Stone Brown
The Jacksonville,
Florida case of Mattie Foster, a 72-year- old elderly black woman, typifies
the immoral and unethical chicanery of the industry known as “predatory
lending.” It began with a knock at her front door and a polite introduction by
a loan broker representing a home repair company. Foster didn’t know it at the
time, but she was a pre-selected victim for predatory lending. She was black,
elderly, and unsophisticated regarding financial matters. Just one of these
three profiling characteristics could have landed a loan broker at her
doorstep. Foster had all three.
The loan broker
persuaded Foster to sign a loan for a new roof and carpet. According to court
documents, Foster never received the carpet and the new roof leaked in the
rain. However, this was the least of Foster’s problems.
When the repair
company arranged her loan, Foster was charged a $1,700 broker’s fee in order
to receive $4,380 to cover the cost of the new roof and carpet. The lender
would later convince her to pay off her original mortgage, which raised her
debt to $18,000. In four years Foster’s debt would be refinanced four times at
the urging of the lender increasing her debt to $22,000 at 18 percent
interest. At each refinancing, Foster received small amounts of money—less
than her closing costs. For instance, on one loan she received $25.66, but the
closing costs amounted to $524.47. Her monthly payment of $385 a month was
nearly half of her social security check. If she could manage to pay off the
$22,000 in ten years, principal, interest, and fees would total $46,200. Still
the lender was merciless, attempting to get Foster to sign a sixth loan before
a local legal aid service and her daughter stepped in. Foster represents one
of thousands of cash-poor/equity rich, minority or elderly homeowners who have
become entangled in predatory loan scams.
Foster obtained
her loan from a subprime lender that practiced predatory tactics. According to
a joint report conducted by the U.S. Treasury Department and Housing and Urban
Development (HUD), the subprime industry has grown from $35 billion in 1994 to
$160 billion in 1999. The industry is made up of specialty lenders such as
AmeriCredit and Credit Acceptance who finance late model vehicles. Other
subprime lenders make loans for a variety of needs, such as personal or home
equity. These lenders include the Associates First Capital, House Hold
Finance, Beneficial (a HouseHold Finance subsidiary) First Alliance, New
Century, Norwest, Textron Financial, (a subsidiary of defense contractor
Textron), and subsidiaries of major banking firms, Citicorp, Chase Manhattan,
Bank of America (formerly Nations- Bank), and Banc One. These banking firms
lend money under the subprime category.
On its face,
there is nothing illegal or unethical about subprime lending. Subprime lending
fills a niche in the consumer loan business, serving borrowers who would
otherwise be rejected by major banks. Subprime borrowers naturally pay a risk
premium for a home equity, personal or auto loan. In contrast, people with
good credit pay interest set by the “prime rate,” the rate major banks charge
their best customers. If the prime rate, for example, is 8 percent, the
subprime borrower might pay a rate 5 to 10 percentage points above prime.
Subprime loans begin to exhibit predatory characteristics when the interest
rate has no relation to actual risk. The interest rate is whatever the lender
can get away with. Other predatory red flags include “packing” the loan with
unwarranted fees, “flipping” the loan or attaching a “balloon” payment to the
loan. All of these red flags allow predatory lenders to evade state usury
laws, which only cap interest rates.
Balloon
payments are commonly used by prime lenders to reduce a borrowers’ monthly
payment, with a final or “balloon” payment to make up the difference at the
completion of the loan. Predatory lenders take advantage of borrowers by
enticing consumers with signs that read: “Refinancing With Low Monthly
Payments” but fail to disclose the balloon payment due at the end of the loan
term. In some cases, if the monthly payments are too low, the balloon payment
can exceed or equal the amount of the principal. In other words, a borrower
could pay off a $10,000 loan, principal and interest, and still have a $10,000
balloon at the end of the loan. So what are the consequences? If a borrower
cannot make the balloon payment at the end of the loan, they face foreclosure.
If the borrower has to refinance the balloon, they start all over paying
interest and fees.
“Flipping,” is
a practice of repeated refinancing of the original loan. The New York Times
reported the case of Beatrice Smith, a retired cleaning lady. Smith had her
small home refinanced by NationsCredit, (a subsidiary of Nations Bank) six
times in ten years, increasing her monthly payment from $267 to $417, which
was more than half of her monthly social security benefits of $709.
One of the more
egregious cases of flipping was the story of Bennett Roberts, an illiterate,
retired quarry worker. According to the Wall Street Journal,
Roberts borrowed $1,250 from Associates First Capital to purchase meat from a
roadside stand in Virginia. In four years, Roberts’s loan was “flipped” or
refinanced 10 times, all at the suggestion of an Associates representative.
The fees Roberts incurred were in excess of $29,000 plus interest and 10
points for each refinance.
“Packing” is a
term used by predatory loan officers to describe a loan packed with
unnecessary insurance or other ancillary products, often without the knowledge
or consent of the borrower. Typical insurance products packed with a predatory
loan include credit life, credit disability, or credit property. Often the
insurance costs are camouflaged into the principal and interest of the loan.
In most cases the insurance policies are underwritten by a subsidiary of the
lender, maximizing profits.
Numerous cases
of alleged “packing” are documented in the book, Merchants of Misery: How
Corporate America Profits from Poverty. One case involved Wilma Jean
Henderson who went to Associates First Capital to take out a small loan.
Henderson was in need of a loan to pay for repairs on her 1987 Ford Blazer.
She went to Associates and signed for a $2,000 loan. She later testified in
court that the loan officer hastily flipped through the loan papers and rushed
her to sign the loan document. It turned out that she was signing for a loan
at an interest rate of 33.9 percent, with another $1,200 for auto club
membership and credit insurance. Henderson also charged in her lawsuit that
her signature was forged to include the auto club membership.
Henderson
wouldn’t be the only person to accuse Associates First Capital of packing,
forgery, and deliberately rushing borrowers to sign loan papers. These lending
practices were highlighted in a 1998 ABC Prime Time news investigation
into predatory loan scams. Prime Time concluded that not only did these
practices seem to be widespread, but they appeared to be company policy.
Phillip White, a former assistant manager for an Associates branch in Alabama,
told Prime Time that there was always a designated “forger” in the
office. White also remembered at least “two-dozen” instances of forgery in two
Alabama offices. Ford Motor Corp, who owned Associates at the time, told
Prime Time they investigated White’s allegations and “found nothing.”
Critics like
the Association of Community Organization for Reform Now (ACORN), a national
grassroots community organization, point to Associates First Capital as one of
the most brazen, if not profitable predatory lenders in the country. On the
ACORN. org website, consumers are warned, “Don’t Associate with Associates”
and ACORN devotes an entire section to explain why. If profits are any
indication, the ACORN warning isn’t getting through to consumers. Last year,
the Associates reported $1.49 billion net profit, a 22 percent increase above
the previous year’s profits.
The Associates
relationship with Ford Motor Corporation stretches back to 1918, when the
company was founded to finance the purchases of Model T Fords. The automaker
purchased the Associates in 1989. Enormous profits of the Associates attracted
the attention of another Wall Street icon, Citigroup. In September 2000,
Citigroup announced it would acquire the Associates for $31 billion. The deal
became official in November 2000.
If
conscientious borrowers have a difficult time avoiding the Associates, it may
be because the company has a chameleon-like presence in the subprime market.
The company also operates under the nameplates of TransSouth Financial, First
Family Financial Services or Kentucky Finance. Moreover, during the past
several years, the company’s strategy has been to acquire smaller subprime
lenders and to partner with home repair, retail, and oil companies. Some of
the private retail cards that have partnered with the Associates include Radio
Shack, Gateway, Goodyear, Office Depot, Office Max, Texaco, Amoco, Shell, and
(BP) British Petroleum. In 1999, Associates acquired AVCO Consumer Finance,
which at the time was the nation’s fourth largest consumer loan company.
All subprime
lenders who practice predatory tactics were put on notice when the Federal
Trade Commission (FTC) filed suit in federal court, alleging that the
Associates First Capital, the parent company of the Associates Corporation of
North America had committed “systematic and widespread abusive lending
practices, commonly known as predatory lending.” The FTC also charged the
Associates with violations of other federal laws, including the Truth in
Lending Act, Fair Credit Reporting Act, and Equal Credit Opportunity Act.
“What made the
alleged practices more egregious is that they primarily victimized consumers
who were the most vulnerable, hard working homeowners who had to borrow to
meet emergency needs and often had no other access to capital,” said Jodie
Bernstein, Director of the FTC’s Bureau of Consumer Protection in a March 6,
FTC press release.
A recent HUD
study found that subprime loans account for 51 percent of home loans in black
neighborhoods and that borrowers from black neighborhoods are five times more
likely to be burdened with a prepayment penalty than their white counterparts.
The seriousness of the long term economic impact of predatory lending on black
communities has prompted Congressional Black Caucus member Stephanie
Tubbs-Jones (D-OH) to refer to the crisis as a “civil rights” issue.
“Predatory
Lending is the civil rights issue for this century,” says Rep. Jones.
“Particularly for our community, African-American wealth is usually passed
from one generation to the next and the biggest single asset is a home. And if
you allow the predatory lenders to take that wealth out of our community,
they’re stealing wealth building from our people.” Rep. Jones’s assessment is
supported by a study conducted by Harvard’s Joint Center for Housing. The
study found that nearly 61 percent of black households have no net financial
assets—and of the wealth that blacks do own 63 percent consists of equity in
their homes.
If subprime
lenders aren’t held in check by federal and state legislation, the wealth gap
between black and white Americans will continue to expand. Rep. Jones, who is
on the House Banking Subcommittee, is a co-sponsor of H.R. 4250, known as the
“Predatory Lending Consumer Protection Act of 2001.” Jones believes this bill
can ward off predatory lenders and strengthen consumer pro- tections.
H.R. 4250 is an
amendment to the 1994 Home Ownership and Equity Protection Act (HOEPA).
Besides not addressing balloon payments, flipping, and packing, predatory
lenders aren’t bound to HOEPA unless they reach the interest rate trigger,
usually around 24 percent. H.R. 4250 would lower the interest rate trigger and
prohibit predatory tactics such as balloon payments, flipping, and up front
fees on any credit insurance. Rep. Jones especially likes the consumer
education provision in the bill.
“I realize that
fighting predatory lenders begins with education and ends with opportunity. We
have to provide citizens with education about their credit, equity financing
and how to seek assistance when they are confused about contract details.”
Z
C. Stone
Brown is an independent journalist who lives near Philadelphia.