Preying on he Poor
A D V E R T I S E M E N T
A D V E R T I S E M E N T
Advocates say questionable loans are devastating some North Texas neighborhoods.\r\nBy Michael May
By Michael May
the kitchen of Daisy Thompson’s modest two-bedroom home in South Dallas, her daughters are cooking meatloaf and cornbread for dinner. Thompson’s four grandchildren wriggle in and out of her lap, stretching their blue Kool-Aid-stained tongues and hamming for a laugh. Thompson, a 48-year-old Headstart teacher with a round, friendly face and smooth dark skin, rewards them with a weary, appreciative smile. As her eyes lower to the mortgage-refinancing papers spread out on her living room table, however, the smile fades into an expression of confusion and despair. “I used to think that I would be leaving this home for my family,” she says with a sigh. “Now I will just be leaving them a mountain of debt.”
It took only a blown engine and a half-hour with the loan officer from Beneficial, a subsidiary of lending giant Household International, to convince Daisy to turn her home from an asset into a burden. In 1998, when Thompson’s 4-year-old Hyundai rolled to a stop with a loud knock and a plume of smoke, she was left without any way to get to work. When Thompson realized it would take a few thousand dollars to replace the engine, she called Beneficial, whose flashy brochures had appeared regularly in her mailbox. Filled with smiling customers and bright, bold slogans like “We are there for you,” the brochures seemed to provide an answer.
But when the Beneficial loan officer arrived at her house, Thompson found out the loan would come with a steep price. He told her that she didn’t qualify for a personal loan, but she would be able to borrow $10,000 by rolling all her debt together and refinancing her home at 18.5 percent interest. Thompson, who at the time had only seven years left on her mortgage, felt as though she had no other choice. “He smiled a lot, looked me in the eyes, and told me that he was here to help me with my financial situation,” she recalled. “I needed to get to work, I didn’t know what to do. I just signed it.”
Thompson said she later tried to get out of the loan, but couldn’t find another lender to take it on. Last year, when Thompson needed a new roof, desperation drove her back to Beneficial. Once again, they told her refinancing her house was her only option. This time, even though her mortgage was extended until 2030 at 14 percent interest, she did not receive any cash for refinancing. Beneficial, on the other hand, made out pretty well. The company issued Thompson a $4,300 personal loan at 19 percent interest to fix her roof, and the refinancing earned the company almost $3,000 in fees.
The fees included $1,800 for single-premium credit insurance (a policy in which the premium is added to the principal instead of charged monthly), which adds thousands of dollars to the interest payments. Consumer advocates such as Rob Schneider, senior attorney at the Consumers Union, argue that single-premium credit insurance is a scam. “Single-premium credit insurance is only sold in the predatory market,” Schneider said. “Since they initially finance the cost of the insurance, the interest can easily end up doubling the cost — with no added benefit.” In Thompson’s case, the blow was softened a few months later when her application was rejected by the insurance carrier, and she was issued a refund.
Schneider said that an ethical banker would never have refinanced Thompson’s house for a $10,000 loan. If a conventional lender had agreed to issue a loan, her options would have included borrowing against the equity of her house, without refinancing. But since Beneficial got to her first, she now pays $647 of her $1,400 monthly salary in loan payments ($534 for the mortgage, and $113 for the personal loan), leaving only $753 to support a seven-member family. If she doesn’t make her payments, she risks losing her house. She will continue to pay on her mortgage until she is 76 years old; unless she refinances for a better deal, the loan will end up costing more than $100,000 in fees and interest. That’s enough money to buy a whole fleet of Hyundais, or put a grandchild or two through college.
Thompson’s story is just one example of a widespread practice known as predatory lending, which has grown exponentially in the past decade along with growth in the so-called “subprime” lending market. Subprime lenders charge rates up to double that of “prime” interest. A few days ago, for instance, the prime rate was x, prevalent mortgage rates were Y but beneficial was charging Z. Subprime lending can provide credit to individuals with low incomes, few assets, or poor credit history. However, critics say that lax laws allow some unscrupulous lenders to take advantage of borrowers who are desperate and inexperienced.
Beneficial officials vehemently deny that their loans are predatory. They maintain that Thompson’s loan legal and fair, and that they provide a valuable service to low-income customers. “A bank would never have given a high-risk borrower like Thompson a loan,” Craig Streem from Household said. “But we did. People who argue that our loans are unfair and deceptive are, in fact, saying that poor people are too stupid to make their own financial decisions. We believe that individuals should be allowed to think for themselves.”
That argument — that freedom of choice exists in the lending market — ignores the fact that minority neighborhoods have always been denied access to credit. Banks don’t tend to open local branches there, so predatory lenders market hard to fill the void. Despite the 1977 passage of the Housing Financial Discrimination Act (HFDA), a bill intended to force banks to make mortgages equitably across class and racial lines, minority applicants in Fort Worth and Arlington, for instance, are still about one and a half times more likely to be turned down for conventional mortgages than whites at the same income level, according to a study by the Association of Community Organizations for Reform Now (ACORN). These would-be borrowers are then faced with a difficult choice — turn to a subprime lender, or forgo the credit and the dream of home ownership.
In minority communities in Tarrant County, ACORN leaders said, the problem has reached epidemic proportions. According to the group’s 2001 study, subprime lenders account for 21 percent of refinance loans to white homeowners. The number jumps to 31 percent for Latino homeowners. African-American homeowners are hit the worst — more than half of all their refinance loans are from subprime lenders. “Fort Worth-Arlington has been hit harder by predatory lenders than most cities in Texas — but not by much,” said John Henneberger of the Texas Low Income Housing Information Service. “The depressing reality is that we are seeing minority communities being stripped of equity across the state.”
The debt burden is hardly necessary. A 2001 Fannie Mae study found that, nationally, almost half of subprime borrowers could have qualified for a prime loan. Many of these borrowers end up tethered to debt for years, and those who can’t keep up lose their homes. A study by the Coalition for Responsible Lending estimated that predatory lending costs borrowers $9.1 billion annually, through excessive interest rates (above what would be reasonable for the additional risk), hefty fees, prepayment penalties, and single premium credit insurance. Including the cost of foreclosures would likely add billions more to the estimate. “Home ownership gives families a stake in keeping their neighborhoods clean and free of crime,” Schneider said. “Predatory lending works to undermine this fundamental principal, and it is having a devastating effect on low-income communities across the country.”
Given Texas’ frontier past, it’s surprising how well predatory lenders have flourished here. Since its early days, the state has had a reputation for holding the homestead sacred, and the original authors of the Texas constitution figured the best way to do this was to prohibit home equity loans altogether. But homeowners complained that they were being unfairly prohibited from using their property as collateral for better credit, and, in 1997, voters passed a constitutional amendment overturning the ban.
The new regulations still contain the most rigorous consumer protections in the country: they prohibit the refinancing of a home more than once a year, limit fees to 3 percent, and make all foreclosures subject to judicial review. They also restrict the size of loans to a maximum of 80 percent of the value of the home and require a 12 day “cooling off” period between applying for a loan and signing on the dotted line. These protections were not universally embraced. A San Antonio Express-News editorial of the time said, “Texans do not need a patrician state government to hold their hands and tell them how to conduct their personal business.”
Those critics can rest easy; subprime lenders have figured out a way to get around most of the protections. Although fees are limited to 3 percent, “points” are not. In a conventional loan, a homebuyer can get a lower interest rate by paying some money up front. One “point” is up-front money equal to one percent of the amount borrowed. In a subprime loan, said Schneider, points are just another name for fees, with little, if any, discernable benefit to the borrower. And what about the restriction on refinancing more than once a year? “So they come back and refinance every year,” said Schneider. “This practice, known as flipping, is great for the lenders, and terrible for borrowers. The fees can add up to thousands and thousands of dollars.”
State Rep. Lon Burnam of Fort Worth insists that regulations need to be toughened. “It is a complicated issue, and hasn’t been prioritized by the legislature,” he said. “But when you start looking at the numbers, it’s astounding. This is white collar crime gone berserk.” The Democrat points out that southeast and northwest Fort Worth, the communities most hurt by predatory lending, are the ones that can least afford it. “This is clearly race and class-based discrimination,” he said.
The legislature is slowly becoming aware of the magnitude of the problem. An anti-predatory lending bill introduced by Senator Royce West, (D-Dallas) passed last session, but even its supporters admit that it hardly puts a dent in the problem. “West tried to pass a very tough law,” said Henneberger, “but he was simply overwhelmed by industry opposition. At the hearing there was Rob Schneider and I arguing for strong legislation and 21 industry lobbyists telling everyone there wasn’t a problem.”
Henneberger wanted a law like the one North Carolina passed in 1999. That measure put strict limits on interest and fees, and outlawed flipping, pre-payment penalties, single-premium credit insurance, and balloon payments. (Balloon payments are loans structured so that initial monthly payments are very low, but the principal continues to grow, and then a large payment is due all at once).
Instead, Texas got a law that requires lenders to consider the borrower’s ability to repay the loan, to make clear that single-premium credit insurance is optional, and to provide additional disclosures on loans over 12 percent. The bill also prohibits the refinancing of certain low-cost loans, like Habitat for Humanity mortgages. “There is still a lot to be done,” said Schneider. “The most promising thing is that the legislator agreed to continue to research the issue for the next session.”
That research is needed because in the past lenders have refused to disclose information that would prove whether discrimination is taking place, or not. The federal Home Mortgage Disclosure Act (HMDA) does provide enough data for advocates like Schneider to prove that minorities are being sold more expensive loans, but it doesn’t answer why. That’s because HMDA data does not include the borrowers credit history. Lenders, therefore, when faced with charges of discrimination, can argue that borrowers in minority neighborhoods simply have worse credit histories.
At a Texas Senate hearing on predatory lending held in Dallas last month, Ronald Abbott, chairman and chief executive officer of Peoples National Bank in Paris, Tx., was asked to explain why minority communities were charged more for loans. “I can tell you culture has a lot to do with it,” he began. “There are cultures that are athletically inclined, and cultures that are intellectually inclined... .” He went on to explain very little about how his bank decides what interest rates will be charged and utterly failed to dispel concerns that the industry is racist.
In a much-needed effort to clear this issue up once and for all, the state’s consumer credit commissioner is attempting to supplement the HMDA data with borrowers’ credit scores. That report is due by January of next year, in time for the next legislative session. “If all of the lenders cooperate, then we will finally know the extent of the problem,” said Henneberger. “If they are telling the truth, and all of these borrowers have terrible credit scores, then we will proceed by offering more consumer education, and worry less about regulation. But I doubt that will be the case. When Sen. West simply proposed last year to make it illegal to sell high-priced loans to individuals with good credit scores, the industry lobbyists were so scared that they had to pick their jaws up off the floor.”
Sen. Eliot Shapleigh, an El Paso Democrat, is gearing up to lead the charge against predatory lenders in the next legislative session. He said that banks in El Paso rarely make loans to poor people, forcing local residents to go to finance companies, where they are charged as much as 2000 percent interest. “I think it is very important that families be productive, not pay interest with their paychecks,” he said. He is holding hearings in El Paso at the end of the month, and plans on proposing regulation next year.
Shapleigh’s concern — that conventional banks are failing to market their services in minority communities — is at the heart of the issue. For example, in Thompson’s mostly black South Dallas neighborhood, eight of the top ten lenders are subprime, according to a study by Consumer’s Union. checking re FW. Facts like these, said Schneider, prove that much more needs to be done to level the playing field. “The fair lending act said you can’t discriminate based on race,” he said. “But that hasn’t forced conventional lenders to suddenly serve the needs of whole communities. To this day, very few conventional lenders do outreach in minority communities.”
Just as the last dinner plate at Thompson’s house was scraped clean and stacked in the sink, Thompson answered a knock at the door. The visitor was Kimberly Olsen, a dark-haired energetic young woman bearing an armful of newsletters focusing on predatory lending in Texas. Olsen is the lead organizer at the Dallas chapter of ACORN, which is part of a coalition working to pass a state law protecting subprime borrowers. (The group plans to start organizing in Fort Worth and Arlington ext month.)
The two sat at the table to review the details of the testimony Thompson planned to give at the Senate hearing. “This hearing will be the first time Texas senators will be able to hear directly from victims like yourself,” Olsen told Thompson. “It’s amazing, but we might even pass tough legislation in a conservative state like Texas.”
ACORN’s Texas campaign is part of a national effort to make predatory lending illegal. The group has been successful at the state and municipal level — ten states and municipalities, including Texas, have passed laws intended to stop or limit the practice — but getting a federal law will be tougher. U.S. Sen. Paul Sarbanes of Maryland, head of the Senate Banking Committee, has called predatory lending a “frontal assault on homeowners” and introduced legislation to regulate the industry; Congress, however, has shown little interest in passing it. “It is hard to describe how out-gunned we are at the federal level,” said Lisa Donner, director of ACORN’s Financial Justice Center. “The banking industry as a whole is opposed to any form of control. We have a had a lot of success at the state level, where politicians are literally closer to the people being affected.”
Even without tougher laws, some of the worst abusers are being taken to court. On March 21, the First Alliance Mortgage Corporation, accused by the Federal Trade Commission of cheating elderly homeowners, settled that lawsuit for $60 million. And in February, ACORN filed a class action suit in California against Household International, Beneficial’s parent company, alleging that the company deliberately misled tens of thousands of California borrowers. “It is very difficult for Household to change,” said Donner. “They spend so much money on marketing that they really are forced to make it back through deception and fraud. What they need to do is stop aggressively targeting poor communities, and that would allow conventional lenders to compete effectively in the subprime market.”
Although Household representatives deny any wrongdoing, they released a list of “best practices” for their branches to follow shortly after the California case was filed. The best practices include limiting fees to 3 percent of the loan value, and offering easy-to-read disclosures of all terms and conditions. Donner is skeptical of the changes. She said that Household promised to stop selling single-premium credit insurance almost a year ago, but borrowers report that they are still sold the dubious product in some states. Household said that it takes time to institute changes in their 1,400 branches. “Our best practices set a standard for the subprime industry,” Streem responded. “We are in the vanguard, but ACORN refuses to give us credit because we won’t sign a deal with them.”
Sometimes lenders can be convinced to change their behavior without lawsuits or legislation. In 2000, ACORN struck a deal with Ameriquest, the largest subprime lender, after a series of noisy protests that included filling the company’s national headquarters with angry borrowers. In response, Ameriquest not only committed to stopping many of its abusive practices, but agreed to partner with ACORN to make loans at discounted terms in certain neighborhoods, including some in South Dallas. “When ACORN first targeted us, we felt unfairly harassed,” said Adam Bass, senior executive vice president of Ameriquest. “But ultimately we decided to hear what they had to say. We found out we could learn a lot from them, and things have improved substantially.”
However, ACORN has found itself on the opposite side of Ameriquest in the fight to pass anti-predatory legislation. Ameriquest, like most lenders, feels that federal laws already prohibit predatory lending, and all that is needed is better enforcement. “If we keep passing tougher laws to regulate loans,” said Bass, “then fewer people will have access to credit. ACORN might argue that those people can’t afford loans, but we believe it is a personal decision.”
Thompson doesn’t feel empowered by the loan she got from Beneficial. She thinks about the music and ballet lessons she can’t afford for her grandchildren now that so much of her paycheck goes to inflated mortgage payments, and hopes that a law will be passed to protect low-income borrowers.
“Looking back, I know I should have talked to a bank and asked for financial advice,” she said. “But, at the same time, lenders shouldn’t be able to take advantage of people in desperate situations. Beneficial cheated me out of my life savings, and they didn’t even have to break the law.”
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