Rural borrowers fall prey to unscrupulous lenders, new research findsMortgagePress.comPredatory mortgage lending, rural America, sub-prime mortgage loans
New research by the Center for Responsible
Lending (CRL) finds that predatory mortgage lending is a
significant problem in rural America that hinders borrowers from
taking advantage of improving credit or interest rate declines.
Perceived as an urban problem by many, certain abusive lending
practices are more prevalent in rural areas than in cities. Rural
borrowers are 20 percent more likely than their urban counterparts
to receive a prepayment penalty that remains effective for five
years or more on sub-prime mortgage loans.
Prepayment penalties of five years or longer are of particular
note because they have often been cited as inflicting the greatest
harm on borrowers. Prepayment penalties in sub-prime loans create a
financial trap that may cost four to seven percent of the loan
balance when a refinance is attempted, and provide an incentive for
mortgage broker kickbacks (yield spread premiums). Prepayment
penalties are common in up to 80 percent of sub-prime loans, while
less than two percent of prime loans contain them. This disparity
is especially troubling given a homeowners' best interest the
ability to refinance from a sub-prime loan into a less costly prime
loan as their credit improves.
The CRL research shows that a majority of rural borrowers who
received sub-prime loans in 2002nearly 63 percenthad a prepayment
penalty with a term of two years or longer, and the disparity
appears to be widening over time. In 2000, rural homeowners with
sub-prime loans were eight percent more likely than similar urban
borrowers to receive a prepayment penalty with a term of at least
five years. By 2002, the difference jumped to 20 percent.
Policymakers have recognized the negative effects of prepayment
penalties, with more than 35 states regulating their use in home
loans. Although most of the poorest counties in the United States
are rural, 75 percent of non-metro residents are homeowners as
compared to 67 percent of those who live in central cities. If
abusive prepayment penalties continue unchecked, rural families
risk severe financial losses or worse, foreclosure.
For more information, visit www.responsiblelending.org.