After intensive study of seven Iowa counties, and a mortgage data review of the entire state, RHI has concluded that subprime lending has increased substantially in urban and rural Iowa over the past six years. Iowa, like much of the upper Midwest, is home to many strong community banks that fulfill many of the credit needs of their communities. However, subprime lenders are making inroads in our communities. This raises caution flags as we seek to increase home ownership among all Iowans. Subprime loans have higher interest rates and usually higher fees. Borrowers with poor credit records usually can not obtain loans at standard rates and find that subprime loans are their only option.  Unfortunately some types of consumers with good credit and some equity in their homes are targeted for subprime refinance loans. While some subprime loans are in the consumer’s interest, others contain such high rates and fees that they end up harming the borrowers and can rightfully be termed “predatory loans” because they end up putting a borrower’s home in jeopardy.

RHI’s study of Iowa loans confirms some findings that are common to other studies on this issue. Loans by subprime lenders are most commonly entered into by low and moderate income and minority borrowers. African-American, Native American and Hispanic borrowers in particular appear to be the targets of some subprime lenders. Refinance loans are more likely to be made by subprime lenders than home purchase loans. Certain groups of borrowers, such as people buying mobile home are also very likely to receive loans from subprime lenders.

On the other hand, RHI’s study contains the good news that subprime lending has not infiltrated the most rural counties as deeply as feared. This study illustrates that the currently available data often exaggerates the presence of subprime lenders in non-metropolitan counties. There is a significant amount of lending by small prime lenders that do not report their loans to the Federal regulators as part of the Home Mortgage Disclosure Act (HMDA). Their data, therefore, is not reflected in studies based solely on HMDA. RHI believes this is good news because it means that rural Iowa’s home ownership solutions are not dependent just on the large national lenders, but can also be improved by partnerships between affordable housing groups and local community lenders.

During the last decade, the percentage of Americans who own their home has been gradually increasing. Because home ownership provides low-and-moderate-income individuals with a base for developing wealth and increases their civic attachment to their communities, RHI believes that continuing this expansion of home ownership should be an important component of the economic development goals for Iowa communities. Freddie Mac and Fannie Mae, the housing secondary market giants, have estimated that between 30% and 50% of borrowers of subprime loans actually have credit records that should allow them to obtain prime loans. In these cases, home equity that could be the basis for economic development in Iowa communities is being drained away by lenders whose corporate offices are often far away. In order to help Iowa homebuyers get the loan products that are best for them, RHI proposes a three-pronged approach for future work on this issue.
 

• 1. Expanded financial education and homebuyers and home ownership counseling efforts in Iowa. RHI believes that Iowa’s financial institutions, a wide range of non-profit organizations and foundations, and state and local government have a role to play in funding and overseeing additional efforts to prevent the financial abuse of our citizens. We believe that general financial education should be available for all elementary, high school and college students and for those populations, which are targeted by subprime, car title and payday lenders. In addition RHI proposes a coordinated home buyers and homeowners counseling effort that would strongly encourage and provide incentives for every borrower to obtain home buyer counseling before entering into loans which have high interest rates or fees or other characteristics of “predatory loans.” RHI also believes that home ownership counseling and support efforts for new homeowners who are particularly vulnerable to the marketing of predatory refinance lenders should also be increased.

• 2. Improved data reporting and collection procedures to improve public monitoring and regulation of high cost loans.  RHI proposes a series of recommendations for state and local officials to develop policies, regulations and laws that help better protect our citizens from abusive lending. While there is a wealth of scattered data available, particularly for the metropolitan areas, most information regarding rural mortgage lending trends is not easily accessible or is difficult to collect. RHI proposes stricter monitoring and regulation to help Iowa identify and correct the financing problems that threaten the continued expansion of home ownership in Iowa.

• 3.  Improved partnerships between community non-profit groups involved in affordable housing and socially responsible lenders.  Most current data indicates that consumers enter into abusive loan situations because of the high pressure marketing of predatory lenders, because they don’t believe that traditional lenders will be willing to loan to them, and because of a lack of financial education. Traditional lenders, with community ties, have a vested interest in developing the wealth of their customer base and community groups are uniquely suited to provide some of the services that can make that possible. RHI believes that partnerships formed around financial education, getting the “unbanked” to open bank accounts, home buyer and home ownership counseling, community development efforts and the development of high-quality affordable housing can create “win-win” situations for all parties. We also believe that small community bankers and community groups working together can also improve small bank utilization of the secondary market, use of government-insured loans, and development of other mortgage products that will compete with high cost loans. 

We can only get to our goals if we know where we are. This study looks at the current status of mortgage lending in Iowa, particularly in the rural parts of the state. While most Iowans have access to reasonably priced mortgage products, some members of our communities find themselves with little choice in mortgage products. RHI wants every Iowan with a job, who wants to own a home, to be able to develop a mutually beneficial relationship with a reputable lender, who will work with them to help make their home-ownership dream a reality at a price they can truly afford.