By Matthew Lee

High interest rate mortgage lending is proliferating across the United States, particularly in communities of color. While this “subprime” lending industry has existed for more than a decade, in recent years major Wall Street investment banks have supported these lenders by creating a market for securities based on the loans they make. As these loans are pooled and sold, the subprime lenders are re-infused with cash and press forward, most profitably into communities with a lack of banks and other normal interest rate lenders. One result is that people of color are paying higher interest rates for mortgage and home equity loans, higher rates than could be justified by their credit histories.  This article will explore strategies, beyond individual litigation or complaints to the Department of Housing and Urban Development, by which community-based organizations and fair housing enforcement groups can challenge and put a spotlight on these troubling trends.

The increasing availability of subprime credit should be clear to any one with a television set or a mailbox. Late-night TV is full of advertisements offering to solve the viewer's financial problems, through the supposed panacea of home equity or debt consolidation loans. “When your bank says no -- Champion says yes” is from Champion Mortgage, bought in 1997 by KeyCorp of Cleveland, Ohio. Ex-Baltimore Orioles pitcher Jim Palmer now pitches the Money Store (bought by First Union in 1998); smaller subprime lenders use lesser-known players, like Bud Harrelson, the light-hitting shortstop of the New York Mets in the 1970s.

Mailboxes in moderate income neighborhoods are full of pitches from subprime lenders. As the subprime industry has gotten more sophisticated, direct marketing has become focused on communities whose residents have already shown a taste or need for high interest rate loans. The logistics of this target marketing was until recently mysterious. Now available on the Internet, however, are publications like “Where Subprime Customers Live,” by New Jersey-based SMR Research.

The promotional material for this marketing tool states: “The data by city and county are crucially important... because subprime customers are not equally dispersed around the country. Consider: Mortgage and home equity originations are almost identical in Madison, Wisc., and Charleston, S.C. In 1997, 16,450 loans were originated in Madison and 16,022 in Charleston. But in Madison, only 13.5% of loan applicants were subprime, while in Charleston, 57.9% were subprime! You don’t have to be a rocket scientist to know that your subprime advertising dollar -- or loan office -- will be more productive in Charleston than in Madison.”

This promotion pitch, directed at the subprime or “wanna-be” subprime lenders themselves, raises troubling questions. First, the racial demographics of Charleston and Madison seem to track the percentages of allegedly “subprime” customers. According to the 1990 census, in the city of Madison, 4.2% of the residents are African-Americans. In the city of Charleston, 41.6% of the residents are African-Americans. See http://www.census.gov/cgi-bin/gazetteer.   When SMR says that “in Charleston, 57.9% were subprime,” does this mean that over half of applicants objectively qualified only for subprime loans under a credit scoring system? Or simply that this percentage went to subprime lenders like The Associates, The Money Store, and Commercial Credit? Even in states that are routinely targeted by subprime lenders, marketing and lending is concentrated in minority census tracts.

What can community, consumer, fair housing and civil rights activists do to combat the targeting of protected classes for higher than normal interest rate credit?  While lawsuits and complaints to HUD have so far proved less than fruitul, there is a strategy, particularly for grassroots community and consumers groups: documenting and raising subprime lending issues to bank regulatory agencies on bank mergers involving banks with subprime affiliates.  A longer-term strategy is examining the liability, under the Fair Housing Act, of the high-falutin investment banks which pool, package and sell these subprime loans as securities, act as custodians of the loan documents, and foreclose on delinquent loans on behalf of investors.

As subprime lending has become more lucrative, numerous banks have bought subprime lenders. In 1997, KeyCorp bought Champion Mortgage. In 1998, First Union bought the Money Store. In 1999, Citigroup acquire IMC Mortgage, and is seeking to acquire Source One Mortgage. Other banks have started their own subprime lending operations. Chase Manhattan has, as part of its mortgage company, the subprime lender Chase Manhattan Funding. Bank One owns Bank One Financial Services; Charter One Bank owns Equity One; BankAmerica owns NationsCredit and EquiCredit (which NationsBank acquire along with Barnett Bank in 1998). The list goes on.

One way to initially evaluate the fairness of these conglomerates, which offer both normal interest rate and subprime loans, is to compare the penetration of minority communities by a conglomerate's normal-interest-rate and high-interest-rate subsidiaries. For example, using publicly-available Home Mortgage Disclosure Act (HMDA) data (available from the Federal Financial Institutions Examination Council, on the Web at http://www.ffiec.gov), one can compare, in the same geographies, the lending of Bank One Mortgage Corp, a normal interest rate lender, and of Bank One Financial Services. Inner City Press' ("ICP") review of 1996 and 1997 data revealed that Bank One Mortgage Corp. underperforms the market in terms of lending to minorities, while the subprime lender Bank One Financial Services has much high market shares to minorities than to whites. ICP’s comments have resulted so far in a Federal Reserve Board fair lending inquiry into Bank One Mortgage Company; ICP is continuing to raise the issue.

In 1998, when Charter One applied to the Office of Thrift Supervision to acquire a bank in New York State, ICP documented and raised similar issues about Charter One and its subprime affiliate, Equity One. Charter One initially submitted a written response, and then asked to negotiate a resolution with ICP. The resulting agreement provides that Equity One will refer up to Charter One, for normal interest rate loans, all those entitled to them, and that Charter One Mortgage Co. will make an additional $1 billion in normal interest rate mortgage loans over the next three years. See, e.g., Charter One's press release. There are numerous other conglomerates to be analyzed and commented on.

The longer-term strategy is to look to the top of the subprime lending industry: the investment banks which pool, securitize, and foreclose on subprime loans by the smaller, retail subprime lenders. Unbeknownst to many, such Wall Street titans as Merrill Lynch, Lehman Brothers, Bankers Trust are all involved in this business. A difficulty is that a number of these players are not insured financial institutions (that is, banks) at all. Bankers Trust, however, owned Bankers Trust Company of New York, a major wholesale bank regulated by the Federal Reserve and the New York Banking Department.

In recent months, ICP and others have been documenting Bankers Trust’s ties to questionable subprime lenders, chief among them Delta Funding, based on Long Island. Delta Funding was subject to a New York Banking Department enforcement action in 1995, and is currently subject to a number of class action lawsuits for violations of the Real Estate Settlement Procedures Act, the Home Ownership and Equity Protection Act and other consumer protection laws. Bankers Trust during this time frame has acted as trustee and custodian for virtually all of Delta’s mortgage backed securities, and has foreclosed on hundreds of loans, all over the United States.

ICP has raised these issues to the Federal Reserve and NYSBD, in opposition to Deutsche Bank’s applications to acquire Bankers Trust. Arcane issues have arisen, such as whether the Fair Housing Act (which, via its regulation, applies to the “pooling” of mortgages) covers Bankers Trust’s activities with subprime lenders. The Federal Reserve has been inquiring into this, in a half dozen letters to the banks, to be answered before the Fed rules on the application. In the interest of space (and so as not to draw this publication into any possible SLAPP [Strategic Litigation Against Public Participation] efforts by Delta or Deutsche Bank, which aims, by acquire Bankers Trust, to become the largest bank in the world), more detailed analysis of these issues can be found at the Inner City Press web site. Regardless of how the Federal Reserve and NYSBD end up ruling on Deutsche Bank’s application to acquire Bankers Trust, I believe that raising these issues to the regulators, of the responsibilities of investment banks involved in subprime lender, is productive, and, long term, is one of the best ways to clean up the industry, and to promote fair lending in our communities.

With reactions, for more information, or to suggest alternate strategies, please contact the Inner City Public Interest Law Center, c/o Inner City Press/Community on the Move. The web site contains links to other fair lending and CRA resources and organizations.

The author

Matthew Lee is the founder of Inner City Press/Community on the Move, a  non-profit community advocacy organization headquartered in the South Bronx of New York City. Since 1987, ICP has worked on housing and Community Reinvestment Act issues in New York and beyond. In 1998, ICP spun off the Inner City Public Interest Law Center, with Mr. Lee as its general counsel.  The Law Center works not only on Community Reinvestment Act and fair lending issues, but on related environmental and telecommunications redlining issues.

Mr. Lee can be reached at ICP’s and the Center’s office, at (718) 716-3540, or via the Internet at http://www.innercitypress.org