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July 17, 2003
Philadelphia Innovates Solutions to Predatory Lending for Low- and Middle-Income Homeowners
    by William Baue

Two programs supported by the city of Philadelphia help low- and middle-income homeowners exposed to predatory lending when seeking loans to rehabilitate their houses.

Low- and middle-income homeowners who need loans to rehabilitate their houses often fall into a gap between financing sources. On the one hand, many of these homeowners do not earn enough to qualify for conventional bank financing. On the other hand, their homeownership or other restrictions typically prevent them from receiving Community Development Block Grant (CDBG) funding, which the U.S. Department of Housing and Urban Development (HUD) distributes to low- and middle-income communities. This leaves these homeowners in limbo and vulnerable to predatory lenders who charge above-market rates to borrowers with limited options. The city of Philadelphia has devised innovative solutions to address these problems.

"Predatory lending has become a very prominent issue in the Philadelphia area that's being addressed by community organizations, the city council, the mayor's office, and regulators, so the banks have been trying to figure out what they can do about it," said Don Kelly, director of community and economic development for the Greater Philadelphia Urban Affairs Coalition (GPUAC).

The GPUAC, which has been uniting banks and community groups to solve urban problems together for some 30 years, started a planning process over a year ago to devise programs to fill this gap.

"The idea was to provide people who would be likely victims of predatory lenders with an alternative," Mr. Kelly told "The greatest concentration of victims of predatory lending is in the low- and moderate-income neighborhoods, and the banks have a particular interest in serving those neighborhoods for community reinvestment purposes, so we're going to concentrate our marketing of the programs in those neighborhoods."

Although the programs will accept homeowners who earn less than 115 percent of the area median income, most of the program marketing will target homeowners who earn less than 80 percent of area median.

Eight banks, including Citizens Bank, Commerce Bank, Fleet Bank, and PNC Bank, are acting as participating lenders, and one bank, First Union, is providing administrative assistance.

The Philadelphia Home Improvement Loan (PHIL) Program acts as the umbrella for these bank-supported programs, called PHIL Plus and Mini PHIL. PHIL Plus is a secured, no-fee loan for up to $25,000 that allows up to twenty years to repay, while Mini PHIL is an unsecured, no-fee loan for up to $10,000 that allows up to ten years to repay. Both require housing counseling and provide a free back-end inspection of the repair work. PHIL Plus additionally requires a front-end home inspection, but it does not require an appraisal.

Although the PHIL umbrella program is federally subsidized, PHIL Plus and Mini PHIL are not.

"They don't have the same strings attached as federal money does," said Mr. Kelly. "A key feature of these programs that enable banks to make loans to subprime borrowers at reasonable rates is the infusion of public funds to create a reserve fund that banks can fall back on, with a ratio of about one dollar for every six dollars lent would be put into this reserve--so basically the banks have recourse for one in six loans going into default."

Mr. Kelly explained that the city of Philadelphia is raising the funds through a bond issue that is part of the Neighborhood Transformation Initiative, a program initiated by Mayor John Street.

Philadelphia municipal bonds thus provide one vehicle by which social investors can invest in innovative community development programs.


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