The Greater Philadelphia Urban Affairs Coalition (GPUAC) has developed a pilot program in which participating lenders make home improvement loans to homeowners with impaired credit who might otherwise have no alternative but high-cost loans.
Owner-occupants of one- to four-family homes in Philadelphia with incomes up to 115 percent of median family income are eligible for fixed-rate loans in the program, which became operational in July 2003 with funding from the City of Philadelphia’s Neighborhood Transformation Initiative. A reserve fund provides some coverage for losses based on the borrowers’ FICO scores, which generally range from 580 to 620. (Credit bureau risk scores produced from models developed by Fair Isaac Corporation are commonly known as FICO scores.)
Loans are of two types: secured loans up to $25,000 for a maximum of 20 years (PHIL-Plus), and unsecured loans up to $10,000 for a maximum of 10 years (Mini-Phil). Up to 50 percent of both types of loans can be used to pay off existing debt.
Donald C. Kelly, director of GPUAC’s community and economic development division, said that 58 loans have been closed in the program as of September 30, 2004, with an average size of $19,500.
Participating lenders are Bank of America, N.A., Beneficial Savings Bank, Citizens Bank of Pennsylvania, Commerce Bank, N.A., National Penn Bank, PNC Bank, N.A., Sovereign Bank, and United Bank of Philadelphia. Wachovia Bank has given some financial support but is not participating in the loan program.
Kelly said that one of the most appealing aspects of the program is the chance to pay off existing debt. “A lot of people have more debt than they’re comfortable with and want to find ways to replace it with more reasonably priced debt,” he said.equity lenders, earnings reports, and public documents. Its data include wholesale purchases, including loans closed by correspondents.
Nonprofit housing counseling agencies play a critical role in the program. The process begins when the borrower contacts one of 25 housing counseling agencies and meets with a counselor. The counselor obtains preliminary information and sends it to GPUAC, which verifies that the borrower meets eligibility requirements and sends the package to a participating bank selected by the borrower. The borrower makes an appointment with the bank, which conditionally approves or denies the application.
In the case of PHIL-Plus, the borrower meets again with the counselor and arranges for an inspection with the counselor's assistance. The borrower pays the inspection fee, which averages $300. The work plan must include essential health-and-safety and structural deficiencies identified in the inspection. The borrower gets a contractor's estimate with the counselor's assistance.
The borrower returns to the bank with the inspection, final work plan, and contractor's estimate. Loan proceeds go to the borrower, not the contractor.
After the work is completed, the Philadelphia Redevelopment Authority conducts an after-work inspection at no cost to the borrower. The borrower is strongly encouraged to retain 10 percent of the contractor's total fees until the final inspection is conducted.
The program's long-term goal, Kelly explained, is to enable banks to become more comfortable with borrowers who have moderately impaired credit.