In the 1990s, minority and working class communities benefited from a significant increase in home and small business lending. Exploiting the rising homeownership in these traditionally underserved communities, predatory lenders have been aggressively marketing their refinance and “debt consolidation” products in these neighborhoods. (See Shelterforce #109.)
Anatomy of a Predator
Subprime lenders charge high interest rates to compensate for the risk of blemished credit histories. Predatory lenders, however, are often deceitful about their terms, and make loans with unjustifiable features. For example, they trap borrowers into high interest rate loans by requiring steep “prepayment” penalties to refinance with another lender.
Balloon payments, under which most of the loan is due in less than 15 years, are another common abuse. Confronted with looming, growing balloon payments, borrowers are convinced to refinance into higher interest rate loans with more fees and points.
Still another abusive feature is so-called single premium credit insurance, which pays the loan in the event of death or disability. Added to the loan, credit insurance can equal 10 to 20 percent of the loan amount. Acquired outside of a loan transaction, it costs much less.
NCRC agrees with Office of Thrift Supervision Director Ellen Seidman that community organizations need to establish neighborhood-warning systems, along with counseling programs and affordable loan programs for neighborhoods dominated by subprime lenders. NCRC can help by providing data analysis that identifies which lenders are subprime, which subprime lenders make loans with onerous terms and conditions, and in which neighborhoods subprime lenders have the highest market shares.
Although critically important, stepped-up intervention efforts will not be enough on their own. Moreover, certain loan terms and conditions are inherently abusive and should be prohibited. We need anti-predatory lending legislation and regulation. Senators Sarbanes (D-MD) and Schumer (D-NY) and Representatives LaFalce (D-NY) and Schakowsky (D-IL) all introduced anti-predatory bills last year. As this article is being written, it is expected that all of the bills will be re-introduced shortly.
The LaFalce and Sarbanes bill, the Predatory Lending Consumer Protection Act, prohibits single premium credit insurance, balloon payments, and mandatory arbitration on high interest rate loans. It also limits the financing of points and fees, including any prepayment penalties, to 3 percent of the loan amount. The Schakowsky and Schumer bills, though similar, prohibit prepayment penalties altogether and ban flipping, the repeated re-financing of loans with the intention of adding points and fees.
Schumer and Schakowsky’s bills share some provisions with the CRA Modernization Act of 2001, introduced by Representatives Barrett and Gutierrez: lower CRA ratings for predatory lenders and mandatory disclosure of the Annual Percentage Rate (APR) and loan terms on HMDA (Home Mortgage Disclosure Act) data. The CRA Modernization Act also applies the Community Reinvestment Act to independent mortgage companies and all affiliates of bank holding companies. Updating and expanding CRA to more prime rate lenders is indispensable to increasing the amount of competition among lenders in underserved neighborhoods, providing alternatives to subprime and predatory lenders.
Advocates must also oppose so-called “reform” efforts promoted by segments of the lending industry. The Mortgage Bankers Association and other industry trade associations are floating a bill that would provide an up-front guarantee regarding closing costs. While the industry promotes this as a means to help consumers shop and compare loan costs, the proposal would eliminate legal remedies available to aggrieved borrowers under the Truth in Lending Act and the Real Estate Settlement Procedures Act.
Anti-predatory bills and regulations similar to the federal bills are also being introduced in more than 20 states and about half a dozen cities. North Carolina enacted the first bill, followed about one year later by ordinances in Chicago and Washington, DC.
Currently, the Federal Reserve Board is proposing to include the Annual Percentage Rate (APR) in the publicly available HMDA (Home Mortgage Disclosure Act) data. This would be critically important to allowing neighborhood warning systems to identify high cost lenders. The Federal Reserve is also proposing changes to its anti-predatory Regulation Z to prohibit certain abusive loan terms such as “due on demand” clauses. The proposed change to Regulation Z would add the cost of credit insurance to the points and fees trigger for defining a high cost loan. Although NCRC believes single premium credit insurance must be banned, this interim proposal would extend federal consumer protections to more high cost loans.
Community advocates have achieved tremendous victories in the fight against predatory lending, including voluntary efforts by industry to curb the most egregious abuses. But the critical tasks of community organizing and advocating must be intensified in order to pass anti-predatory bills and prevent the enactment of industry “reforms.” Considerable work remains to be done.
For the most recent information about these bills, contact the National Community Reinvestment Coalition: (202) 628-8866, or www.ncrc.org.