Loans to minorities rise, but at a price

That claim renewed attention to fair lending laws and the Community Reinvestment Act (CRA) of 1977. The federal government backed up its campaign for fairness by levying tens of millions of dollars in fines against discriminatory lenders.

Under pressure to reach out to underserved neighborhoods, many banks discovered that lending to low- and moderate-income residents could be profitable. Subprime lending was made possible in the 1980s when the federal government lifted mortgage interest ceilings, but it wasn't until the 1990s that it took off. By the late 1990s, "there was huge pent-up demand," says Wright Andrews, a lobbyist for the subprime industry in Washington.

Subprime mortgage loans increased nearly tenfold between 1994 and 2003, according to Edward Gramlich, who wrote about subprime lending as a governor on the Federal Reserve Board until August 2005.

Today, the subprime market accounts for 19 percent of all home-loan origination. But, some warn, it has drawn its share of unscrupulous lenders, who target the very people who would have been denied for home loans a decade earlier.

"It is the nasty side effect of opening up credit markets, which did benefit millions of people," says Mr. Gramlich.

That side effect has played out in several high-profile settlements recently. In January, Ameriquest Mortgage Co., the country's largest subprime lender, agreed to a $325 million settlement to some 725,000 borrowers in 49 states for alleged abuses such as concealing high interest rates. In 2002, Household International Inc. agreed to the largest settlement to date, nearly $500 million, after being accused of practices such as charging higher rates than disclosed.

Some of these alleged deceptive practices have been a "nagging concern" for Alicia Munnell, who wrote the 1992 Boston Federal Reserve Bank report and who now teaches finance at Boston College. "I've been worried that in a good faith effort [by banks] to reach minorities that lending standards are too lax."

Some say that a flawed market is better than no market at all. "We have done what needed to be done and made credit available to millions of folks who could otherwise not get it," says Mr. Andrews.

Others say the industry needs more regulation. "I would urge a hard look at the lending records of non-bank lenders," says Eugene Ludwig, who was the federal comptroller of the currency in the 1990s.

Industry advocates, including Andrews, are pushing for a federal law to regulate the subprime market, but some consumer advocates say that would just weaken the stronger state laws.

More than two dozen states have put protections in place against predatory lending, says Debbie Goldstein, executive vice president at the Center for Responsible Lending in North Carolina.

More minority homeowners, meanwhile, are getting squeezed, says Norma Moseley, a 20-year veteran of fair housing advocacy at the Ecumenical Social Action Committee. She says the problem will get worse if home values drop..

Some of her clients, she says, made bad choices; many others were swindled. "These lenders promote the American dream and lure people into home ownership," says Ms. Moseley. "A home may be something that everyone wants, but it's not a thing that everyone can afford."

Watch out for loans ...

• with higher monthly payments than promised.

• with high interest rates and adjustable rates that climb.

• with large sums of money due at the end of the term.

• that have a lot of fees, including "yield spread" and points.

• that require little or no documentation.

• that are offered regardless of credit history, income, and/or financial circumstances.

• that are aggressively marketed on radio, television, fax, e-mail, and Internet.

Ecumenical Social Action Committee

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