Stopping Mortgage Holdups

Smooth-talking predators knock on doors in poor neighborhoods looking to persuade elderly homeowners to trade a piece of their equity for a check with many hidden strings attached. Con men offer second mortgages impossible to pay on a widow’s pension, tack on balloon payments and “flip” that mortgage, refinancing again and again, building up huge fees. Finally, the lender wins and the homeowner loses the house. A bill, AB 489, would make this form of exploitative lending a state crime with real penalties.

The measure, scheduled Tuesday before the state Senate Banking Committee, would place reasonable restrictions on all residential loans secured by a home and would especially protect consumers with shaky or bad credit.

Borrowers with poor credit should pay higher interest rates and fees to compensate for the greater risk of default. That legitimate cost of doing business keeps credit available where it would otherwise be impossible to get. But while those with bad credit histories should pay more, they shouldn’t pay double the customary rate, which is what they’re paying now in some cases.

No one should face foreclosure because of lies, confusing paperwork, high-pressure tactics, exorbitant fees or payments improperly made so high that the owner has no chance of repaying the loan.

The bill, sponsored by Carole Migden (D-San Francisco), who chairs the Assembly Committee on Appropriations, would prohibit “packing,” the practice of adding eextras such as outrageously expensive unemployment, disability, life or property insurance in a loan. It would also outlaw “flipping,” the practice of repeatedly refinancing a second or third mortgage to generate higher fees for the lenders with no additional benefit for the homeowner. And the law would prohibit making a home equity loan to anyone who was mentally incapacitated.

Unscrupulous lenders often get away with these deceptive practices when approving loans for the most vulnerable homeowners. The Migden bill would impose fines equal to the total loan amount and up to $1 million. Repeat offenders would face even higher fines and jail time.

Sacramento and Washington should crack down on lending practices that resemble thievery. Banking regulators should scrutinize mergers and stop reputable financial institutions from acquiring sleazy outfits that profit from predatory lending.