AARP Warning Elderly of Scams

Speaker says too-good-to-be-true loans usually just that; General Assembly urged to take action

The loss of a treasured and hard-won home can start with a phone call.

For many elderly, minorities and low-income families around Kentucky and across the country, it sounds like it’s too good to be true: a phone call, or a television ad, offering a debt-consolidation or home-improvement loan at bargain rates on easy terms.

It is.

While most lenders are “honest and honorable,” Bill Harned told a small, mostly elderly crowd at the Carroll Knicely Conference Center Monday afternoon, a few take advantage of their clients with predatory lending practices.

Nothing is more shattering to the AARP’s vision of self-sufficient retirees than the specter of the elderly being enticed into disastrous loans, said Harned, president of AARP Kentucky.

That’s why AARP held the forum, and why it is pushing in the Kentucky General Assembly for passage of House Bill 240, which was introduced Friday by Rep. Grady Stumbo of Floyd County. The bill, modeled on the AARP’s national model, bans or regulates a wide variety of predatory practices.

There are legitimate reasons for high-interest or high-risk loans, called subprime loans, for people with poor or no credit, said John Rosenberg, an issue specialist for AARP Kentucky. But loans become predatory when they cease to be based on the borrower’s ability to repay them, instead simply setting traps that result in higher and higher fees and payments – until, after exhausting borrowers’ resources, lenders can foreclose on borrowers’ collateral, usually their homes.

Subprime loans went from $34 billion in 1994 to $173 billion in 2001, Rosenberg said. Excessive fees and costs take $9 billion from borrowers annually.

A recent settlement between state attorneys general and Household Finance over its predatory lending practices will send about $3 million back to Kentucky borrowers, Rosenberg said. With the average refund payment around $1,500 to $2,000, that indicates Household alone made more than 1,000 predatory loans in Kentucky during just the two years covered by the settlement.

The results of predatory practices are hard to track, Rosenberg said. But some indication is given by the rate of foreclosures, which quadrupled between 1980 and 1999, while home ownership only rose by 2 percent.

Many people have taken out consolidation loans or refinanced debts in this period of generally low interest rates. But some lenders exploit this trend with too-good-to-be-true loan offers and a raft of hidden charges.

One common tactic is “loan flipping,” or offering refinancing of existing loans every few months; it sounds like a good deal from the standpoint of interest, but the savings are eaten up in refinancing charges. Among its other practices, Household Finance was found by the Federal Trade Commission to be offering its clients a loan flip every 90 days.

Another is the balloon payment, in which low payments for now are secured with a single, massive payment years down the road. When the borrower can’t make that payment, the lender forecloses or offers to refinance at a much higher rate. Then there are yield-spread premiums, in which a mortgage broker hired to find prospective borrowers a good deal essentially takes a payoff for setting them up with a rotten lender.

And there’s flat-out deception, in which borrowers wind up paying far higher interest than they thought they were agreeing to.

About a third of those holding subprime loans should actually qualify for better rates, Rosenberg said.

The elderly are frequent victims of predatory lending, but so are low-income families and minorities, Rosenberg said.

“Minorities are hit twice as hard as the white population,” he said.

Senior citizens get hit particularly hard since they do not have the means or the time to pull themselves out of debt, Rosenberg said.

North Carolina, Georgia, California and New York have all passed strong laws against predatory practices, Rosenberg said. Now the AARP is working on the same in Kentucky. The Bowling Green, Franklin and Glasgow AARP chapters are taking buses to Frankfort to rally for House Bill 240 bill on Feb. 19.

The AARP expects the lending industry to introduce a watered-down substitute, said Phil Peters, AARP Kentucky state director.

Source: Daily News Online