Predatory Lending

Law, Notable, Race, The Economy

When I lived in North Philadelphia, check cashing places (which charge nearly 300% interest) were the only businesses I saw in the poorer neighborhoods. But it isn’t just these small-time outfits that are sucking the blood out of the nation’s poor, some of the country’s largest banks are doing the same thing!

Predatory lenders prey on people who are unfamiliar with bank loans. They trick people into paying unnecessary fees and high interest rates. Victims of predatory lending are usually low to middle income families who face the loss of their home through foreclosure.

And they are usually minorities. According to a study conducted in New York City in 2002:

43% of Black Homeowners Use Subprime Loans Compared to 10% of White Homeowners — Difference Can Mean As Much as $150,000 Over Life of a Mortgage.

One organization devoted to fighting predatory lending practices is ACORN. The latest issue (#254) of Dollars and Sense has an article about how ACORN fought back and won” against Household International, a high-cost lender” (the following quotes are transcribed from this article):

High-cost lenders-including large national operations like Household, Wells Fargo, and Citigroup, as well as small-time local sharks-strip away, rather than build up, equity in poor neighborhoods. Predatory high-cost lenders turn the usual logic of lending upside down. They make their money by intentionally issuing loans that borrowers will be unable to repay. Their loans invariably leave borrowers worse off, not better off.

Most high-cost (also called subprime”) loans are home-mortgage refinance loans. They carry excessive, and sometimes vanable, interest rates and exorbitant fees. The more abusive lenders bundle bogus products like credit insurance into their loans, which accrue more interest and fees. Some lenders quietly omit taxes and insurance costs from monthly mortgage statements, causing crises when the yearly tax and insurance bills arrive. Others encourage borrowers to consolidate credit card and other debt within the mortgage, which further decreases home equity and places the home at greater risk. Loans may even exceed the value of the home, trapping people in debt they cannot refinance with a responsible lender Hidden balloon payments force repeated refinancing (with fees each time). When borrowers find themselves unable to meet payments, the predatory lender refinances them repeatedly and ultimately seizes the house. Borrowers often have little recourse, as mandatory arbitration clauses written into their loan contracts prevent them from taking lenders to court.

Unfortunately, ACORN agreed to a gag order as part of their nearly half a billion dollar settlement, which means that they can’t post any of the details about Hosehold International on their web site. But some interesting information was revealed after HSBC bought out the company.

It turns out that not all the victims were people with poor credit ratings:

After British financial corporation HSBC bought Household International in March 2003, it announced that 46% of Household’s real estate-backed loans had been made to borrowers with A’ credit. But Household had made no A’ (standard low-cost) loans.

ACORN won that battle, and now is focusing on other abusive lenders, like Wells-Fargo:

Wells Fargo’s abusive lending practices include:

  • Promising low interest rates, and then charging extremely high ones, even to borrowers with good credit.
  • Misleading homeowners into refinancing out of perfectly good first mortgages and into new loans which cost the borrowers much more.
  • Financing huge — and hidden — fees into loans. Many borrowers have been charged more than 10% of what they borrowed. And then have to pay interest on this amount.
  • Trapping borrowers with prepayment penalties which require them to pay thousands of dollars more if they want to escape into a better loan.
  • Trying to escape from any legal consequences of their actions by slipping mandatory arbitration clauses into virtually of their high cost loans. These clauses are designed to make it impossible for borrowers to enforce the law by take Wells to court.
  • While these loans bring misery to homeowners, they bring huge benefits to Wells Fargo executives. The CEO of Wells Fargo, Richard Kovacevich, received $8.2 million in compensation in 2002, plus another $64.3 million in stock options.

More information on Predatory Lending can be found here and here.

It is worth reading the original article to learn how Household fought back. If your institution has an EBSCO account you can see it here. Or pick up a copy of Dollars and Sense at your local bookstore.