Even the Savvy Can Be Victimized by Predatory Lenders
The federal government has declared war on so-called predatory lenders who victimize the poor and elderly with exorbitant fees, high interest rates and deceptive marketing practices.
But you don’t have to be low income or on Social Security to wind up with a bad loan.
Irene Eichel, 62, wanted a $30,000 home equity loan in 1994 to make improvements to the Encino townhouse she purchased with proceeds from her divorce settlement; she also wanted to repair damage from the Northridge earthquake. A lender she contacted persuaded her to take out a reverse mortgage, a loan that allows borrowers to tap their home equity. The loan generally is not repaid until the borrower sells the house or dies.
Eichel understood the loan would accrue at 13% interest, a rate that was higher than that of a comparable home equity loan. But Eichel thought the convenience of not having to make payments was worth the higher cost.
When she sold her home six years later, however, she wound up losing more than half her equity--$126,800--to the reverse mortgage lender. The loan document’s fine print included a provision that gave the lender a large share of the equity, plus the 13% interest.
“I was in escrow to buy another home. I had to cancel it,” Eichel said. “Now I’m living in a studio apartment.”
Eichel told her story earlier this week to a public forum on predatory lending hosted by the Housing and Urban Development Department. HUD Secretary Andrew Cuomo has characterized predatory lending as a national crisis, and the forum is one of a series being held across the country to publicize loan abuses, especially in the sub-prime and reverse mortgage lending businesses.
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In home equity lending, as in many consumer financial transactions, uneducated consumers can easily become victims of their own ignorance. But some lenders seem particularly adept at exploiting customers with unconscionably high fees and bad terms.
A case in point: Emma Conley, a 76-year-old Long Beach woman with poor credit who was persuaded by a contractor to finance home improvements. By the time the transaction was done, Conley paid a whopping $6,704 in fees to get a $80,600 loan at a 10.99% interest rate. The loan payments equaled more than 42% of Conley’s $1,800 monthly income. What’s worse, part of the loan was used to refinance a 3% fixed-rate loan from the city of Long Beach that was not due until Conley died or sold the home.
Conley’s sister, who is now her guardian, said the elderly woman suffered from diminished mental capacity and failing eyesight when she signed the documents; Conley has since been disabled by a stroke.
The sister, Naomi Ferns, said she warned Conley against signing for the loan, but the lenders were persistent.
“They even took her out to dinner--several times,” said Ferns, former chairwoman of Long Beach’s Citizen Police Complaint Commission. “When I showed her the loan documents she had signed . . . she became very, very disturbed. She hadn’t realized what she had done.”
Some of the most egregious practices in reverse mortgage and sub-prime lending--sub-prime meaning lending to people with flawed or nonexistent credit--are aimed at low-income elderly people such as Conley whose major asset is the equity in their homes, explained William Apgar, HUD’s assistant secretary for housing and a leader in the agency’s fight against predatory lending practices.
“Predatory lenders have stripped thousands of dollars from low-income families” in high fees or excessive debt payments that result in foreclosures and homelessness, Apgar said.
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Because low-income and minority borrowers tend to make the most use of sub-prime lending, they are particularly at risk. HUD figures show sub-prime lending in Los Angeles accounted for 23% of loans in low-income communities and 33% of loans in predominantly black neighborhoods, compared with 11% of loans in upper-income and 9% of loans in predominantly white neighborhoods.
Not all sub-prime lending is abusive; lenders point with pride to the fact that such loans are making more credit available in neighborhoods underserved by other lenders.
Sub-prime lenders are a better alternative for many borrowers whose other options might be pawnshops or loan sharks, said Jeffrey Zeltzer, president of the National Home Equity Mortgage Lenders Assn., a trade group for sub-prime lenders. Most sub-prime lenders do not target the poor or vulnerable with inappropriate loans.
But federal regulators see far more predatory lending practices among sub-prime lenders than among lenders that face more competition or market to consumers with good credit histories, Apgar said.
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Sub-prime lending is not limited to poorer neighborhoods. HUD figures show sub-prime lending increased from 1% of loans made in middle- and upper-income neighborhoods in 1993 to 11% of loans to middle-income neighborhoods and 7% of loans in upper-income neighborhoods last year. HUD officials say complaints from affluent borrowers are increasing as well.
“Even sophisticated consumers have fallen prey to some of these deceptive practices,” Apgar said.
Some consumers may assume, incorrectly, that state usury laws protect them against paying too much for a loan or that they will have some recourse against bad lenders. Predatory lenders are swift to exploit gaps in the law, said Manuel Duran, Eichel’s attorney.
Some lenders have even withheld loan proceeds because they know borrowers have little redress. Once a loan has been sold on the secondary market--as it typically is, sometimes the same day the loan is made--the borrower is legally on the hook to the loan’s new owner, even if the original lender never paid out a dime, Duran said.
The loan documents themselves are usually complex enough to make an attorney’s eyes cross, leaving little hope that a consumer can wade through the legal double talk, Duran said.
That’s why consumer groups from AARP to Consumers Union to the National Assn. of Consumer Advocates are demanding regulation of sub-prime and reverse mortgage lenders that would cap fees, limit interest rates and force lenders to consider the borrower’s ability to repay the loan.
Lawmakers have responded by passing or proposing restrictions on lenders who make high-cost loans. North Carolina recently increased curbs on sub-prime lending, Congress is considering a bill, and legislation has been introduced in California by state Sen. Hilda Solis (D-La Puente). California Senate Bill 2128 is scheduled for a hearing next week.
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Consumers can limit the possibility of abuse by checking out their lenders with the Better Business Bureau. The Los Angeles area bureau received hundreds of complaints about Irvine’s First Alliance Corp., for example, before that sub-prime lender filed for bankruptcy in March amid lawsuits and regulatory investigations of its practices, bureau President William Mitchell said. Older borrowers interested in reverse mortgages should be particularly scrupulous about which lenders they use. AARP, formerly the American Assn. of Retired Persons, has brochures and a video available to educate consumers about reverse mortgages.
But the fact remains that reverse mortgages and sub-prime loans tend to be more complicated than standard mortgages and loans made to borrowers with good credit. With complications come opportunities to confuse and abuse consumers, Apgar said, calling these two areas of lending “a breeding ground for predatory lending.” Whether through increased regulation or better enforcement of laws already on the books, more needs to be done to reduce the number of people who become these lenders’ prey.
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Liz Pulliam Weston can be reached at liz.pulliam@latimes.com. For past Money Talk question and answer columns, visit The Times’ Web site at https://www.latimes.com/moneytalk.
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Recipients of Sub-Prime Loans
Sub-prime loans are higher-cost loans made to borrowers with troubled or nonexistent credit histories. Percent of loans that are sub-prime:
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Los Angeles Nationwide Low income 23% 26% Middle income 14 11 Upper income 11 7 Predominantly white neighborhoods 9 9 Predominantly black neighborhoods 33 51 Upper-income black borrowers 29 39 Upper-income white borrowers 15 6
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*Low-income neighborhoods are U.S. census tracts with median incomes that are less than 80% of the median income for their metropolitan area; middle-income tracts, between 80% and 120%; upper-income tracts, more than 120%. Predominantly white neighborhoods are those with less than 15% minority populations, and predominantly black neighborhoods are tracts where blacks make up at least 75% of the population.
Source: Housing and Urban Development Department
