Proposal: Developing a Screening and Referral System
The thin line between subprime and predatory loans
Though they pose a significant risk to our clients, subprime loans fulfill a definite need to
make purchasing a home more affordable for borrowers with poor credit histories. Within
recent years the market for subprime loans has grown substantially; currently it comprises
about one-third of mortgage loans issued. And as these alternative mortgages become more
sophisticated and aggressively marketed the mounting pressure to provide safer alternatives
for our target communities is of high priority. Upcoming partnerships with Mortgage
Grader and Opportunity Finance Network (OFN) hopefully will address that need and at
least give some kind of regulation to the subprime loans presented to our clients. Whether
CFRC crosses that line between subprime and predatory loan provider depends on two
basic factors: the characteristics of the individual borrower and the features of the loan
itself. It is clear that Mortgage Grader and OFN understand the ethical responsibilities that
a partnership with a non-profit organization implies and these responsibilities must be
reflected in the services they provide (for instance, yield-spread premiums would conflict
with department objectives and vision). Additionally, it is CFRC’s duty to ensure we act in
the best interest of the client as well as make these partnership ventures lucrative or
worthwhile for our partners. This balance was easily achieved with the existing model due
to exclusivity, but with an expanded program that offers more diverse loan services the
issue must be revisited.
The mission of this re-constructed first-time homebuyer program should not be to place
homebuyers in subprime loans just because they are available or out of obligation to our
partner lenders. The mission remains the same as with the old model; to present first-time
homebuyers with limited resources opportunities to finance a home purchase. If we tread
carefully, CFRC can extend its reach to a larger portion of our target communities by
offering subprime loans that are suitable for them. Here are some caveats associated with
being involved in this process which I have identified below:
 Cost to borrowers. Besides monetary costs of high fees, high rates and penalties,
borrowers assume a greater risk of defaulting and foreclosure. Add to that the
emotional strain of demanding loan terms of such a big purchase.
 Slight increases in already higher-than-average fees can greatly increase the risk of
default, foreclosure and economic hardship for our clients.
 Affordability and Responsibility. Lenders could approve borrowers based on a cost
significantly lower than that of the loan when and if the loan’s interest rate resets
and monthly payment increases.
 The partner lender’s own goals and objectives could conflict with those of our
department (ADD) - namely, those that directly affect the client.
 Subprime loans are attractive opportunities to families and individuals with
impaired credit histories and high debt-to-income ratios (DTI). Involvement with
these loan products themselves can be counter-productive in building asset wealth.

A system to combat these threats (and others which I left out or failed to recognize) must
develop from two sources; a refined screening/referral process developed by ADD and the
guidelines & terms of the loan products offered as outlined by the partner lender. The
following highlights some suggestions to help develop a systematic process of screening
and referral for incoming clients.
 Subprime loan conditions
 Eliminate pre-payment penalties or limit to 3 years or less
 Should be bundled with subsidized second mortgages (city/county down
payment and purchase assistance programs)
 Loans cannot be made in excess of 100% LTV
 Loans with interest only features should only be reserved for clients that
show a capacity to handle the increase in monthly payments after the
transition to PITI with a fixed rate. Although, analysts have showed Interest
Only loans could hurt clients; citing sharp increases of defaults as a result
of homeowners having relatively little equity.
 Adjustable-Rate Mortgages (ARM) should be restricted from clients
 Pre-determined caps on interest rates and mortgage fees (“fee padding”)
 Clients must show at least one other source of income that will contribute
to financing the home; perhaps only limited to families and “joint
ventures” between individuals
Candidates for receiving subprime loans should display certain characteristics that should
allow for an accurate assessment of readiness for a loan. Among them, candidates should:
 Be unable, according to their current financial state, to be approved for a traditional
loan
 Be able to demonstrate capacity to tackle monthly mortgage payments. They should
not be “struggling” and barely making ends meet.
 Should have impaired credit histories and low incomes, but a reasonable DTI ratio.
Clients with high DTI ratios have less bargaining power when negotiating loan
terms and fees. Additionally, borrowers with high DTI ratios would have a more
difficult time assuming the additional loan debt.
 Have stable employment, significant time spent at job currently employed, and
steady income
 FICO credit scores below 620 near 560, but not lower than 560.
 Have received financial literacy training and 12-hours of Homeowner Education
Workshops (HEW).
There is no doubt a correlation between insufficient education/preparation and the risk for
default and foreclosure. And part of the objective of these programs is to present
opportunities for our clients to develop and sustain wealth. In the case of the homeowners,
this means purchasing a home and maintaining the financial health to keep the home.
Based on the old model incoming clients received financial literacy training and asset-
specific training after being accepted into the program. This model presented here suggests
mandatory financial literacy training and pre-qualification interview prior to entrance in the

program. The intuition here is that incoming clients will be equipped to make more
informed decisions about their ability to handle an asset purchase and/or goal. On the
department side, the counselor can be assured that a client has been well-prepared.
Additionally, the class sessions encourage client-counselor relationships as well as reveal
the strengths and weaknesses of clients; allowing counselors to discern client readiness and
capacity. It is during this probationary period where credit information, debt information,
income verification, and other relevant information is collected and logged to capture the
financial “snapshot” of a client’s economic health. The following list is the first stage of
required information needed to asses the readiness of a client:
 FICO score
 Credit Report
 Debt assessment
 Income gathered during pre-screen
 Residency verification gathered during pre-screen
 Employment history (self-employed, length of time at job, etc)
Clients with FICO scores of 620 and above who are not certified employees of LAUSD
will generally be referred to Opportunity Finance Network (OFN) and Mortgage Grader
respectively. Those with FICO scores of 620 who are certified employees of LAUSD will
generally be referred to LATMAP. Clients with FICO scores between 620 and 560 with
higher DTI ratios will be referred to OFN and Mortgage Grader, giving preference to OFN.
Clients with FICO scores between 620 and 560 with lower DTI ratios will be referred to
Mortgage Grader and OFN, giving preference to Mortgage Grader. The logic behind this
allocation of clients is that clients who are most at risk to defaulting and foreclosure (here,
clients with low FICO scores and high DTI ratios) are prone to paying more for their loans
then they can handle. In order to curb this problem, they require loan agreements that are
flexible, but manageable. Since OFN’s loan products are tailored for this “unconventional”
market under which so many of our prospective clients come from, I elected their services
as the main provider for clients of this type. Clients with low DTI ratios but low scores
could be better equipped to handle a subprime loan than that of a client with a high DTI.
Since subprime loans will cost the client more monthly and cumulatively (in the long run),
it is preferable that a client with a lower DTI ratio assume that risk, instead of a family that
is just barely getting by. Perhaps post-DTI ratio projections would determine if the loan
product is even worth undertaking. Meaning, if the client’s DTI ratio would be severely
high after monthly mortgage payments are calculated in, perhaps they should not enter
that particular loan agreement.
The probationary period closes on the heel of a Pre-qualification Interview; designed to
give both counselor and client an accurate view of feasibility. Pre-Qualification Interviews
also allow the client to add any other pertinent information that they neglected to bring up
first hand. These one-on-one sessions open up the opportunity for counselors to assess the
attitude and economic behavior of the client as well.
The second stage of eligibility information will be acquired just before program placement,
with the assumption that the Home Counselor Online (HCO) software will be in place.

Additional affordability tests and case files for clients will be generated and then
counselors, utilizing all of this cumulative information, will refer clients to the most
appropriate program. From that point on client’s progression will be tracked and updated in
HCO database by an assigned counselor. Clients receiving subprime loan agreements
through OFN or Mortgage Grader must attend a mandatory (at least 2 hours)
default/foreclosure counseling session and/or training after going into escrow. Clients
receiving loan agreements through LATMAP and participating lenders will be strongly
encouraged to attend default/foreclosure training or counseling sessions. Clients with 620
FICO scores but income levels higher than which would allow them to be eligible for
government subsidy programs should be referred to Mortgage Grader. Clients who,
according to the counselor, would not place in any of the first-time homeowner programs
will be referred to credit counseling services, an IDA program and/or additional money
management counseling. Generally, a FICO score of below 560 will not be considered.
LATMAP-referred clients will continue to work with LATMAP partner lenders provided
they meet subsidy eligibility requirements. Attached you will find a rough flowchart
outlining the process explained above.
Proposed Financial Literacy Training Curriculum
I. Your Relationship with Money
2-Hours
a. Understanding how Money Works
b. Building Assets
c. Benefits of Saving Money
d. Finding Money to Save
e. Understanding Interest Rates
f. Identifying Steps to Successful Money Management
g. Understanding Your Paycheck
h. (Opportunity Cost Models)
i. Finding right bank account, credit union
j. (Survey)
II. Consumer Awareness
1-Hour
a. Comparison Shopping
b. Pitfalls of Rent to Own
c. The Cost of Credit
d. Pursuing a Consumer Complaint
e. Consumer Rights
f. Bankruptcy
III. Budgeting and Goal Setting 1-Hour
a. Understanding the Purpose of Creating a Budget
b. Identifying Budgeting Methods
c. Creating a Successful Money Management Plan
d. Using a Plan to Guide Decision Making

e. New Goal Management Worksheet
IV. Credit & Debt Management 2-Hour
a. Understanding Your Credit
b. Discuss the Importance of Having Good Credit
c. How to Establish and Maintain Good Credit
d. How to Order Your Credit Report
e. Understanding Your Credit Report
f. Disputing Entries on Credit Report
g. Identifying Methods to get out of Financial Trouble
h. Dealing with Collection Agencies
V. Avoiding Predatory Lending 1-Hour
a. Identifying Aggressive Marketing Techniques
b. Understanding Your Credit Score
c. Understanding Interest Rates
d. Credit Cards and High Fees
e. Predatory Lending Scams
f. Check Cashing Facilities
g. Understanding Credit Offers
h. Prime vs. Subprime
VI. Financial Records Keeping 1-Hour
a. Tracking Expenses
b. Organizing Monthly Bills
c. (Post-Survey)
Optional Elective Courses (determined by client interest)
I. Insurance Basics
a. Life
b. Medical/Health
c. Automotive
d. Elderly Care
e. Disability
II. Planning for Retirement
a. Emergency fund
b. Traditional and Roth IRA
c. CDs
d. Social Security
e. 401(k), 403(b)
III. Investing for Beginners
a. Introduction to the stock market
b. Risk vs. Return
c. Interest types (compound interest)
d. Setting long-term and short-term goals
e. Difference between Saving and Investing

f. How to invest to with $2