Middle Class Borrowers Fall Prey to Predatory Lending
According to the San Diego Business Journal, a recent study completed for the San Diego City-County Reinvestment Task Force found that nearly three out of four predatory loans were made to borrowers with middle and upper incomes. The study also referred to the rising use of interest-only mortgages, which may be predatory if they include high fees and points, balloon payments, and late or pre-payment penalties.
A joint city-county program funds the task force, which monitors banks on lending activities and compliance with federal laws regarding community reinvestment. The report used lending data supplied by mortgage lenders as required by the 2004 Home Mortgage Disclosure Act. The report, compiled by Bouton & Associates, a San Diego bank consulting firm, found that 14 percent of the loans approved in 2004, were considered predatory.
According to the report, while 27 percent of the predatory loans were made to low- and moderate-income borrowers, 73 percent of the borrowers came from either middle-income or upper- income census tracts. Middle income was defined as 80 percent to 120 percent of the national median family income of $62,400 by the federal government. Upper income was 120 percent or more of the median family income.
According to Steve Bouton, the report's author, the report does not define predatory lending, but refers to loans that have predatory characteristics such as excessive interest rates, high points and fees, balloon payments and disproportionate penalties for prepayment.
The report also referred to interest only loans as predatory, but some lenders have questioned the report's findings regarding this specific issue, citing good underwriting as the reason for such loans as other than predatory.
According to Bouton, the fact that most predatory loans were made to people from higher income levels was surprising, and stated that it is not just an issue for low to moderate-income borrowers anymore, but a problem for middle America in general.