Borrowers Pay Price of Predatory Lending
The fliers offering easy credit and low payments on home-equity loans started arriving almost from the moment Lena Jones closed escrow on her townhome in Inglewood. The house was a “fixer,” and Jones’ car was a junker, so the cash was sorely needed. But Jones now says taking the loan was one of the biggest financial mistakes of her life.
By the time she realized that she’d be paying thousands of dollars in fees and making monthly payments much higher than she’d expected, the loan agent said it was too late to unwind the deal, Jones said.
Some of the fees were later reversed at the request of regulators. But Jones still considers herself a victim of predatory lending--the practice of luring vulnerable borrowers into taking out loans with exorbitant interest rates and fees.
“This is how people get tricked,” Jones said. “I hope they do something about this because I don’t want to lose something that I’ve worked so hard to get.”
Jones’ lender disputes part of her story, but no one denies that similar dramas are played out thousands of times every year, often with disastrous results. In recent congressional hearings, dozens of consumers and consumer advocates testified about elderly, poor and unsophisticated borrowers being victimized and often losing their homes as a result. The problem has become so pronounced that national, state and local lawmakers have passed or proposed laws and rule changes that would outlaw the most abusive practices.
Meanwhile, several big lenders are revamping their internal policies, dropping products considered abusive to consumers and attempting to be more responsive to complaints. Just last week, Citigroup Inc. agreed to repay as much as $20 million to borrowers in North Carolina to settle an investigation by the state into alleged deceptive practices at one of the lender’s consumer-credit units.
There are no statistics on the number of predatory loans made each year. The loans are a part of the sub-prime mortgage market, which has grown exponentially since 1993, according to the Department of Housing and Urban Development. Sub-prime lending, which concentrates on borrowers who have marred credit histories, has made it much easier for many lower- and moderate-income borrowers to get credit--something consumer advocates applaud.
Existing Laws Address Most Issues, Lenders Say
What separates predatory loans from other sub-prime loans is a raft of abusive practices, including misleading borrowers about the high cost of the mortgage and forcing them to buy costly optional products, such as credit insurance.
Lenders maintain that most predatory lending complaints are about practices that violate existing federal laws. For instance, misleading borrowers about the terms of a mortgage is illegal under current law. If these borrowers are being misled, the problem isn’t the law, it’s the lack of enforcement, said a spokesman for the Mortgage Bankers Assn., which opposes any new laws aimed at stemming predatory lending.
Some lenders favor a national bill--preferably one that doesn’t set caps on interest rates. The current practice of passing different rules in various states and localities across the country is too cumbersome, bankers complain.
They also note that some borrowers are more likely to default than others. If banks aren’t able to charge more to account for that risk, they’ll simply pull out of the business.
“Somebody is going to look back three or four years from now and say that there were some unintended consequences” of the efforts to regulate predatory lending, said Kenneth L. Lewis, chief executive of Bank of America, which recently closed a division that lent to higher-risk borrowers. “You may see all the reputable lenders get out, leaving only the marginal players.”
Consumer advocates say laws allow too many abusive practices, such as charging sky-high rates and imposing prepayment penalties.
“Outrageous practices are perfectly legal under current law,” said Lisa Donner of the Assn. of Community Organizations for Reform Now, or ACORN.
That may change, however. Consumer groups, including ACORN, Consumers Union and the AARP, formerly known as the American Assn. of Retired Persons, are pushing for new restrictions on high-cost loans.
Several cities, including Oakland, Chicago and Philadelphia, have adopted predatory lending rules. In addition, Connecticut, Illinois, Massachusetts, New York, Pennsylvania, Texas and Virginia have approved some form of regulation. Several additional states are considering new laws, including California, where an anti-predatory lending proposal has passed its first major legislative hurdle and received the backing of Gov. Gray Davis last week.
Focus on Practices Is Sparking Change
The trouble, lenders and consumer advocates agree, is that these initiatives vary widely. Some impose strict limitations on interest rates and fees. Others simply require additional disclosures or bar government agencies from doing business with companies that make predatory loans--proposals consumer advocates say are far too mild to fix the problem.
However, chances of passing a national predatory lending bill this year are slim, mainly because Congress is concentrating on other priorities, such as health care and education, congressional insiders said.
Still, the attention that predatory lending has received in recent months is having repercussions. The nation’s two biggest sub-prime lenders, though not admitting predatory practices, have revamped their lending policies and banned some products that consumer advocates maintained were abusive.
Citigroup, whose subsidiary CitiFinancial Credit is the nation’s biggest sub-prime lender, announced in June that it would stop selling single-premium credit insurance, a product that consumer advocates maintained was often sold and financed at huge costs in conjunction with predatory loans. Household International Inc., parent of No. 2 sub-prime lender Beneficial Mortgage, quickly followed suit.
Both companies also shortened their prepayment-penalty periods and changed a variety of internal policies to reduce the number of foreclosures. In addition, they agreed to reduce interest rates as a reward for borrowers who make their loan payments on time.
Citigroup also announced that it stopped doing business with about 3,500 of the 6,000 loan brokers who previously sold loans for Associates First Capital Corp., a sub-prime lender it purchased about a year ago. Some of the brokers were jettisoned after Citigroup reviewed loan records, others when they failed to sign the bank’s new ethics policy.
It’s a start, said ACORN’s Donner, but more needs to be done.
“This is a tremendously important problem that’s not going to go away overnight,” she said.
“We are going to work very hard to pass federal legislation, but we are not going to wait for it. We’re going to work in cities and states, too. We have to. Too many people are being hurt.”
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Borrowing Binge
Predatory loans are an outgrowth of the subprime mortgage market, which focuses on loans to high-risk borrowers and has grown rapidly in recent years.
Subprime mortgage originations
(in billions)
1995: $65.0
1996: 96.5
1997: 125.0
1998: 150.0
1999: 160.0
Subprime refinance loans
1994: 126,776
1995: 158,395
1996: 320,239 1997: 551,396
1998: 789,696
Source: Department of Housing and Urban Development
