An Iowa program that was the first of its type in the country is putting the finishing touches on a study of lending practices and predatory loans in the state, but the harder work still remains. Now, the Community Lender Partnership Initiative must use its research as a springboard to educate the public and encourage lenders to adopt more fair-lending practices.
The research was done as part of the Community Lender Partnership Initiative (CLPI), a federally funded program designed to combat predatory lending. The Iowa Finance Authority has been working with the Rural Housing Institute on the $500,000 project, which began in February 2001. (According to the project's Financial Status Report, it had spent nearly $290,000 of its funds by the end of 2001.) In addition to research, the initiative is supposed to engage in consumer education and make agreements with financial institutions to increase their lending to low- and moderate-income and minority populations.
The Rural Housing Institute focused its research efforts on subprime lending in rural areas, while the National Community Reinvestment Coalition compiled information on metropolitan areas in Iowa and for the state overall. The reports should be finalized at a CLPI meeting in mid-May.
The reports' findings aren't surprising: Following national trends, the amount of subprime lending in Iowa has increased dramatically in the past decade. The study is valuable, though, in quantifying where the subprime lending is happening the most, and which financial institutions are doing it.
Subprime loans are those given to people with spotty or poor credit, and they generally have higher interest rates and fees. Few dispute the need for or appropriateness of subprime loans; the loans have higher costs because the borrowers are at higher risk for default.
What fair-lending advocates are fighting are "predatory loans," those in which the costs are higher than they should be for the credit risk. Predatory loans are characterized by features such as high interest rates (typically more than four points above the current prime rate), pre-payment penalties, and balloon payments (when the remainder of the loan is due at once, usually within 15 years). Predatory loans also include situations in which people with good credit get loans with interest rates higher than the current average mortgage rate. Not all subprime loans are predatory, but most predatory loans take place in the subprime market.
While the studies do provide valuable information, their biggest asset could be in how their data are used. "A lot of studies just sit on the shelf," said Shelley Sheehy, director of development for the Rural Housing Institute. The CLPI wants to put its study "in a format that does more than just reiterate the data."
Sheehy said people involved in the initiative hope that the report can become part of a Web site that will give consumers information about all sorts of lending options. She envisions a site on which consumers can go to their census tract and look at lenders who've given loans in their neighborhood, and also look at financial institutions in their market to compare their lending practices.
Already, the CLPI has held two "train the trainer" sessions to increase awareness of predatory lending and how to avoid it.
But educating consumers won't do nearly as much good as making agreements with prime lenders to improve their performance in certain neighborhoods.
The crux of the reports - where they'll be most valuable in trying to work with lenders - is summarized in the National Community Reinvestment Coalition portion of the research: "Significant increases in market share by subprime and manufactured-home lenders in a particular type of loan or to a particular group of borrowers or geographical areas suggests where prime lenders should intensify their efforts to be competitive and provide alternatives to high-interest-rate products."
With the research in-hand, fair-housing advocates can work with lenders in low- and moderate-income neighborhoods where they have little presence. The challenge will be convincing financial institutions that it's in their best interests to make more reasonable loans to borrowers in those neighborhoods. (Advocates could invoke the requirements of the Community Reinvestment Act.)
The report summarizes that competition is key: "Community groups, local government agencies, and lenders should work together to ensure that certain neighborhoods or population groups do not receive a disproportionate amount of subprime lending. Vigorous competition among prime and subprime products protects working-class and minority neighborhoods from becoming prey to predatory lending."
In Davenport, for example, the market share of subprime lenders rose from 2.2 percent in 1995 to 18.9 percent in 2000. For low- and moderate-income households, though, the increase in market share was even more dramatic: from 5.0 percent in 1995 to 32.5 percent in 2000.
Also, female and black borrowers were disproportionately represented in the subprime market in 1999, according to the study.
The National Community Reinvestment Coalition study also ranks major Iowa lenders on a variety of criteria, such as percentage of loans to low- and moderate-income borrowers and percentage of loans to racial minorities. The nine highest-volume lenders were ranked in this order in 2000, going from best to worst: U.S. Bank, Bankers Trust Company, Firstar, Iowa State Bank & Trust, Hills Bancorporation, Brenton, Wells Fargo, Northwest, and First Federal Bank.
The study also notes that bank mergers make the situation less clear but also provide an opportunity. "Three banks - U.S. Bank, Firstar, and Mercantile - were included on the ranking analysis and subsequently merged," the report states. "Their performances were inconsistent. ... After the merger, community groups and local government agencies should work with the new U.S. Bank to identify those products and practices that helped each of the three lenders to perform well and to discard those practices which produced worse performance on some of the categories."
With another merger, though, the situation was less hopeful: "Two other banks - Wells Fargo and Brenton - that subsequently merged did not perform well in the ranking analyses."
The work of the Community Lender Partnership Initiative is also unique because it has brought banks to the table. The Iowa Bankers Association has reviewed the initiative's study, and representatives of three individual financial institutions have also participated.
"If we can get a consensus ... we're hoping they'll be part of implementing" recommendations and programs, Sheehy said. "They're definitely going to part of the process. ... We're glad that they're at the table."
What remains to be seen is whether that effort pays dividends. If financial institutions buy into the study, it might make it easier to forge long-term partnerships to address predatory lending. But fair-housing advocates will need to push the financial institutions and watch them to ensure they're making any improvements they agree to.
The research was done as part of the Community Lender Partnership Initiative (CLPI), a federally funded program designed to combat predatory lending. The Iowa Finance Authority has been working with the Rural Housing Institute on the $500,000 project, which began in February 2001. (According to the project's Financial Status Report, it had spent nearly $290,000 of its funds by the end of 2001.) In addition to research, the initiative is supposed to engage in consumer education and make agreements with financial institutions to increase their lending to low- and moderate-income and minority populations.
The Rural Housing Institute focused its research efforts on subprime lending in rural areas, while the National Community Reinvestment Coalition compiled information on metropolitan areas in Iowa and for the state overall. The reports should be finalized at a CLPI meeting in mid-May.
The reports' findings aren't surprising: Following national trends, the amount of subprime lending in Iowa has increased dramatically in the past decade. The study is valuable, though, in quantifying where the subprime lending is happening the most, and which financial institutions are doing it.
Subprime loans are those given to people with spotty or poor credit, and they generally have higher interest rates and fees. Few dispute the need for or appropriateness of subprime loans; the loans have higher costs because the borrowers are at higher risk for default.
What fair-lending advocates are fighting are "predatory loans," those in which the costs are higher than they should be for the credit risk. Predatory loans are characterized by features such as high interest rates (typically more than four points above the current prime rate), pre-payment penalties, and balloon payments (when the remainder of the loan is due at once, usually within 15 years). Predatory loans also include situations in which people with good credit get loans with interest rates higher than the current average mortgage rate. Not all subprime loans are predatory, but most predatory loans take place in the subprime market.
While the studies do provide valuable information, their biggest asset could be in how their data are used. "A lot of studies just sit on the shelf," said Shelley Sheehy, director of development for the Rural Housing Institute. The CLPI wants to put its study "in a format that does more than just reiterate the data."
Sheehy said people involved in the initiative hope that the report can become part of a Web site that will give consumers information about all sorts of lending options. She envisions a site on which consumers can go to their census tract and look at lenders who've given loans in their neighborhood, and also look at financial institutions in their market to compare their lending practices.
Already, the CLPI has held two "train the trainer" sessions to increase awareness of predatory lending and how to avoid it.
But educating consumers won't do nearly as much good as making agreements with prime lenders to improve their performance in certain neighborhoods.
The crux of the reports - where they'll be most valuable in trying to work with lenders - is summarized in the National Community Reinvestment Coalition portion of the research: "Significant increases in market share by subprime and manufactured-home lenders in a particular type of loan or to a particular group of borrowers or geographical areas suggests where prime lenders should intensify their efforts to be competitive and provide alternatives to high-interest-rate products."
With the research in-hand, fair-housing advocates can work with lenders in low- and moderate-income neighborhoods where they have little presence. The challenge will be convincing financial institutions that it's in their best interests to make more reasonable loans to borrowers in those neighborhoods. (Advocates could invoke the requirements of the Community Reinvestment Act.)
The report summarizes that competition is key: "Community groups, local government agencies, and lenders should work together to ensure that certain neighborhoods or population groups do not receive a disproportionate amount of subprime lending. Vigorous competition among prime and subprime products protects working-class and minority neighborhoods from becoming prey to predatory lending."
In Davenport, for example, the market share of subprime lenders rose from 2.2 percent in 1995 to 18.9 percent in 2000. For low- and moderate-income households, though, the increase in market share was even more dramatic: from 5.0 percent in 1995 to 32.5 percent in 2000.
Also, female and black borrowers were disproportionately represented in the subprime market in 1999, according to the study.
The National Community Reinvestment Coalition study also ranks major Iowa lenders on a variety of criteria, such as percentage of loans to low- and moderate-income borrowers and percentage of loans to racial minorities. The nine highest-volume lenders were ranked in this order in 2000, going from best to worst: U.S. Bank, Bankers Trust Company, Firstar, Iowa State Bank & Trust, Hills Bancorporation, Brenton, Wells Fargo, Northwest, and First Federal Bank.
The study also notes that bank mergers make the situation less clear but also provide an opportunity. "Three banks - U.S. Bank, Firstar, and Mercantile - were included on the ranking analysis and subsequently merged," the report states. "Their performances were inconsistent. ... After the merger, community groups and local government agencies should work with the new U.S. Bank to identify those products and practices that helped each of the three lenders to perform well and to discard those practices which produced worse performance on some of the categories."
With another merger, though, the situation was less hopeful: "Two other banks - Wells Fargo and Brenton - that subsequently merged did not perform well in the ranking analyses."
The work of the Community Lender Partnership Initiative is also unique because it has brought banks to the table. The Iowa Bankers Association has reviewed the initiative's study, and representatives of three individual financial institutions have also participated.
"If we can get a consensus ... we're hoping they'll be part of implementing" recommendations and programs, Sheehy said. "They're definitely going to part of the process. ... We're glad that they're at the table."
What remains to be seen is whether that effort pays dividends. If financial institutions buy into the study, it might make it easier to forge long-term partnerships to address predatory lending. But fair-housing advocates will need to push the financial institutions and watch them to ensure they're making any improvements they agree to.
