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More U.S. home buyers
fall prey to predatory lenders
After Martha Lawler lost her job at Bell Atlantic in 1993, she fell
behind on her house payments. Then her troubles really started.
Desperate to hang on to her Brooklyn, N.Y., home, Lawler, 55, took
out a new mortgage with a local finance company that carried an
18.25% interest rate, big fees that were rolled into her balance and
a "balloon" payoff due in five years. Unable to make the higher
monthly payments, Lawler refinanced into what she thought was a more
affordable loan.
The pattern continued through six lenders, 10 years and thousands of
dollars of dubious charges that eroded her home equity and pushed
her mortgage balance from $50,000 to $198,000.
"For 10 years I've been going in a circle, robbing Peter to pay
Paul, trying to keep this mortgage up," Lawler said. "No fly
clothes. No new car. My mortgage is my life."
Lawler got caught up in a problem that has drawn increasing concern
and action from state and federal regulators: predatory lending,
loosely defined as loans with excessively high interest rates, fees
or other provisions that can make them extremely difficult to repay
The focus on predatory lending has coincided with the heady growth
of the so-called subprime mortgage market. Subprime lenders offer
higher-interest loans to people with troubled or non-existent credit
ratings. While most subprime loans are not predatory, consumer
advocates caution that all predatory loans are subprime.
More than 25 states and a host of towns and cities have passed
predatory-lending restrictions since 1999. Looking ahead, predatory
home lending is expected to be a continuing financial and political
issue for several reasons:
•The rise of subprime. Subprime mortgage lending grew an average of
25% a year from 1994 to 2003 and now is a
more-than-$330-billion-a-year industry that provides about 1 in 9
U.S. mortgages. The growth has helped broaden homeownership — nearly
70% of American homes are occupied by their owners — and given a
boost to minority home buying.
Subprime lenders provide mortgages or home equity loans to people,
including high-income borrowers, who don't qualify for conventional
financing. Such lenders accept credit scores below the 620-660
threshold generally needed for prime financing and require
less-stringent income documentation.
But critics say many of the subprime lenders' clients could qualify
for conventional loans. Subprime lenders offer mortgage rates that
sometimes range into double digits, though they can be as low as 6%
to 7% for those with near-prime credit. Costs rise, often steeply,
as credit scores fall.
•Changing demographics. Recent immigrants and minorities, who will
make up the bulk of new households and about half of first-time home
buyers in coming decades, are far more likely than whites to take
out subprime loans — and appear more likely to be victimized by
predatory lending. Federal data show even affluent minorities are
more likely than whites to take out subprime loans, and some
consumer groups say minorities are unfairly diverted to the subprime
market.
The elderly population, too, is growing and may be vulnerable to
predatory lending, because older homeowners have built up years of
equity. AARP has a major initiative to combat predatory lending
through education and litigation.
"Most of our clients don't go looking for loans," says Jean
Constantine-Davis, an AARP attorney in Washington, D.C. "It very
often starts out with a home-improvement loan. ... People think
they're getting a loan for a chimney, (but) they've refinanced the
house, rolled credit cards into it."
In Memphis, consumer advocates say predatory lenders, including
firms owned by blacks, have targeted African-American neighborhoods,
resulting in a rash of foreclosures. Data from Boston and Chicago
also show concentrated subprime lending in minority neighborhoods.
•The growth of the secondary market. More than $200 billion in
subprime mortgages were resold, bundled into bonds and offered to
investors as mortgage-backed securities in 2003. Mainline entities
such as Lehman Bros. or mortgage giant Fannie Mae are major players
in the market.
•Uneven regulation. Mortgage brokers, middlemen who match buyers
with lenders, now originate 50% of subprime mortgage loans — about
the same as for regular mortgages — but are lightly licensed and
monitored by states. The number of mortgage brokerage firms has
climbed to 44,000 last year from 7,000 in 1987. State laws on
predatory loans don't govern national banks, which are exempted
under a ruling by the federal Office of the Comptroller of the
Currency. The banks fall under less-restrictive federal rules.
A turning point?
The debate over subprime lending may be at a turning point. Banks
and brokerages with a stake in the booming subprime market complain
legislatures have gone too far, creating a confusing patchwork of
laws that hurt legitimate business and prevent consumers from
getting loans. Many want federal legislation overriding state
statutes.
"You err on the side of letting people try to live the American
dream if they want to buy a house," says Wright Andrews, a
Washington, D.C., attorney who represents subprime lenders.
Congress is poised to take up the issue next year, though
legislation is far from a sure thing. State governors and attorneys
general, already opposed to the Office of the Comptroller ruling,
fear a federal power grab. Consumer groups, which had pushed for a
federal law, worry about losing state protections.
"A lot of people have been victimized. Not just poor people —
middle-class, professional people, people of every stripe," says
Allen Fishbein, director of housing and credit policy for the
Consumer Federation of America.
Predatory-lending restrictions
What is a predatory loan? There's no official definition. Both sides
say the issue is akin to a Supreme Court justice's description of
pornography: You know it when you see it.
Source: USA
TODAY
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