G 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 them—everything. 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' marketing—for 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."

Why now?
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:
  • Interest rates significantly above market rates, not justified by the degree of risk involved in granting credit.

  • Excessive balloon payments that require refinancing at a rate higher than the rate on the existing rate.

  • Lending without regard to whether the borrower has the ability to repay.

  • Prepayment penalties, in excess of actual costs incurred and unpaid.

  • Exorbitant fees and insurance premiums that the borrower may be required to finance, further jeopardizing equity.

  • Misleading or false advertising.

  • Requirements for frequent refinancing of the loan resulting in additional costs to the borrower and significant erosion of the borrower's equity.

     More money traps

    Predatory lenders
    prey on low-
    to moderate-income
    consumers lacking
    financial savvy.

    So far,
    no bills on
    predatory lending
    have made it
    into law.

    Victims of
    predatory lending
    face exorbitantly high
    interest rates and
    padded closing costs.

More money traps
According to "Fair Deal: Creating Credit Union Alternatives to Fringe Financial Services," published by CUNA & Affiliates, check-cashing outlets typically charge a fee between 2% and 10% to cash government benefit and personal checks. Fees charged for these services are usually substantially higher than typical financial institution fees for customers with accounts.

Payday lenders allow a consumer to borrow against the next paycheck, usually by writing a postdated personal check for the amount of the loan plus interest. Interest rates as high as 400% or more are common, with rates going as high as 1000%, according to the Consumer Federation of America, in Washington, D.C.

Title loans are targeted at people having few other assets and a poor credit history, allowing them to use the title to their car to get access to credit, while continuing to drive the car. The loan is based loosely on the worth of the car and usually is written for a one-month period. High interest rates and easy rollovers, the fees for which are rolled into the loan balance, end up costing consumers several times the cost of the original loan.

Rent-to-own services charge consumers a set monthly amount to rent home furnishings, appliances, or electronics. Consumers can continue to rent the item, return it, or pay the higher cost to buy it. A $500 television set could end up costing $2,200 in a two-year contract.

© 2000 Credit Union National Association Inc.