Study Disputes Subprime Prepay Claims

A new study has found that, contrary to subprime industry claims, subprime borrowers subjected to prepayment penalties are given higher interest rates on purchase loans, with minority neighborhood homeowners being 35% more likely to get a prepayment penalty than their nonminority counterparts.While lenders maintain that they offer a lower interest rate on loans with a prepayment penalty, a study by the Center for Responsible Lending, Durham, N.C., found that in 2002, borrowers with a 30-year, fixed-rate purchase subprime mortgage with a prepayment penalty paid an interest rate 40 basis points higher than for a similar loan without the penalty. CRL estimates that borrowers who obtained a subprime loan in 2003 will pay up to $881 million in excess interest over the life of their loans. "Not only do prepayment penalties lock borrowers into the higher-cost subprime market or force them to give up the wealth they have built through homeownership, but they also turn out to offer no benefit to borrowers in the form of lower interest rates, as the subprime industry has claimed," said CRL president Mark Pearce. "These abusive prepayment penalties operate as a hidden fee that disproportionately affects both rural and minority neighborhoods."