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There are crimes
being committed in our neighborhoods that won’t show up on a police
blotter. The predators who commit these crimes don’t use guns or knives.
In fact, because they often wear suits, they are being invited in to many
homes. They are unscrupulous lenders, mortgage brokers, real estate
brokers, attorneys, and appraisers and they prey upon the vulnerable such
as these folks:
·
An elderly African-American
widow, sick, unable to walk because of a recent leg amputation faces
losing the home she has lived in for over 30 years. She just wanted a home
improvement loan to take care of some badly needed repairs. What she ended
up with was shoddy repairs, a loan she couldn’t pay back, and foreclosure
of her home by the very people who gave her the loan.
·
An elderly African-American
widower who didn’t eat or take care of himself because, he said, he’ll
never be able to repay the $86,000 home loan on his limited income that an
unethical lender steered him into. Instead of living his older years
relaxing, he suffered a stroke and died before anyone could help him with
his troubles.
Borrowing trouble
The term to describe
what happened to these folks and thousands like them is predatory lending.
It sounds like a fairly scary thing--like someone lending you something
is really preying on you-- and that is just what it is. Predatory lending,
which happens most often in the home loan business, refers to abusive
lending terms and practices such as:
·
lenders making loans that
cannot be repaid;
·
lenders including unfair,
unnecessary and expensive terms; and
·
brokers taking kickbacks for
referring borrowers to loans that are more expensive for borrowers, but
yield a higher profit for brokers and lenders.
Most predatory
mortgage lending occurs in the refinance sub-prime market, which has grown
by astronomical amounts in the last few years. (A sub-prime loan is one
that has a higher interest rate than a conventional loan.) Twenty-five
billion dollars in sub-prime loans were made in 1990; in 1998, that amount
increased over 300% to $175 billion.
While these
loans are perhaps not inherently bad, they can be devastating for
homeowners unprepared to pay them back. A study done by ABT Associates in
Boston found that although overall foreclosure rates decreased between
1994 and 1998, the rate of foreclosures of sub-prime loans increased by
154 percent. The study also showed that while the average age of a
conventional loan at foreclosure is seven years, the average age of a
sub-prime loan is three years at foreclosure.
In a typical
predatory loan situation, a mortgage lender makes a high-cost,
unaffordable loan to a borrower, using the borrower’s home as collateral.
When the borrower falls behind on the payments, the lender sues the
borrower for the entire amount of the loan. If the borrower cannot repay
the loan, the lender forecloses on the borrower’s home and sells the home
in a foreclosure sale. Sometimes the sale price of the home does not cover
the amount of the loan and the borrower ends up without his or her home
and having to file for bankruptcy.
Predatory
lenders can make their money from charging high interest rates but more
often, they make their profit by packing unfair, unneeded and costly fees
into a borrower’s loan. By charging these fees, the lender is able to
immediately extract his or her profit from the transaction. The lender
then sells the loan in "bundles" with other less-risky loans to investors
on Wall Street. Once the loan is sold, there is no more risk to that
lender if the loan goes bad. If the borrower defaults on the loan, the
problem belongs to the Wall Street investors.
Sound
complicated, sophisticated, and sleazy? It is and that is why these
predators don’t need a gun or knife to rob you of your home. They rely on
bamboozling homeowners with fast talk, pen and paper.
A fair housing
issue
One would think that
predatory behavior would be illegal. Unfortunately, however, most
seemingly "predatory" loans are perfectly legal. Only when the terms of
the loan or the practices of the lender are egregious enough to be
prohibited by federal or state law can the lender be brought to justice
and the borrower helped by the legal system.
Perhaps the worst aspect of predatory
lending is the way in which predators target certain folks in our
community. The number of clients needing legal assistance for protection
against foreclosure who are elderly, African-American, widowed, or
disabled far outnumber other classes of homeowners. Lenders prey
especially on older homeowners who have built up equity in their homes but
don’t have the cash they need for home repairs and medical expenses. They
also target minority communities.
Minority communities have historically been
subject to a vicious cycle of discrimination. Because of decades of
‘redlining’ practices, they have had less access to conventional credit.
Unscrupulous lenders, knowing these communities have not had access to
conventional credit, have taken advantage of the situation by offering
high cost loans and credit at exorbitant rates and for unfair terms. When
borrowers can’t afford to pay back those high cost loans, they are
punished with a bad credit rating. They then become ineligible for
conventional loans. Lenders offer them inferior products knowing that
borrowers with bad credit have no other alternatives if they want, for
example to repair a home, consolidate a debt, or pay for uncovered medical
expenses.
The practice of targeting certain segments
of the population for unequal loan terms and unfair practices makes
predatory lending a fair housing issue. Using federal fair housing law,
fair housing groups and private attorneys across the country are bringing
legal actions against predatory lenders for their targeting of minority
and elderly homeowners. AARP has also undertaken a major educational,
legislative, and legal campaign against predatory lenders.
A vulnerable region fights back
Foreclosures are not only devastating to
individuals, but to neighborhoods. Often in the Buffalo area, a bad lender
will stop just short of foreclosing on a defaulting borrower. The house
may then end up in legal limbo for a time because either the homeowner or
the lender doesn’t pay taxes resulting in tax foreclosure. Eventually the
City becomes the owner through the tax foreclosure process and if the
property cannot be sold at auction, in many cases, the City will demolish
it. As you may have noticed in some of our Buffalo neighborhoods, the sad
process has contributed to entire streets being devoid of homes—making a
community look more like a ghost town than a neighborhood
Are predatory lenders coming to your
neighborhood? They may be. The Western New York area is particularly
vulnerable to home loan scams for several reasons. First, because housing
is relatively cheap here as compared to other urban areas, many low and
moderate-income families can afford to purchase a home. According to the
1990 Census, there are approximately 35,000 families at or below 150% of
the federal poverty level who own homes in the Buffalo-Niagara
metropolitan area.
In addition, the Buffalo area has a high
number of senior citizens that are homeowners. There are over 80,000
senior citizens that own their own homes in the Buffalo-Niagara
metro-region; 20,000 of them fall at or below 150% of the federal poverty
level.
What is even
more disturbing is that according to data compiled by the Neighborhood
Economic Development Advocacy Project of New York City, most refinance
loans made in low- and moderate- income census tracts in the
Buffalo-Niagara metropolitan region in 1999 and 2000 were sub-prime loans.
That means that poorer families are paying more for loans/credit than
middle class families.
Unethical
lenders, particularly in the Western New York area, are making refinance,
home equity, or home improvement loans not based on the borrower’s home
equity but by over-appraising the value of the borrower’s home. By
appraising a home at 150% or 200% of the home’s true value, lenders are
able to refinance the home-purchase loan and then roll the homeowner’s
other debt—and a hefty fee-- into the second loan.
What can be
done to get these pernicious thieves out of our area? The Buffalo Urban
League in partnership with Consumer Credit Counseling is spearheading the
City’s “Don’t Borrow Trouble Campaign.” They are being assisted by
Freddie Mac, the City of Buffalo, the County of Erie, and area financial
institutions, not-for-profit legal agencies, law firms, community
officials, and not-for-profit housing agencies. The coalition has devised
a three point plan to help eradicate predatory lending in our area:
·
educating consumers about good
vs. bad credit;
·
training housing counselors,
community development officials, and attorneys to recognize "predatory"
and illegal loans; and
·
offering housing counseling,
credit counseling, and legal assistance to homeowners facing foreclosure
because of predatory lending.
The Buffalo "Don't
Borrow Trouble Campaign" is one of the most comprehensive and aggressive
anti-predatory lending projects in the country. As predatory lenders begin
to feel the pain of dealing with more educated consumers, lawsuits, and
bad publicity, they will decide that Western New York is closed to their
business.
The Erie County Fair
Housing Partnership’s Task Force on Predatory Lending has also been
conducting trainings and seminars for community development officials,
housing counselors, and attorneys. The next seminar, to be held in April,
will deal with the issue of over-appraisals.
If you would like to get involved in either one of these projects, please
contact me at
moeflynn@aol.com.
Together, we can drive predatory lenders from our area and keep our
neighborhoods safe. |
