Loan Sharks in Sheep’s Clothing
Christine Hill owed only $12,000 on her house in suburban Atlanta when a man came by offering to help her get the roof repaired. Pushed into signing loan documents she says she didn’t understand, Hill saw her mortgage suddenly balloon to more than $60,000 at a 20% rate of interest.
Within months, it was clear Hill couldn’t make the payments. The lender quickly foreclosed.
“If I had known what I was getting into, I would never have done it,” she says. “I regret it a million times. By now I would have had that house paid off.”
Betty Moore suffered a similar fate. She had become ill and was behind on her house payments when a lender came to her saying he could help. He had her sign blank loan documents and promised to pay off her debt and keep her monthly payments below $200.
A month later, after the deal was done, the “filled in” versions of what she had signed were delivered. She was paying 15% interest and $8,800 in up-front fees on a $55,000 mortgage. Her payments were nearly $700 a month--far beyond what Moore could afford. The lender foreclosed and sent Moore packing from her home of 30 years.
Hill and Moore are among thousands of former homeowners whose troubles with mortgage scams are inspiring greater concern among consumer advocates and a bill recently introduced in Congress. The bill, which aims to warn consumers about so-called high-cost mortgages, would not stop many of the abusive practices, but it would at least advise consumers about what they’re getting into, consumer advocates say.
The bill is badly needed, proponents say, because mortgage scams are proliferating. No one has precise statistics, but attorneys and consumer advocates maintain that the scams have grown by geometric proportions, thanks to the sluggish economy and regulatory shortcomings.
Specifically, while banking rules require federally regulated banks and thrifts to make loans in low-income and minority neighborhoods, many big lenders have ignored the rules. Abusive lenders charging exorbitant interest rates and fees have filled the void.
Meanwhile, federal usury laws that bar excessive interest rates and loan-sharking have been eliminated or watered down in many states, leaving swindlers to operate largely within the law.
At the same time, the lackluster economy and falling interest rates left millions of people out of work and forced many retirees to live on declining investment incomes.
Old, ill and financially troubled consumers are the main targets of these scams because they are often desperate enough and unsophisticated enough to trust people who call them on the phone or show up at their door offering money.
In the end, many find themselves thrown out of their homes and still thousands of dollars in debt. Some are too ill or too old to ever recover what they worked all their lives to earn.
The most common mortgage scams come in two varieties: home improvement loans and simple home equity loans.
It is important to note that there are plenty of legitimate lenders offering the same types of credits. The scam companies differ by offering money at exorbitant rates and fees. Often they misrepresent what the consumer will be getting. And they’re willing to lend to individuals who clearly can’t make the payments because, unlike legitimate lenders, their goal is not to receive monthly payments--it is simply to foreclose.
The proposed legislation would address the problem by requiring a series of disclosures before the loan is settled. Specifically, consumers must be given the annual percentage rate and the corresponding monthly payment before the deal is done. They also must be told, in writing, that they could lose their home if they don’t repay the loan on a timely basis. And consumers must also be told that they aren’t required to complete the transaction. (Some people thought that once they had gotten to a particular point, they were bound to go through with the deal.)
Additionally, it would bar lenders from charging prepayment penalties of more than one month’s interest or holding back more than two months’ payments from the loan proceeds. It would also bar “balloon payments”--big, onetime obligations that are usually due at the end of the mortgage term--and negative amortization, a fancy term for allowing your loan balance to grow even while you’re making scheduled payments.
Banking groups are fighting the bill even though it targets only a very small segment of high-cost mortgages: those that charge upward of 10 percentage points more than Treasury rates; those that are granted despite the fact that the consumer’s debt payments will exceed 60% of their income, and those that charge fees and points that equal more than 8% of the loan amount. (Points are a type of fee based on your loan amount.)
Many believe this bill has a good chance of flying through Congress to become law despite the banking industry opposition. Why? It’s sponsored by some of the most powerful legislators on both sides of the House, and the Clinton Administration has already given the bill its blessing.
Avoiding Mortgage Scams
Even if the Home Ownership and Equity Protection Act of 1993 does quickly become law, consumers will still need to be wary. Rather than barring many abusive practices, the law would simply make lenders disclose them. People who aren’t careful can still end up trapped. How can you serve as your own watchdog? Here are a few tips.
* Beware of lenders at the door. Most legitimate lenders don’t come to you. They might mail you a flyer, but they typically will not show up on your doorstep. If somebody comes to your door offering money, be particularly skeptical.
* Demand documents. Never agree to home improvements or home equity loans without a formal contract. Never sign a contract that you haven’t read or that’s not completely filled out. And always get a copy of what you’ve signed--on the spot. Don’t let somebody take the contract away and deliver your copy later. Unscrupulous people might change the terms while you’re not looking.
* Sweat the details. Before taking out a loan, you should know exactly how much you’ll pay in fees, interest and monthly payments. You also must know whether your home is being used as collateral.
* Shop around. If you need a loan, shop for one. Don’t just take what’s easily offered. You may find a legitimate company willing to lend you money at a much lower cost.
* Never get pushed. If the salesman says you don’t have time to shop around or pushes you to sign on the spot, consider it a warning sign. People offering good deals have plenty of takers. They don’t need to badger. It’s the crooks and the con men who want you to part with your money immediately.
