Mortgage Lending On South Dakota's Indian Trust Land

M O R T G A G E L E N D I N G O N S O U T H D A K O T A’ S I N D I A N T R U S T L A N D PA G E 4the issues lenders view as the greatest impedimentsto lending on Indian trust land. The two factorsidentified as most strongly affecting lenders’ abilityto attract mortgage applications are borrower credithistories and the lack of affordable housing forpurchase on tribal lands.Still other comments identify a follow-on problemfrom the limited number of qualified borrowersand limited demand. They point to the fact thateven when lending occurs, lending volume may beinsufficient to justify institutional investment in theprograms. For example:There also was considerable consensus thatfour other factors—fractional property ownership,processing hurdles (delays in environmental reviewand land title reports), borrower characteristics otherthan credit history, and lenders’ lack of familiaritywith the mortgage process—posed significantbarriers to mortgage lending on Indian land.When we have attempted to makeSection 184 loans, the overall volume ofthe loans has not supported the overheadof training and product implementation.Open-ended responses to this and related surveyquestions focused on three broad categories ofbarriers to lending—borrower qualifications andeffective demand, inaction and slowdowns at thetribal level, and lender knowledge.5 Comments ineach of these categories provide additional contextfor the particular issues identified as important inthe scoring analysis.With respect to borrower qualifications andcharacteristics, one respondent stated directlythat the institution’s issue was a “lack of qualifiedapplicants.” Others cited a lack of demand formortgage loans on Indian trust lands—and whilethis is a broader problem with multiple causes(including a lack of affordable housing to purchase),borrower characteristics are a key determinant ofdemand. Borrowers who do not realize that homeownership is even an option, or whose financialsituation is too uncertain or risky to be consideredby lenders, cannot contribute to the effectivedemand for mortgage products. Again, lenderswere to the point in their comments:I have never had a customer apply forthis product.Our company had been approvedto be a HUD 184 lender since 9-2015but thru 4-2019 we had only receivedtwo applications that resulted inloans closing.[For us], the overhead required to properlyoffer these programs and the [low]projected volume of business we wouldhave in the markets we serve [is a barrierto lending].In Table 1, only “fractional property ownership,”is an aspect of inaction and slowdowns at the triballevel. Yet it is clear from the number and content ofwrite-in comments that a wider range of tribal-levelissues—from a lack of program participation bytribes, to limited demonstrated interest from triballeadership, to the pace of engagement dictatedby tribal culture—are front and center in somerespondents’ minds as they consider the barriersto mortgage lending on trust land. These statementsare indicative:Lack of support from tribal leaders/entities[is a barrier].The most difficult challenge is consistencyin documentation for the trust land property— either from the Tribe or from the BIA.We can’t make trust land loans if tribe isnot approved with HUD to use 184 on trustlands.Culture.5 The responses discussed are to these questions: 1) “To what extent do the following issues affect your company’s ability to attract mortgage applicantson Indian lands?” Rank scoring followed, as well as this open-ended prompt: “Name any other mortgage origination challenges.” 2) “What are somereasons you do not lend at all on Indian trust land or do not lend as much as you would like to?” 3) “What are some other reasons that your lendingactivity on Indian trust land may be limited?”

M O R T G A G E L E N D I N G O N S O U T H D A K O T A’ S I N D I A N T R U S T L A N D PA G E 5“Instead of complainingwe need to step in andtry to understand andwork towardsunderstanding.”One respondent also described how theseconcerns can compound:During a training provided by a NativeAmerican, we were told to slow down, getto know us, let us get to know you, bepatient and talked about “Indian time.”Most times we don’t get a complete lendingpackage and request more information,and it takes anywhere from several weeksto several months to get the requireddocuments if we can get them at all. Wetalk about communication and the needto get more housing, [but] when given theopportunity to apply, it doesn’t seem tobe important anymore.With respect to lender knowledge, severalcomments expand on the finding that lenderslack familiarity with the mortgage process ontrust land:[This is] not our issue, but most lenderslack the knowledge on how to reallynavigate the process.[Our institution is] not approved to dothe programs and not familiar with theprocess of approvals [necessary toparticipate in them].Yet another respondent observed that animpediment for their institution is “the legal process[for foreclosure] if a loan would go delinquent,”which suggests that some lenders remain unawareof programs that support the mortgage process byproviding loan guarantees. A related response wasthat “we cannot get clear title to Indian trust land,so we do not loan against those properties with[secondary market] underwriting standards.” Thecomment may have been correct in the past andfor the particular products this lender offered, but itmight have been tempered had the respondent’sinstitution been up to date on the Indian landmortgage process: throughout 2018 and 2019, inresponse to Duty to Serve regulatory requirements,the Government Sponsored Enterprises (GSEs) havedeveloped variances to allow their loan products tobe used on Indian trust land.In sum, lenders that serve or have the potentialto serve the homeownership market on Indiantrust lands experience and perceive a variety ofbarriers to mortgage lending; some of the mostacute are potential borrowers’ credit scores and thelimited inventory of affordable properties for sale.Nonetheless, not all barriers are external to lenders.In making this point, one respondent observed:Instead of complaining we need tostep in and try to understand andwork towards understanding.

M O R T G A G E L E N D I N G O N S O U T H D A K O T A’ S I N D I A N T R U S T L A N D PA G E 6Strategies to Attract BorrowersLenders participating in the survey reportedthat a variety of tactics can be valuable forattracting potential borrowers. However, theyconsistently identified one approach as beingmost effective: working collaboratively with tribes,Tribally Designated Housing Entities (TDHEs),and other tribal institutions such as Native CDFIsand credit unions. This type of community-levelcollaboration likely serves to build a foundationof trust between borrowers and lenders and tofacilitate direct connections between qualifiedapplicants and lenders.Table 2 lists all the items respondents consideredin the question “How effective are the followingstrategies at attracting mortgage applicants ontrust land?” and the ranking results.6 As shown,responses to this question suggest that in additionto community-level engagement, lender presenceon or near Indian lands, direct advertising throughTABLE 2: Effective Strategies forAttracting Applicants for Mortgageson Indian Trust Land** Most important * Next most important**Working in collaboration with tribes, TDHEs,and other tribal institutions, including NativeCDFIs and credit unions***Lender presence on/near Indian landsAdvertising on social mediaAdvertising through media that reaches Nativeborrowers living in reservation communitiesAdvertising at Native community events (on andoff reservations)Advertising on reservation grocery storemessage boardsIncluding culturally sensitive language andmessaging in outreach materialsMobile bank branchesOutreach through employers ofNative Americansmedia that reaches Native borrowers living inreservation communities, and advertising on socialmedia also may be highly effective strategies. Onerespondent specifically noted that local radio was aneffective traditional media mechanism; two othersmentioned Facebook as their most used socialmedia platform. Additionally, while it is nota “strategy” per se, several lenders cited personaltestimony, in the form of referrals and word ofmouth, as a critical means for connecting themwith individuals and families interested in owninga home on Indian trust land:Referrals from current and past clientsare HUGE!Word of mouth. Once one person is able toclose a mortgage, it will spread like wildfire.When asked to identify processes that helpthem identify qualified borrowers, lenders againemphasized that the most effective approachis to work with community institutions and tribalprograms. At the same time, they also expressedsignificant support for homebuyer education andcounseling, affordable and flexible lending products,flexible and culturally appropriate underwritingrelated to credit, and fair access to credit.When queried about management strategiesfor fostering mortgage lending on Indian land,community-level engagement was one of threestrongly valued strategies in the ranking analysis.6 Identical to the process used to better understand barriers to lending, survey respondents used a 1 to 5 scale to rank the effectiveness of a varietyof possible strategies for attracting mortgage applications. Aggregate scores were calculated focusing on the upper end of the scale—that is, on thosestrategies perceived to be the most effective. A secondary calculation gave greater weight to 5s over 4s to differentiate among similar overall scores. Becauseonly seven respondents scored these questions, the results are at best indicative. However, the identified “top strategies” are those for which seven of seven or six ofseven respondents gave the strategy a 4 or 5 on the “effectiveness” scale; in other words, there was full or substantial agreement that these strategies work.

M O R T G A G E L E N D I N G O N S O U T H D A K O T A’ S I N D I A N T R U S T L A N D PA G E 7“Referrals from current and past clientsare HUGE! Once one person is able to close amortgage, it will spread like wildfire.”TABLE 3: Management Strategies forFostering Lending on Indian Trust Land** Most importantTable 3 shows that senior management commitmentand specific lending goals also were viewed asimportant to creating a lender culture capable ofincreasing the engagement of reservation-basedtribal citizens in the mortgage market.Finally, while several lenders participating in thisstudy have had some success attracting mortgageborrowers on Indian trust land, just over half (sevenof 15 responding to the question) indicated that theywould like information about how to expand theirreach in Indian Country. An even larger majority (11of 16 respondents) said they would be interested inlearning more about ways to develop their portfoliosin Indian Country. One way to summarize thesefindings is that, in general, lenders that already are * Next most important**Working with TDHEs and other tribal institutionssuch as Native CDFIs and credit unions*****Senior management commitmentSpecific lending goalsMarket researchCompensation formulas that encourageaffordable lendingStaff who are familiar with issues associatedwith originating mortgages on Indian landWorkforce development and educationTargeted outreach activitiesClear methods for including trust-land lendingwhen reporting on CRA obligationsengaged in mortgage lending on trust landin South Dakota would like to do more andthose that are not yet active in the marketwould like to be.

M O R T G A G E L E N D I N G O N S O U T H D A K O T A’ S I N D I A N T R U S T L A N D PA G E 8Challenges in the Process of OriginatingMortgages on Indian Trust LandWhenever lenders are working with first-timehomeowners, applicants for whom manualunderwriting may be required, or individuals whoare buying homes in markets with “nonstandard”characteristics, the mortgage origination process—the multiple steps that occur after attractingapplicants but before closing loans—is challenging.Lending in Indian Country fits this profile, so frictionin the process is expected. Nonetheless, too muchfriction can shut the process down entirely. Surveyquestions probed specific aspects of the originationprocess to better understand these hurdles (some ofwhich are unique to the trust-land mortgage market)and whether lenders are meeting with success inovercoming them. Findings suggest that severalhurdles continue to be of significant concern tomany active and potential lenders. At the sametime, the findings also show that as lendinginstitutions develop capacity for Indian Countryoutreach, build relationships, and gain practicalexperience with lending on trust land, they areable to address or to avoid several barriers toprogress with mortgage origination.In fact, based on survey feedback, obtainingproperty appraisals for homes on trust land is amongthe greatest challenges to lending in Indian Country.When asked to identify specific speedbumps in theappraisal process, the primary issue identified byactive lenders was the lack of qualified appraiserswho understand Indian trust land. One lenderpainted a vivid picture of this struggle:Property Appraisals on Indian Trust LandTo originate a mortgage loan, a lender mustknow the value of the property to be mortgaged,a number that is provided by an independentproperty appraiser. In the off-reservation mortgagemarket, comparable properties offered for salehelp appraisers gauge value. In rural and trustland markets, the limited (or nonexistent) numberof comparable sales necessitate an approachto valuation based on cost rather than saleprices, which is not always well-known. Thesecharacteristics of the appraisal process—thatit requires the services of professionalsindependent from the lending system, that itrelies on a non-standard approach to valuation,and that appraisers may not be trained in thisalternative approach or may not know how toimplement it well—all increase the level of difficultyof this phase of the origination process for loanson Indian trust land.Significantly, lenders not yet active in the marketalso perceive these challenges—perceptions thatcan discourage market entry. Said one,Very few appraisers have the skill or interestin appraising trust land. The appraisingindustry does not provide time to learn thecost-based approach during its training,therefore appraisers have to learn on thejob. Additionally, they aren’t monitoredclosely on the cost-based approach, [and]therefore there are inconsistencies andquestions whether they are even doingthem correctly. Because of the cost tothe appraiser to travel to rural areas forone appraisal, the appraiser charges an“inconvenience” fee to the appraisal price,making the appraisals cost more.[It is] extremely difficult to find an appraiser,and then they are so booked out that ittakes forever for an appraisal.In the face of these difficulties, at least onelender has found a way to help the processalong. This survey participant noted, “we typicallyhave to educate new appraisers surroundingthe allowed cost approach method”—a remarkwhich suggests that just-in-time education, deliveredby lending institution personnel to one appraiserat a time, can work. Even so, a broader approach,aimed at strengthening the profession overall,might be more efficient.

M O R T G A G E L E N D I N G O N S O U T H D A K O T A’ S I N D I A N T R U S T L A N DTitle Status Reports for Trust LandMortgage origination also requires that lenders gainclarity about the title status of the trust land parcelsassociated with their mortgages. Because the USgovernment has a fiduciary responsibility for Indiantrust assets, responsibility to certify the title status oftrust land lies with the US Department of the InteriorBureau of Indian Affairs (BIA). The BIA fulfills thisresponsibility by issuing Title Status Reports (TSRs). PA G E 9These refrains are repeated even among lendersthat have not pursued lending on trust land:The information [on Indian land title status]does not seem readily available.The time to obtain [a TSR] is excessive, and[BIA] staff are unresponsive.It takes a while.Survey respondents identified the BIA process forobtaining TSRs as another significant challenge tooriginating mortgages in Indian Country. One activelender noted that their institution already had waitedsix months for a TSR—and still was waiting. Suchdelays and other difficulties with the BIA ledto numerous complaints, including:Yet there also is a subset of active lenders whoreport that for them, obtaining a TSR is not aproblem:We have experienced very few challenges.We can get a TSR within 30 days.Too much time is involved in this process.[We can get a TSR in] two weeks.Significant fault [for limited mortgageloan origination in Indian Country] lieswith the BIA in their delayed andinconsistent processes.No challenge[Our problem is] getting the recordedlease and TSR in a timely fashion so wecan property originate the loan withall land/sites.We can’t get the local realty officer toeven respond so we can gauge a timelineor if we have the correct paperwork.It is impossible to find a regionalrepresentative to give you more than15 minutes of their time. They will cite theinformation needed and ask you to turnit in, and you will wait months to get aresponse. As you wait for a response, youare constantly reminding them, and theydo not communicate back. The undue costsare associated with the administrativeexpense of chasing down BIA employeesand begging for a response.Overall, findings concerning the TSR processmirror those concerning property appraisals—somelenders have had direct negative experiences,some lenders not yet active in the market are highlyskeptical of the TSR process, and a few lendersappear to have developed capacity, workflowflexibility, and relationships that minimize theirconcerns. An additional finding is that nine of 11responding lenders indicated that if the TSR processwere streamlined, their institution would be morewilling and better able to engage in lending ontribal lands. Based on this evidence, change may beneeded on several fronts: within the BIA, to speedthe processing of TSRs; outside the BIA, perhaps byfinding ways to reduce dependence on the BIA forTSR processing; and within the lender community tocreate and strengthen lender-BIA relationships.Underwriting Mortgages on Indian Trust LandUnderwriting is the process through which a lendinginstitution assesses a potential borrower’s capacityto repay a loan. Underwriting takes account of theborrower’s creditworthiness, available collateral,and other indicators of capacity to repay (such assalary and other sources of income). A few survey

M O R T G A G E L E N D I N G O N S O U T H D A K O T A’ S I N D I A N T R U S T L A N Drespondents identified underwriting as the greatestchallenge they faced in the process of originatingmortgages on Indian trust land.When questioned about the specific aspectsof underwriting that were problematic, surveyparticipants pointed to applicants’ credit as a keysource of concern. While it is likely that a significantfraction of applicants for Indian Country mortgageshave relatively low credit scores, many othersmay simply have thin files, which makes it difficultfor lenders to quickly assess creditworthiness.7Employing alternative approaches to credit scoringis a possible response. Yet elsewhere in the survey,when participants were asked whether assistancewith such alternatives would be helpful in theirefforts to provide home mortgage financing ontrust land, only three responded that they wereinterested in alternative credit scoring models. Allof these were practitioner-lenders (Native CDFIs,Native loan funds, and tribal housing authorities).These data suggest not only that lenders generallymay require more information about alternativeapproaches to credit scoring but also that traditional7 Dimitrova-Grajzl et al. 2015. PA G E 1 0commercial lending institutions may have moredifficulty implementing such approaches, eitherbecause staff are not trained in how to employ themor because bank policies prevent their use.Survey respondents also expressed concern aboutmeeting underwriting standards when makingmortgage loans for pr

HOPE NATION CONSULTING, LLC PREPARED FOR: SOUTH DAKOTA NATIVE HOMEOWNERSHIP COALITION Findings from a Survey of Lenders Mortgage Lending on South Dakota's Indian Trust Land: . MORTGAGE LENDING ON SOUTH DAKOTA'S INDIAN TRUST LAND PAGE 2 2 See CDFI Fund 2001, Dimitrova-Grajzl et al. 2015, Kingsley et al. 1996, Jorgensen 2016, Jorgensen .