Predatory loans: on borrowed time?

In the late 1980s, when Arnold Schwarzenegger and Jesse
Ventura teamed up for the film Predator,
America was deregulating and otherwise fantasizing its way into economic
trouble. Soon enough, ordinary working people spied some monsters among the
dollar signs. One was called consumer debt, with credit-card marketers getting
top billing.

            There are
stealth predators, too. One made the front pages last summer, when Citigroup,
an incredible hulk itself, agreed to stop selling “single premium credit life
insurance.” This type of mortgage insurance requires the borrower to make an
upfront, single-sum payment rather than ordinary monthly premium payments. So
the borrower takes out a secondary loan to pay the upfront “premium” — and
ends up paying magnum interest. This can lead to a loss of equity, or a loss of
the home altogether. As the New York
Times reported, Citigroup vowed to mend its ways; but Household
International, another big lender, said it would keep providing the insurance.
Days later, though, Household also dropped the hot potato.

Larger
dramas are playing out in the mortgage market — especially in
what the Federal Reserve Board calls “high-cost home-secured credit.”

            In an
explanatory note to its “Regulation Z,” the Board defines the problems and
names the likely victims simultaneously: “The term ‘predatory lending’
encompasses a variety of [home credit] practices. Oftentimes homeowners in
certain communities — particularly the elderly and minorities — are
targeted with offers of high-cost, home-secured credit. The loans carry high
up-front fees and may be based on the homeowners’ equity in their homes, not
their ability to make the scheduled payments. When homeowners have problems
repaying the debt, they are often encouraged to refinance the loan. Frequently
this leads to another high-fee loan that provides little or no economic benefit
to the borrower.”

            The
regulatory language sounds bad enough. But individual cases of this type could
make a fixed-income senior’s hair go grayer.

            Peter
Dellinger, a staff attorney with the Public Interest Law Office of Rochester,
cites one case he’s working on. (Dellinger says he can’t reveal the borrower’s
or lender’s names.) In this case, he says, a family secured a home mortgage of
$57,000. The 20-year mortgage was quoted at 9.6 percent interest but actually
came in with a rate of 11.2 percent, he says. Moreover, he says, the couple had
to pony up $9,100 in points and fees.

            Then came
the clincher: a lump-sum “balloon” payment due at the very end. “They’re paying
$547 a month for 239 months,” says Dellinger, “and their final payment will be
$42,700.” In other words, the family will pay years’ worth of high interest,
only to see their equity drained off in the balloon payment.

            But the bad
news doesn’t stop there. The family, says Dellinger, also has taken out a
$10,000 home-equity loan at 18.49 percent to pay off other creditors.

            Can the
family be helped? Dellinger says there’s not much room for maneuver here. “The
legal tools are not very good,” he says. “That’s one of the reasons we have
this problem… and why we need [stronger] legislation.”

            High
interest rates and apparently onerous terms may compensate lenders for the
riskiness of certain loans, some of which are sure to go bad. Still, the
amounts that some people have to shell out are staggering. “It’s not the way it
used to be, when you went down to the local banker” for an off-the-shelf
mortgage, Dellinger says. In many states, he says, anti-usury laws “were pretty
much abolished in the early 1980s.” Without these laws, he explains, lenders
have been able to jack up interest rates greatly.

            Of course,
the availability of legitimate “subprime” or higher-interest loans has good
effects, too. Such loans allow people with low incomes or checkered financial
histories to get credit. In the old days, they may simply have gone without —
another sort of burden.

The
world of finance has two minds about predatory lending
— at least about how stringent the laws should be. But in New York, no one
denies that such lending is a widespread problem. It could hardly be otherwise
in a state with declining cities and large low-income populations.

            That’s why
the coalition New Yorkers for Responsible Lending was formed. NYRL’s nearly 100
members include local organizations like the Group 14621 neighborhood
association, Housing Opportunities Inc., and Rural Opportunities; and statewide
organizations like AARP (formerly known as the American Association of Retired
Persons) of New York, the League of Women Voters, and the New York Public
Interest Research Group.

            For the
past year, NYRL has made a special push to get strong anti-predatory
legislation passed in Albany. But competing bills (S.5005 in the Senate, and
A.7828 in the Assembly) ran aground. The Assembly did pass one version almost a
year ago, but that died in the Senate. This year the Assembly took up the bill
again, but the Senate adjourned last week without taking action.

            The
Rochester-based ESL Federal Credit Union is an influential member of the NYRL
coalition — but was somewhat on the fence regarding the legislation. “As
responsible lenders, we feel it’s important to give support” to anti-predatory
lending bills, says ESL general counsel Tim Pryor. Nonetheless, he says, ESL
doesn’t want a law on the books that’s “inordinately broad.” In other words,
ESL, like many lenders, doesn’t want to prevent legitimate high-rate loans from
being made — loans that could help certain high-risk borrowers get what they
need.

            But
high-risk borrowers, like all others, need special protection. And there is
some already. For example, as an AARP backgrounder explains, a federal law
known as HOEPA, the Home Ownership and Equity Protection Act, has been in place
since 1994. HOEPA, says the backgrounder, covers loans whose “annual percentage
rate (APR) is 8 points higher than the rate on a Treasury bill for the same
length of time.” At this moment, any loan that carries 13 percent interest or
more would be considered high-interest and thus would fall under HOEPA’s
protective umbrella. Among other things, HOEPA requires lenders to disclose
crucial information about the loan before a borrower signs on the dotted line,
and it puts limitations on balloon payments.

            Trouble is,
HOEPA covers only carefully defined
high-interest loans — leaving any predatory practices associated with
lower-interest loans untouched. Bill Ferris, New York State legislative
representative for AARP, says HOEPA “is a very good law.” But, he says, “it
doesn’t capture part of the market where a lot of bad things are happening.”
The bad things, according to an AARP fact sheet, include excessive brokers’
fees or points; huge balloon payments; and “flipping,” or serial re-selling to
add yet more fees and points.

            Hence the
need for a strong state law.

To
help prevent such abuses, anti-predatory-lending
groups like New Yorkers for Responsible Lending want a strong provision in
state law for “assignee liability.” HOEPA contains such a provision, but again,
HOEPA doesn’t cover all the loans out there.

            What is
assignee liability? Essentially, it means that a lender who buys a problem
mortgage can be held responsible for the legal defects written into that
mortgage by the original lender. (This is no mere detail, since the defects may
include serious things like deceptive trade practices or outright fraud.) With
assignee liability in the legal toolbox, a borrower can make claims against the
current owner of a predatory mortgage. Without it, the borrower is limited to
making claims against the originator of the mortgage — and the originator may
be difficult to pin down, or even impossible to find.

            As you can
imagine, assignee liability would also give financial institutions in the
so-called “secondary” loan business a powerful incentive to police their own
ranks. Peter Dellinger of the Public Interest Law Office of Rochester sums up:
“Assignee liability becomes a critical tool for making institutions behave.”

            Unlike
NYRL, the New York Bankers Association isn’t so interested in a strong
assignee-liability provision. “We totally concur,” says Bankers Association
general counsel Roberta Kotkin, “that anyone in the loop has to have
appropriate culpability… but we’re concerned the language [in proposed
legislation] will chill the secondary market.” As a counterweight to regulatory
moves, the Bankers Association is pushing a set of “Home Lending Best
Practices” among its members. The voluntary guidelines speak of “full enforcement
of existing… laws and regulations” but do not address legal reforms.

            The state
legislature is not in session right now. An aide to Senator Rick Dollinger says
S.5005 could be taken up when the Senate goes back to work this week. But there
are more high-profile items to be dealt with, says the aide — like the state
minimum-wage hike.

            So don’t
expect the predatory lenders to meet the legislative equivalent of Ventura and
Schwarzenegger very soon.

This article appears in Jun 19-25, 2002.