinancings.

Home refinancing is where predatory lending enters the picture. So far we've considered subprime lending as a good thing ? not perfect, not beyond criticism, but on balance a good thing. Think of it this way: if your credit record is pretty beat up, subprime lending is the best way for you to get a loan. You will pay more for money loaned you than other borrowers, but these extra costs will be related in some rational way (whether you agree with it or not is another matter) to the lender's assessment of risk.

Subprime lending becomes predatory lending when a subprime mortgage borrower has established equity in a home. Homeowner equity, the monetary value a homeowner has built up in mortgaged property through loan payments, is almost always the main attraction to predatory lenders. The goal of predatory lenders is to strip the equity from the homeowner and secure it for themselves, either through heavy interest and unnecessary fees, or ultimately through foreclosure. The hallmark of predatory lending is that the expense to the borrower is far in excess of any realistic assessment of risk ? predatory lenders are not interested in compensating themselves for risk. They are interested in equity-stripping.

Home equity is the main value a subprime mortgage borrower has to offer. Think about it: a subprime mortgage borrower probably doesn't have a lot of disposable income, or they wouldn't be subprime borrowers in the first place. Likewise, they may not have a lot of options for getting a loan because of their credit history.

Predatory lenders take advantage of this situation. They see that the home is the primary asset of a subprime home mortgage borrower who is making loan payments ? the payments have built up equity, a share of ownership, in the home. They make loans readily available to such borrowers, who would face a humiliating line of questions from traditional lenders ? lenders they may never have trusted much anyway. Many tricks of this unsavory trade are devoted to getting the subprime, financially unsophisticated borrower to sign on the dotted line for a higher interest rate than was agreed to, or to fees that were not originally discussed, or to sudden "balloon" payments of the full principal after a period of up-front installment payments, or to expensive penalties for early repayment, or to unnecessary contractual home repairs that the homeowner didn't have in mind before getting talked into them. Even if everything goes smoothly, the predatory lender may be back shortly, offering to "flip" the loan ? that is, to provide still more money against homeowner equity, but with a new round of origination fees attached.

All of these tricks have two purposes: to leverage borrowers into a higher-cost loan than they can afford to pay off, and to package the loan into the mortgage that they can then foreclose on when payments fall behind, thus obtaining title to the property. That is a predatory loan, and you will know it by one simple test: will your mortgage loan payments be a great deal higher, according to all the terms of the written contract, at any time after the loan papers are signed than before? If so, don't sign a thing.

Just as mortgage financing is becoming more frequent among Indian families, so have predatory lenders descended on our people. Information on this swarm of locusts can be found by visiting KnowledgePlex, the web site for community housing developers maintained by the Fannie Mae Foundation, in partnership with other national and regional organizations, at www.knowledgeplex.org under Hot Topics or by joining the National Community Reinvestment Coalition (202-628-8866) and participating in its listserve, where an extensive archive on predatory lending is available. (For a rundown of predatory lending scenarios, see especially the New York Times' March 24 edition, "A Wider Loan Pool Draws More Sharks" by Dennis Hevesi; and Indian Country Today for Dec. 19, 2001, "Predatory lenders target Indians" by Mark Fogarty).

But the best protection against predatory lending ? and for that matter the best way out of subprime borrowing ? is enhanced financial literacy. The curriculum Building Native Communities: Financial Skills for Families, developed by the Fannie Mae Foundation and First Nations Development Institute, is a good start on this work of years. The curriculum can be obtained by calling (800) 659-7557. For training information, contact Malinda M. Amiotte at First Nations Oweesta Corporation, (605) 462-6118.

Rebecca Adamson is president of First Nations Development Institute and a columnist for Indian Country Today.