University of Wisconsin - Extension

Rural home owners are more likely to be offered sub prime mortgages loans than are urban Wisconsin home owners. This is among the conclusions of a recent study using information on mortgage lending available under the Home Mortgage Disclosure Act (HMDA), says a University of Wisconsin-Extension housing specialist.

"HMDA requires larger banks to make public certain data about the home mortgage loans they make," says John Merrill. "The analysis was for activity in 1999, the most recent data available. The study was conducted by Fairness in Rural Lending (FIRL), a new non-profit organization with a mission to eliminate prejudice and discrimination in credit and financial services in the Midwest."

Merrill says sub prime loans are those made by lenders who target borrowers who are judged to be higher risk. In some cases, sub prime lending can involve not only higher interest rates but ''predatory practices'' as well.

These can result in the borrower paying excessive fees and being subject to loan terms that are so expensive that the borrower faces foreclosure on the home.

The analysis shows that 12.3% of home purchase loans in rural areas were made by lenders HUD classifies as sub prime. This compares with 5.2% in urban areas.

The difference for home refinancing loans was slightly smaller. Here, 12.5% of the loans in rural counties were made by sub prime lenders while only 9.4% of the refinancing loans in urban areas were made by sub prime lenders.

These state averages mask markedly higher percentages in some counties, Merrill says. In eight rural Wisconsin counties, the percentage of sub prime refinancing loans exceeds 20%. These counties include Juneau, Jackson, Florence, Adams, Grant, Monroe, Crawford, and Marquette.

No urban counties had such a high percentage of sub prime loans. In most cases the percentages are much higher when only loans to low and moderate income borrowers are considered .

Merrill says the study may overstate urban-rural differences, since it is likely that more rural banks are small enough that their loan data was not available as part of the analysis.

If you are considering refinancing your home or if you are looking for a new mortgage, Merrill suggests checking out these details to avoid being the victim of a predatory lender:

-- Check the closing costs carefully. When you obtain a mortgage, there are usually some front end costs. However, predatory lenders may charge between 10 and 25% of the amount borrowed up front. These costs must be listed on the Truth-In-Lending Disclosure which every lender is required to provide within 3 business days of your application. Read it carefully and ask about costs you don't understand. Some lenders include the closing costs in the amount borrowed so you are less likely to notice them and will be paying interest on these costs over the life of the loan.

--What is the term of the loan? Some lenders provide short term loans and then require the payment of additional fees when the loan must be renewed. Sometimes these short term loans have attractively low payments. Unfortunately, the reason for the low payments is that the payments only cover interest. Check to see if there is a lump sum payment or balloon payment required at the end of the term.

--Is the interest rate fixed for the life of the loan or is it just for a few months? Many mortgages now have rates that change from time to time.

They are often referred to as ARM's (adjustable rate mortgages). Just because a loan is an ARM doesn't make it a predatory practice. However, some lenders use "teaser" rates that increase sharply once the loan is in place that are not legitimate ARMs. Interest rate information is required to be in the Truth_In_Lending Disclosure.

--Are you being encouraged to borrow more than you need or to refinance soon after you close the loan? The more you borrow and the more often you borrow, the more money the lender makes. Borrow only what you need and refinance only for important purposes like home repairs or medical bills or to substantially reduce interest charges.

--Is a home improvement contractor offering to arrange financing for you as part of a door to door marketing campaign? The financing being offered may be very expensive and may be to the contractor instead of you. As soon as you sign the loan, the contractor is paid whether or not the work is done.

-- Is the lender requiring you to purchase credit life insurance to get the loan? These insurance policies pay off the mortgage if you should die. These polices often have very high premiums and predatory lenders require that the premium for the life of the mortgage be paid when you close the loan. If you sell the house or pay off the loan early, the insurance will then be worthless since it is tied to the loan.

-- Does the lender answer any questions directly and completely? If the lender seems to avoid answering your questions or showing you the information you request, it is a good idea to look elsewhere for your loan.