More U.S. Home Buyers Fall Prey to

Predatory Lenders

Part I

By Sue Kirchhoff, USA TODAY

December 6, 2004

WASHINGTON — After Martha Lawler lost her job at Bell Atlantic in 1993, she fell behind on her house payments. Then her troubles really started.


Martha Lawler stands outside the Brooklyn property she nearly lost after falling behind on her payments and refinancing into a mortgage with an 18.25% rate.

Desperate to hang on to her Brooklyn, N.Y., home, Lawler, 55, took out a new mortgage with a local finance company that carried an 18.25% interest rate, big fees that were rolled into her balance and a "balloon" payoff due in five years. Unable to make the higher monthly payments, Lawler refinanced into what she thought was a more affordable loan.

The pattern continued through six lenders, 10 years and thousands of dollars of dubious charges that eroded her home equity and pushed her mortgage balance from $50,000 to $198,000.

"For 10 years I've been going in a circle, robbing Peter to pay Paul, trying to keep this mortgage up," Lawler said. "No fly clothes. No new car. My mortgage is my life."

Lawler got caught up in a problem that has drawn increasing concern and action from state and federal regulators: predatory lending, loosely defined as loans with excessively high interest rates, fees or other provisions that can make them extremely difficult to repay.



How can you avoid being a victim? What can you do if you think you've been victimized? USA TODAY's Sandra Block answers readers' questions.

The focus on predatory lending has coincided with the heady growth of the so-called subprime mortgage market. Subprime lenders offer higher-interest loans to people with troubled or non-existent credit ratings. While most subprime loans are not predatory, consumer advocates caution that all predatory loans are subprime.

More than 25 states and a host of towns and cities have passed predatory-lending restrictions since 1999. Looking ahead, predatory home lending is expected to be a continuing financial and political issue for several reasons:

The rise of subprime. Subprime mortgage lending grew an average of 25% a year from 1994 to 2003 and now is a more-than-$330-billion-a-year industry that provides about 1 in 9 U.S. mortgages. The growth has helped broaden homeownership — nearly 70% of American homes are occupied by their owners — and given a boost to minority home buying.

Subprime lenders provide mortgages or home equity loans to people, including high-income borrowers, who don't qualify for conventional financing. Such lenders accept credit scores below the 620-660 threshold generally needed for prime financing and require less-stringent income documentation.

But critics say many of the subprime lenders' clients could qualify for conventional loans. Subprime lenders offer mortgage rates that sometimes range into double digits, though they can be as low as 6% to 7% for those with near-prime credit. Costs rise, often steeply, as credit scores fall.

Changing demographics. Recent immigrants and minorities, who will make up the bulk of new households and about half of first-time home buyers in coming decades, are far more likely than whites to take out subprime loans — and appear more likely to be victimized by predatory lending. Federal data show even affluent minorities are more likely than whites to take out subprime loans, and some consumer groups say minorities are unfairly diverted to the subprime market.

The elderly population, too, is growing and may be vulnerable to predatory lending, because older homeowners have built up years of equity. AARP has a major initiative to combat predatory lending through education and litigation.

"Most of our clients don't go looking for loans," says Jean Constantine-Davis, an AARP attorney in Washington, D.C. "It very often starts out with a home-improvement loan. ... People think they're getting a loan for a chimney, (but) they've refinanced the house, rolled credit cards into it."

In Memphis, consumer advocates say predatory lenders, including firms owned by blacks, have targeted African-American neighborhoods, resulting in a rash of foreclosures. Data from Boston and Chicago also show concentrated subprime lending in minority neighborhoods.

The growth of the secondary market. More than $200 billion in subprime mortgages were resold, bundled into bonds and offered to investors as mortgage-backed securities in 2003. Mainline entities such as Lehman Bros. or mortgage giant Fannie Mae are major players in the market.

Uneven regulation. Mortgage brokers, middlemen who match buyers with lenders, now originate 50% of subprime mortgage loans — about the same as for regular mortgages — but are lightly licensed and monitored by states. The number of mortgage brokerage firms has climbed to 44,000 last year from 7,000 in 1987. State laws on predatory loans don't govern national banks, which are exempted under a ruling by the federal Office of the Comptroller of the Currency. The banks fall under less-restrictive federal rules.

A turning point?

The debate over subprime lending may be at a turning point. Banks and brokerages with a stake in the booming subprime market complain legislatures have gone too far, creating a confusing patchwork of laws that hurt legitimate business and prevent consumers from getting loans. Many want federal legislation overriding state statutes.

"You err on the side of letting people try to live the American dream if they want to buy a house," says Wright Andrews, a Washington, D.C., attorney who represents subprime lenders.

Congress is poised to take up the issue next year, though legislation is far from a sure thing. State governors and attorneys general, already opposed to the Office of the Comptroller ruling, fear a federal power grab. Consumer groups, which had pushed for a federal law, worry about losing state protections.

"A lot of people have been victimized. Not just poor people — middle-class, professional people, people of every stripe," says Allen Fishbein, director of housing and credit policy for the Consumer Federation of America.

Predatory-lending restrictions

What is a predatory loan? There's no official definition. Both sides say the issue is akin to a Supreme Court justice's description of pornography: You know it when you see it.



States that have cracked down generally bar or limit these practices: loans that carry excessive interest and fees, exceed a borrower's ability to pay, include big balloon, or lump-sum, payments or penalties for early payoff or are subject to "flipping" — repeated refinancing with fees that strip out home equity.

"We were spending all our time trying to help people become homeowners, but two, three or five years down the road, they were going to get flipped into a loan with high fees and interest. We were building wealth so that it could be stolen," says Mark Pearce, president of the Center for Responsible Lending in North Carolina, a non-profit focusing on homeownership.

North Carolina's 1999 law started the move toward predatory-lending restrictions.

Mortgage giants Fannie Mae and Freddie Mac have set national standards for subprime loans that they purchase or package into securities with a guarantee for payment of principal and interest. Fannie, for instance, requires mortgages be based on ability to repay, not on home equity. It recently said it would not buy subprime loans that included mandatory arbitration clauses, which bar lawsuits. The industry, tarnished by a rash of legal settlements, has begun setting best practices, internal standards that govern lending activities.

How do consumers become victims? One of the biggest reasons is simple lack of education. Freddie Mac and the Department of Housing and Urban Development (HUD) have been reaching out to minority home buyers, saying many consumers don't understand how to get a loan or what they could qualify for. They may not have access to mainstream banks or they may lack a credit history or the proof of income needed for financing.

Fannie Mae CEO Franklin Raines, citing HUD research, says subprime lending is three times as likely in minority neighborhoods. Other research suggests as many as half of those taking out subprime loans could qualify for conventional financing — and would pay lower interest. Subprime lenders hotly dispute those figures.

Pamela Caudill of Dayton, Ohio, is a first-time home buyer who purchased her house from her brother three years ago with a $52,000 adjustable-rate mortgage from a local firm. Though there were no major blemishes on her credit record, she was given an initial rate of 13.25%. In 2001, adjustable-rate mortgages nationally were carrying average initial rates of 5.8%.

After missing a payment because of job troubles, Caudill was put into an expensive catch-up plan. The servicer who bought her loan did not post some payments. Because of the way the lender calculated Caudill's rate, her loan climbed near 15% from 2001 to 2004, as interest rates were falling nationally.

"I was told one thing, and yet the opposite would happen," says Caudill. The National Community Reinvestment Coalition (NCRC), which bought her loan and financed a cheaper one, said Caudill could have qualified for cheaper financing if she had shopped around. The NCRC runs a national consumer rescue fund for victims of predatory lending.

Memphis Area Legal Services lawyers cite the case of Edgar McDaniel, a 68-year-old with a psychiatric disability and minimal reading ability, who in 2003 owed $4,800 on his home, and whose income was a monthly $756 Social Security check.

After being contacted by a door-to-door salesman in summer 2003, McDaniel contracted for $16,500 of home improvements. To finance the project, lender American General Financial Services lent McDaniel nearly $34,691 at 12.81% interest, for payments totaling $78,789.32 over 15 years. Payments were $433, more than half his monthly income.

According to the lawsuit against the lender and contractor, the contractor was paid $22,000, or $5,500 more than the agreed-to price, even though less than $7,500 in work was done, while thousands of dollars in other dubious payments were made. American General is fighting the charges, saying that McDaniel misrepresented his income, that lawyers overlooked missed documented payments and that it pressed the contractor to complete work.

Elzenia Pitchford, 77, also of Memphis, contracted for $20,000 in repairs to her home but, according to a lawsuit, was fraudulently sold a bill consolidation loan, with high upfront fees and monthly payments that were more than 88% of her Social Security income.

She says she was promised new siding for her home, but the contractor did nothing to close up the many holes in the house's exterior.

Now, she says, rats come and go through the house. And the heating system was left in such a mess that the fire inspector will not allow her to turn on the heat. She and an 11-year-old grandson who lives with her use the stove and small heaters to stay warm.

Vulnerable victims

Borrowers can also get into trouble when they are forced to take out loans at stressful points in their lives — a bout of unemployment or an expensive illness that erodes their credit score, even as it increases their need for cash.

Priscilla White, 54, of Peabody, Mass., refinanced her 7% mortgage in 2002 to pay off $20,000 in debt tangled up in divorce proceedings. Her divorce attorney referred her to a mortgage broker, who offered to set her up with financing at a 6% interest rate. At closing, she discovered the rate was 11.25% but signed out of fear she'd be in legal trouble if the debts weren't paid.

Six months later, White tried to refinance, only to discover the initial appraisal inflated the value of her house. Her income had been overstated in loan documents, with monthly payments exceeding her net income. Unable to get an equivalent mortgage, White, a secretary in a large law firm, started investigating. She settled out of court with the company and refinanced through NCRC with a 30-year mortgage at 7%.

"He was my divorce attorney. I thought he was going to be good for me," White says. "The documents were immense and a lot of the (fraudulent) stuff they put in the back. ... By the time you got to the good stuff, you were exhausted."

Robert Armbruster, president of the National Association of Mortgage Brokers, says while most mortgage brokers are ethical, some engage in unscrupulous lending. "There are probably some bad apples out there. There are bad apples everywhere," he says.

Armbruster would like to see a national registry of mortgage brokers and wants Congress to give states seed money to prosecute bad brokers.

The Center for Responsible Lending estimated in a 2001 study that predatory loans cost consumers at least $9.1 billion a year. Lenders call those figures grossly inflated.

There are no comprehensive data on predatory lending, but there are clear signs it has been a problem:

• Household International, now HSBC, in 2002 agreed to change its practices and pay up to $484 million in consumer restitution for alleged predatory-lending practices in the subprime market. Household now funds the NCRC rescue fund.

• Citigroup in 2002 agreed to pay $240 million to resolve abusive-lending charges against its subprime subsidiaries, which the Federal Trade Commission says lured borrowers into high-cost loans through false statements.

• First Alliance Mortgage in 2002 agreed to a $60 million settlement with the FTC and six states.

"When the market expanded rapidly, there were excesses, and excesses created problems," says Mitch Feinstein of the National Home Equity Mortgage Association, a trade group for non-prime lenders. "We believe the market has responded very favorably by companies imposing much higher standards and fraud-reduction efforts."

Still, the legal cases continue churning.

"When I first started ... I wasn't in big trouble. I was running along smooth. But then I got jammed up, and I never could get out of it," says Allen Winston, 64, a Natchez, Miss., mechanic who was part of a lawsuit against lender Beneficial Mississippi.

Winston and his wife, Mary, in 1987 took out a home equity loan to consolidate $18,000 in debts. The couple paid $3,300 in fees, and according to their law firm, was required to buy $2,261 of special insurance to pay off the mortgage if they died. Premiums for single-premium insurance, which some state laws bar, are collected upfront and added to a loan balance.

After closing the deal, the Winstons were deluged with offers for more loans. Lenders sent letters pegged to Christmas or other expensive times of the year. After cashing a "check" that came with a solicitation, the Winstons found themselves in yet another loan.

Allen Winston, who left school after the eighth grade, and Mary, who attended through sixth grade, saw their original $22,500 loan gradually rise above $66,000, including $23,000 for insurance.

Montgomery, Ala., law firm Beasley Allen Crow Methvin Portis & Miles represent the Winstons in arbitration with the lenders. Officials of HSBC, which now owns Beneficial, say they do not have permission from the firm to talk about the case. They note it dates before 2002, defend their lending record and add, "In light of our contract with the Winstons, arbitration is an appropriate way of resolving their concerns."

Tom Methvin, managing shareholder for Beasley Allen, which has cases around the Southeast, says 90% of its predatory-lending clients are black.

'Paying ... the rest of my life'

Meanwhile, Lawler, the Brooklyn woman who signed multiple refinance loans, has gotten on with her life. The NCRC bought her mortgage in August, refinancing her into a 5%, 30-year fixed-rate loan. But she remains saddled with a high balance.

"Renovations? Forget it. Whatever falls down, forget it. I'll just leave it until I have the money," Lawler says. "I'll be paying for it the rest of my life."

Contributing: Sandra Block


Part II

Subprime Loan Market Grows

Despite Troubles


Sue Kirchhoff and Sandra Block


WASHINGTON -- Bad credit is good business.


December 7, 2004

Subprime lending -- higher-interest loans to consumers with impaired or non-existent credit histories -- has been the fastest-growing part of the mortgage industry.

Subprime mortgage activity grew an average 25 percent a year from 1994 to 2003, outpacing the rate of growth for prime mortgages. The industry accounted for about $330 billion, or 9 percent, of U.S. mortgages in 2003, up from $35 billion a decade earlier.

The growth has attracted accolades and controversy. Federal Reserve Governor Edward Gramlich has said subprime lenders helped push homeownership to record levels, making it possible for a growing number of minorities to buy homes. But he also raises questions about high delinquency rates.

And dozens of states have passed laws since 1999 to crack down on predatory lending -- loans with high fees, excessive interest or other unaffordable provisions -- clustered in the subprime sector.

Still, there's no doubt subprime lending is now a Main Street, mainstream business with sophisticated marketing that promises to deliver the American dream of homeownership, or lower the monthly burden of all-too-American consumer debt.

* Ameriquest, one of the nation's biggest subprime lenders, is paying an estimated $15 million to sponsor February's Super Bowl halftime show and became a season-long NFL sponsor. The California-based firm has naming rights to the Texas Rangers' baseball stadium, Ameriquest Field. The efforts are part of a broader move to expand into prime financing.

* Home 123, a subsidiary of New Century Financial, has home improvement guru Bob Vila as a spokesman. New Century Financial's total revenue was up 87 percent in the third quarter from a year ago. The company expects $40 billion or more in loan volume this year.

* Citigroup, Wells Fargo and H&R Block are among old-line companies that have subprime entities. Major bond firms including Morgan Stanley and Lehman Bros. have a stake in the industry. That's because the bulk of subprime mortgages are packaged into bonds that are resold to investors.

* Amerisave, an online mortgage lender, moved into subprime lending about a year ago, after rising interest rates reduced demand for refinancing among borrowers who qualify for prime mortgage rates.

"We found there was a huge opportunity still in the subprime or less-than-perfect credit area," says David Herpers, chief marketing officer for Amerisave. "Many of these consumers were not able to take advantage of the low rates in the last few years. Our estimates are a third of U.S. citizens fall into this category."

Amerisave has 30 loan officers dedicated to subprime lending. They plan to increase that number to 200 by the end of next year. Amerisave estimates subprime loans will account for at least 50 percent of the company's total revenue within the next six to 12 months.

Subprime lenders are expected to fare better than the prime lenders as interest rates rise, because their borrowers tend to be less rate sensitive.

Higher-priced products

Even as they push states to pass tougher predatory-lending laws, some consumer groups are working with subprime lenders to deliver credit to borrowers who otherwise could not get financing. And the industry is adopting best lending practices or funding consumer awareness and education campaigns.

Some remain concerned, however, that the industry is selling people higher-priced loans they may not need or be able to handle.

"There are a lot of these people who got the subprime who, if they had shopped more aggressively, would have gotten the prime loans," says Jim Campen, a research associate at the University of Massachusetts Gastn Institute, who works with the Massachusetts Community and Banking Council.

Subprime clients are increasingly being marketed products -- zero-down loans, interest-only financing and home equity loans as high as 12 percent of a home's appraised value -- that allow them to buy or borrow, but at an elevated risk.

Like the credit card industry, mortgage companies are pushing their product through television advertising, pop-up ads on the Internet and mailings. While the industry touts its efforts at consumer education, a message of its sales pitch is speed.

"Even if other banks may have turned you down. We don't care -- we want to get to know you," says a mailing from Home 123. "We'll get your loan application processed instantly, privately and anonymously over the Internet."

The default rate for subprime loans historically has been well above that of prime loans. The Mortgage Bankers Association says the numbers are improving, with 2.4 percent of prime loans past due in mid-2004, compared with 10.04 percent of subprime loans. Those subprime past-due figures are down from 15.67 percent in mid-2002. Still, 4.61 percent of subprime loans were in foreclosure in mid-2004, above the 0.49 percent prime figure.

Growth of the industry

The subprime market has grown for a number of reasons.

Deregulation allowed cross-fertilization between banks and financial service firms, while the federal government in the 1980s lifted mortgage interest ceilings. Congress in 1986 ended the deductibility of consumer debt, such as credit card payments, though still letting filers deduct mortgage interest. The change provided incentives for refinancing. Even rates for subprime loans at 3 percentage points above prime loans, or about 8percent to 9 percent now, are lower than many 18 percent credit card rates.

Advances in risk modeling have produced standardization. The bond market for subprime loans has provided cash.

The majority of subprime mortgages are now sold by the initial lenders, bundled into bonds and offered to individual and institutional investors. In 1994, $11 billion of subprime mortgages were sold on the secondary market; in 2003, it was more than $200 billion.

"Done right, subprime lending provides an important source of mortgage financing for families with imperfect financial or credit histories," Fannie Mae CEO Franklin Raines said in a recent speech. "Done wrong, subprime lending is a huge rip-off that siphons wealth -- and hope -- from people who have very little to begin with."

Like the prime mortgage sector, subprime lending is becoming increasingly concentrated, partly because of bankruptcies in the late 1990s when some companies became overextended.

The top 25 lenders made nearly 90 percent of loans in 2002, nearly double their 1990 market share, according to the Harvard Joint Center for Housing Studies. Ameriquest, New Century Mortgage and National City are among industry leaders. Mainstream lenders are entering the market, but the vast majority of business is done by mortgage firms, thrifts and other entities.

"For a small start-up shop … it would be harder today to come into this business. In the past you could make a lot of mistakes, and there were very wide spreads. That has gone away," says Laura Swartz, senior vice president of American Mortgage Network, a wholesale firm that sells to mortgage brokers.

The industry is increasingly offering purchase mortgages, though subprime lending is heavily concentrated in refinancing and home equity loans. Firms are targeting potential clients with credit scores and incomes just at the margin needed to easily qualify for a prime loan. They sometimes compete with prime lenders for such loans.

The Fed's Gramlich in a May speech said borrowers with credit scores below 620 are generally viewed as higher risk, unable to get a prime loan without a large down payment. About half of subprime borrowers had credit scores above that threshold, Gramlich noted, indicating "a good credit history alone does not guarantee prime status."

Swartz says borrowers with credit scores of 620 to 640 are the "sweet spot" for the subprime industry.

Consumer groups

The rise of subprime lending presents something of a dilemma for community and consumer groups. Even while they fight for tougher laws against predatory lending, and accuse some firms of reverse red-lining -- targeting minority neighborhoods -- they are forming partnerships with subprime lenders.

In September, Acorn, a community organization representing low- and moderate-income families, announced an agreement with Citigroup to create an affordable lending program for home buyers, with a special focus on immigrants.

"The partnership with Citigroup had less to do with subprime lending, predatory lending, and more to do with our interest in working with Citigroup and other lenders to extend credit broadly," says Steve Kest, executive director of Acorn. "We see thousands of families who have staked their whole future in this country, have jobs, (but have) only been able to access subprime credit through pretty shady lenders."

Ameriquest, working with consumer groups, is among subprime lenders that have developed best practices for loans, including no loan "flipping" -- refinancing at high fees that strip out equity.While consumer groups and subprime firms have joint interests, disagreements remain. Consumer activists say too many subprime customers are not told they could qualify for prime financing.

New Century, one of the biggest subprime lenders, in testimony to Congress laid out its own internal numbers, which it says underscore that the industry does not overcharge for loans or target minorities. But they also appear to bolster the contention that good credit alone does not guarantee a prime rate.

The firm said slightly more than 19 percent of its borrowers had credit scores 660 or higher, which lending experts say could easily qualify borrowers for a prime loan, including more than 30 percent of Asian/Pacific Islander borrowers, 23 percent of Hispanics, 12 percent of blacks and 19 percent of whites. An additional 22 percent had scores between 620 and 660, which could also qualify them for prime rates, depending on their income, collateral and other financial data, including the ability to make a down payment.

A slight majority of borrowers were white, and on average, New Century clients were under age 50 with annual family income of about $72,000.

Terry Theologides, executive vice president for corporate affairs at New Century, says credit scores tell only part of the story.

"The products that we offer to our highest-credit-grade borrowers are competitive with prime (rates). The spread becomes extremely compressed when you get to those folks," he said, adding the company offered loans with interest rates near 5 percent to 6 percent -- competitive with prime rates.

The federal Office of the Comptroller of the Currency in a 2002 study said pricing in the industry did not seem out of line with its higher risk. But even a small difference in rates means a big jump in payments. The Harvard Joint Center says a 2 percentage-point difference on an $85,000 loan, a common size for many first-time buyers, adds up to $18,000 halfway into paying off a conventional 30-year mortgage.

Subprime borrowers are far more likely than those in the prime market to take out adjustable-rate loans, and could take a hit as interest rates rise.

Subprime lenders offer products from fixed-rate mortgages to interest-only loans, where borrowers pay just the interest for a set number of years, or 80-20 loans, in which borrowers finance a home with an 80 percent mortgage at one rate and the remaining 20 percent through a second loan. Prime lenders also offer such products.

Interest-only products are "very appropriate for a sophisticated borrower, but are they appropriate for a first-time home buyer who has not amassed a lot of equity?" asks Jim Carey, vice president of marketing for AmeriDream, a Maryland non-profit for low-income buyers.

Industry officials say they carefully screen clients to make appropriate loans and avoid defaults that cost the industry money and hurt its reputation.

"If you owned a bank, would you rather be Jimmy Stewart or Mr. Potter sitting in the wheelchair?" asks Mitch Feinstein, National Home Equity Mortgage Association, referring to banker Henry Potter, the villain in the classic movie It's A Wonderful Life

Source: (c) Copyright 2004 USA TODAY, a division of Gannett Co. Inc.

This article was brought to you by the Bank Fraud Victim Center.

Our mission is to educate homeowners about predatory lending practices, bank fraud and the legal options available to them. 



We believe that if you don't know your rights, you don’t know your options.


To learn how we can help you Click Here


Find out if you are a victim of predatory lending practices:

To Get a Free PreliminaryConsultation Click Here



| Home | Articles | Foreclosure Help | Legal Disclaimer | Case Law |

| Legal Resources| Resources | Privacy Policy | Sitemap |

| About Us | Contact Us |