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Spencer for Hire :: Are We The Prey? Part 3: Purchase

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Once again we’re back with the third part of Predatory Lending, Sub-prime loans and racial disparity among borrowers. Before we begin, I need to address a few areas you may not be aware of, but are crucial to our existence as homeowners. I covered the Home Mortgage Disclosure Act (HMDA) implemented by Regulation C a few weeks ago. Here are three other very important terms and regulations I will touch on and encourage you to research. Coincidently, I plan to cover these areas more in depth after this series.

Equal Credit Opportunity Act (ECOA) implemented by Regulation B.
The Equal Credit Opportunity Act, and the Federal Reserve Board’s implementing Regulation B, prohibit discrimination in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age (provided that the applicant has the capacity to enter into a binding contract), receipt of income from a public assistance program or the good faith exercise of any right under the Consumer Credit Protection Act.

Real Estate Settlement Procedures Act (RESPA) implemented by Regulation X.

The Real Estate Settlement Procedures Act (RESPA) provides borrowers with pertinent and timely disclosures regarding the nature and costs of the real estate settlement process. RESPA provisions also protect borrowers by placing limitations on the use of escrow accounts and requiring specific disclosures of applicable charges and disbursement dates.

Truth In Lending (TILA) implemented by Regulation Z.

The Truth in Lending Act (TILA), Title I of the Consumer Credit Protection Act, is aimed at promoting the informed use of consumer credit by requiring disclosures about its terms and costs. In general, this regulation applies to each individual or business that offers or extends credit when the credit is offered or extended to consumers; the credit is subject to a finance charge or is payable by a written agreement in more than four installments; the credit is primarily for personal, family or household purposes; and the loan balance equals or exceeds $25,000.00 or is secured by an interest in real property or a dwelling.

It’s time for the numbers.

In a local metropolitan area, sub-prime lenders accounted for 25.9% of all the conventional purchase loans made to African-American homebuyers and 20.8% of all conventional purchase loans made to Latino homebuyers, but just 13.1% of the conventional purchase loans made to white homeowners. In comparative terms, this means that African-Americans were 2 times more likely than whites to receive a sub-prime loan when buying a house with a conventional loan, and Latinos were 1.6 times more likely than whites to receive a sub-prime loan.

The racial disparity is still present when comparing minority homebuyers with white homebuyers of the same incomes, even among higher income borrowers. 23.1% of the conventional purchase loans, received by upper-income African-Americans were from subprime lenders, as were 21.5% of the conventional purchase loans received by upper-income Latinos. In contrast, only 11.5% of the conventional purchase loans received by upper-income whites from subprime lenders. This means that upper-income African-Americans were 2 times more likely than upper-income whites to receive a subprime loan when buying a house with a conventional loan, and upper-income Latinos were 1.9 times more likely than upper-income whites to receive a subprime loan.

In addition, upper-income African-Americans and Latinos were more likely to receive a subprime loan than low-income whites when buying a house. Minorities received a much larger share of subprime purchase loans than of prime purchase loans. In 1999, African-Americans received 2.9% of all the subprime purchase loans made in the metropolitan area, a 2.5 times larger share than the 1.2% they received of prime purchase loans. Latinos received 17.5% of the subprime conventional purchase loans, almost double their 9.4% share of prime loans. In contrast, whites received 49.0% of the subprime purchase loans and 45.7% of the prime loans.

I realize that a lot of this information is overwhelming and the numbers look staggering but things are getting better for us. We are better-informed and more astute investors when it comes to our fiduciary life. These articles are to tell you what is really going on. I plan to do a series to tell you where we are headed. The future looks bright but for now are we the prey?

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