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Study shows high-income minorities more likely to be sold subprime loans

Photo When you apply for a loan, whether it's to purchase a home or an automobile, the lender is going to make a determination about your creditworthiness. If they decide you have good credit, you'll get better terms and a competitive interest rate. If they decide you are not creditworthy, you are likely to end up with a subprime loan.

During the run-up to the housing collapse, many people purchased homes with subprime loans. The interest rates were low to start, but quickly reset to very high rates, raising the monthly payments, in some cases, to unaffordable levels.

The housing crisis may be over but a lot of borrowers are still being saddled with subprime loans. Let's be clear – if you have blemished credit, a subprime loan may be the best you can do. But it turns out that people with pretty good credit can be lumped into that category.

A 2007 analysis by the Wall Street Journal showed that, of the $2.5 trillion in subprime loans made since 2000, an increasing proportion went to people who should have qualified for prime loans.

Racial disparity

A New York University (NYU) study of Home Mortgage Disclosure Act (HMDA) data since 2006 — the peak of the previous decade's housing boom – shows something a bit disturbing. African-American and Latino mortgage applicants were more likely to be denied prime loans, even though they were in relatively high income brackets.

"These findings offer strong evidence for the continuing significance of race in one specific, but crucial, aspect of the housing market: the mortgage application process, " said Jacob Faber, a doctoral fellow at NYU's Furman Center for Real Estate and Urban Policy. "The historical absence of affordable credit in communities of color and for applicants of color, which created a market void into which subprime lenders grew, was not accidental. While it is not possible, in this study, to identify personal prejudice on behalf of lenders, racial disparities in subprime lending are nonetheless part of a long trajectory of structural, race-based disenfranchisement."

That suggests that if you are a minority, you are more likely to be placed into the subprime category, even if you have the income and credit history to qualify for a prime loan. In fact, even if you are not a minority, you should be aware of the differences in prime and subprime loans and try to avoid being sold a subprime loan if you can avoid it.

Identifying a subprime loan

But how can you tell? Home Mortgage Disclosure Act (HMDA) data does not include a field that identifies whether an individual loan application is a subprime loan application.

The first giveaway is the interest rate. Subprime loan rates can range from 1% to 2% to over 10% higher than the cost of a conventional loan, depending upon a lender’s rates and the borrower’s credit history. That's why you should be aware of what the prevailing interest rate is for the type of loan you are seeking.

Over time – and remember a mortgage is usually for 30 years – the difference in interest rates and monthly payments between prime and subprime loans can be thousands of dollars. The difference in prime and subprime interest rates for a $100, 000, 30-year, fixed rate mortgage loan can be as much as 50%.

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