A Tale Of Two Maines: Subprime Lending Or Predatory Lending?

Is subprime lending good for the local economy in Maine? The answer is – it depends who you're asking.

Earlier this year, the Center for Responsible Lending (CRL) issued a survey that determined predatory subprime lending cost Maine $23 million a year. The CRL survey, conducted by Coastal Enterprises Inc. (a Maine-based nonprofit community development corporation), stated that rural areas and minorities were particularly targeted for predatory practices.
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However, the New England Financial Services Association (NEFSA), a regional trade association, feels otherwise. In October, NEFSA issued its own survey that claimed subprime lending is not destructive to the Maine economy – rather, it is a critical factor in the state's economic well-being.

In reading the surveys and speaking with representatives of both groups, one can assume there are two very different Maines.

The CRL is using its survey to advocate increased state regulation of subprime lending, which the organization views as the foundation for predatory lending activities. However, NEFSA argues such regulations would result in diminished credit opportunities in Maine. The NEFSA is using its survey to predict that available mortgage credit in Maine under CRL-backed regulations ‘would probably shrink by 15-20%, or about $200-$400 million, each year.’
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According to Uriah King, policy associate with the CRL, that argument doesn't hold water. ‘It's a fundamental assumption that we take issue with,’ he says. ‘The most recent research flatly and unequivocally said that's not true. We found no reduction of available credit in many states with protective regulations. In fact, we found the loan volume went up.’

James M. Demers, president of the NEFSA, points to subprime lending as a key factor in the Pine Tree State's business climate.

‘Subprime lending pumps $2 billion a year into the state's economy,’ says Demers. ‘That's approximately 4% of the state GDP, which has a gigantic effect on Maine's economy.’

Demers observes that subprime lending is not wholly synonymous with predatory lending, and any attempts to regulate the latter could damage honest subprime lenders. ‘If a problem exists, we need to address it,’ he says. ‘But we don't need to overreact and hurt the people we want to help. And subprime lending is a significant credit option that many borrowers are looking to.’

But who exactly are the borrowers seeking subprime loans? The rival surveys have contradictory findings.

According to the NEFSA's report, ‘subprime credit is predominantly for the middle class and wealthier borrowers. Most of those who obtain subprime mortgages in Maine have incomes close to or over Maine median household income. Maine's median household income in 2004 was $42,163. For example, 65% of higher rate subprime mortgages were for borrowers with incomes over $50,000, and 35% had incomes over $75,000.’

NEFSA adds that only 16% of subprime borrowers had incomes under $35,000. ‘Residents of the poorest counties in the state were the least likely to use subprime mortgage credit,’ the report adds.

Yet the CRL report finds something completely different. ‘The majority of Maine subprime mortgage originations are in rural areas,’ says the CRL report. ‘Between January 2004 and May 2005, 52% of Maine's subprime originations were in rural parts of the state, while only 42% of Maine's population is rural. In fact, Maine ranked fourth in the nation for the percentage of subprime loan originations in rural areas.’

The CRL also found racial disparity in subprime lending. ‘African-Americans got 31.3% of their home purchase loans from subprime lenders, compared to just 6.9% for whites, for a disparity ratio of 4.5 (31.3/6.9),’ the report states. ‘In other words, African-Americans were 4.5 times more likely to receive a home purchase loan from subprime lenders than white borrowers.’ The report also noted disparity among the state's Hispanic and American Indian population compared to white borrowers.
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But the NEFSA counters the CRL's claim by noting the overall racial demographics for the state. ‘Based on their low proportion of the population, we would expect that minority borrowers do not have a large impact on the higher rate market, and the 2004 HMDA statistics bear this out,’ says the NEFSA report. ‘In 2004, only 158 higher rate loans were made to racial minorities, which amounts to only 1.8% of the higher rate loans made that year, and well below the 3.1% of the Maine population that is a racial minority. Hispanic borrowers received only 85 higher rate loans, or only about 1% of the loans made. White, non-minority borrowers, 96.9% of the Maine population in 2004, obtained 97.3% of the higher rate loans.’

So who's winning the fight in Maine in regard to tougher lending regulations? Demers says his group is gaining in the hearts and minds campaign with the statehouse. ‘The reaction has been very positive, and legislators we spoke with want to move forward with a more balanced approach to dealing with any predatory lending,’ he says.

But the CRL's King says his group also has statehouse support. ‘Governor John Baldacci instructed that regulations based on our findings be made next year,’ he says.


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