ive us your poor, your disadvantaged, your uninformed and house-rich, and we'll see that they get a home equity loan that just might cost themeverything. If this sounds dire, it is. Victims of predatory lending, as it's called, often face such abuses as exorbitantly high interest rates, padded closing costs, balloon payments, unfair prepayment penalties, and repeated refinancing. And that's just for starters.
A California man missed a mortgage payment when his son became ill and his wife suffered an injury at work. Almost immediately, he received a call with an offer to refinance his mortgage and other debts at a 7.25% interest rate. The finance company representative visited the house and pressured the man into signing the papers without reading them, telling him he had three days to cancel the loan.
After the representative left, the homeowner discovered the interest rate was 11.25%, with $8,000 of fees financed into it, and monthly payments of $1,800$400 more than his previous payments. Despite numerous attempts over three days to cancel by phone, no one would assist him or return his calls. Eight months later, the family lost its home. (Part of testimony provided by Gloria Waldron, member, Brooklyn, N.Y., ACORN during the House Banking & Financial Services Committee Hearing on Predatory Lending, May 24, 2000.)
What it's all about
Predatory lenders prey on low-to moderate-income consumers lacking financial savvy and needing money to pay for medical expenses, home repairs, or debt consolidation. Although these lenders most often target the "subprime" lending market, which offers higher cost loans to individuals lacking the credit history to qualify for a traditional mortgage, even the more creditworthy aren't immune. The hard part for consumers is coming to terms with what they face once the loan is in place; often they have no idea what's coming, according to Martin Eakes, CEO of Self-Help Credit Union, Durham, N.C.
Mr. J, a 72 year-old North Carolina man, had owned his home for 13 years, with a mortgage rate of 8.4%, when he agreed to refinance with another mortgage company for an "affordable mortgage." The refinanced loan not only increased his interest rate to 10.99% and his monthly payment from $850 to $1,125, but the new loan rate was adjustable and could go up to 16.99%.
In addition, Mr. J was promised $15,000 cash from the refinanced loan to help pay off his debts, but only received $7,800. Mr. J, who was retired before refinancing, was forced to take a job at a grocery store in order to meet his monthly mortgage payments.
Predatory home loans are rarely demand-driven. "Instead," says Eakes "the loans are solicited by 'push' marketingfor example, ads that appear on TV ..., come through the mail, or are offered door to door."
Eakes says a 1996 Education Department study reported that 24% of all adult Americans are functionally illiterate. He likens this loan process to that of filling a cart at a store, and having a clerk hand you a card in the checkout line asking if you can read. If you can't read, the clerk triples the price of the items in your cart. "This is essentially what's going on in the mortgage market today. If you're not savvy or have a blemish on your credit report, you get triple the price at the checkout counter. Fees that strip the equity, or cash value, of your home away from consumers the moment they sign the loan.
"Self-Help got involved because our borrowers are low-income homeowners. They were coming to us to refinance loans that were putting them in jeopardy of losing homes," says Eakes. "We kept looking at loans that charged $15,000 in fees on a $29,000 loan." Thinking these at first were just isolated incidents, Self-Help started doing courthouse research, and holding meetings in churches. Instead they found at least 25% of subprime loans in North Carolina were abusive. "Ten thousand to 20,000 North Carolina families each year are put on a path that will ultimately lead them to foreclosure."
Factors such as banking deregulation, changes in the tax code, the near-abandonment by mainstream banks of low-income neighborhoods, and appreciating real estate values have coalesced to create an ongoing mortgage crisis for low-income homeowners, said Margot Saunders, National Consumer Law Center, Washington, D.C., in testimony offered before the House Committee on Banking and Financial Services hearing on predatory lending.
Saunders reports that "...foreclosures have increased by almost four times since 1980, and ... in 1998 there were over half a million families that lost their homes to foreclosure in the U.S. There are a number of reasons for this. We believe that one of the most significant reasons is the huge number of new loans that are being made by lenders who pay little attention to a borrower's ability to repay, and instead focus on bleeding the homeowner of the equity in the home."
Several states have taken action against predatory lenders and federal banking regulators are starting programs to halt unfair lending practices at banks and thrifts. Yet, despite the introduction in Congress of at least five bills on predatory lending, none have made it into law.
Be wary and be wise
Predatory lending includes home equity-stripping loan products with one or more of the following characteristics, according to the Credit Union National Association's Voluntary Lending Standards and Ethical Guidelines:
More money traps
prey on low-
no bills on
have made it
face exorbitantly high
interest rates and
padded closing costs.
|© 2000 Credit Union National Association Inc.|