WASHINGTON (By Carrie Moskal, United Press International) January 19, 2004 - Navigating home loans, mortgage payments and debt consolidation is difficult for many Americans, but for minorities, the financial risks appear to be greater than most.

The Center for Responsible Lending (CRL), a predatory lending watchdog, described how Ira Cheatham, a 73-year-old, retired Korean War veteran, has lived with his wife, Hazel, in the same Portland, Ore., home for 21 years. The Cheathams purchased their home in a minority neighborhood in 1983, shortly after getting married, and paid for the house with a loan from the Veterans' Administration. In Dec. 2001, the Cheathams were close to paying off their first mortgage.
 

But that month, a check from Wells Fargo Financial arrived at their Portland home for the amount of $1,000. The couple were feeling financial strain since Ira Cheatham had recently retired, so they decided to cash the check, taking out a high-interest loan in the process.
 

Within weeks, a Wells Fargo representative called the Cheathams and urged them to consolidate the loan and all of their credit-card debt into a single mortgage. Cheatham said the representative promised him an interest rate between 5 and 6 percent, which would lower the couple's monthly mortgage payment. The Cheathams decided to accept the offer.
 

A short time later, a Wells Fargo employee arrived at the Cheathams' home with paperwork to sign. According to Ira Cheatham, the employee failed to mention that the loan they were signing contained a 9.9 percent interest rate instead of the previously promised 5-6 percent. The new loan stripped away the Cheathams' equity and raised their monthly mortgage payment to about 57 percent of their monthly income.
 

The Cheathams eventually decided to refinance their loan with another lender at a 5 percent interest rate, but due to prepayment penalties at Wells Fargo, the couple had to pay a $7,500 fee to escape their predatory loan.
 

The Cheathams were two of many minority victims who have borrowed subprime loans and been saddled with prepayment penalties -- fees charged by lenders when borrowers pay off a mortgage debt early.
 

In an e-mail, a Wells Fargo representative said customer confidentiality prevented him from commenting on any specific complaint, but stated that "Wells Fargo will not tolerate discrimination against, or unfair treatment of, any consumer."
 

Wells Fargo customers "are given a choice: a loan with a lower rate and a prepayment option or a loan with no prepayment option and a slightly higher rate. It is up to the customer to decide which loan product meets their needs," the representative said.

The representative added that "the prepayment fee option is fully disclosed in a written disclosure describing applicable prepayment fees included in the loan," and that Wells Fargo Financial waives the prepayment fees if a borrower refinances with any Wells Fargo entity or sells his home.
 

Subprime home loan borrowers who live in minority neighborhoods face a 35 percent greater chance of incurring prepayment penalties than borrowers living in predominantly white neighborhoods, according to research released recently by the CRL.
 

"Prepayment penalties in subprime loans are locking African-American families out of the prime mortgage market and rolling back hard-earned economic progress," said Hilary Shelton, Director of the NAACP Washington, D.C. Bureau.
 

Shelton called the prepayment penalties "discriminatory and injurious" and evidence of African-Americans' "second-class" status in the subprime loan market.
 

In addition to prepayment penalties, borrowers also pay higher interest rates on subprime home purchase loans and receive no meaningful interest rate reduction when they choose to refinance, according to the CRL's findings. The CRL's research showed that 30-year subprime purchase loans with prepayment penalties carried an interest rate 40 basis points higher than would otherwise be expected. Based on these findings, researchers estimated that during the life of these loans, Americans pay up to $881 million in extra interest on purchase loans with prepayment penalties, according to the CRL.
 

"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 home ownership, 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's president, Mark Pearce.
 

Prepayment penalties are evidenced in 70 to 80 percent of all subprime home loans but are almost nonexistent in the prime mortgage market, said the CRL.
 

Such a discrepancy contributes to an ever-widening wealth and ownership gap between whites and minorities.

A typical penalty is equal to six months' interest on any prepayment greater than 20 percent of the mortgage balance, meaning a $150,000 subprime mortgage at 10 percent interest could result in a $6,000 fee for prepaying the loan, said the CRL. Prepayment penalties can result in severe financial losses for families or, in some cases, foreclosure.
 

Thirty-five states regulate the use of prepayment penalties in home loans, and nine states ban their use completely.