Mario and Ivonne Luna got into trouble with their credit when a friend for whom they had cosigned on a loan ran up bills and left them for the Lunas to pay. As they contemplated borrowing money to pay off the debts, they got a call from Household Financial Services. “They said they had good news for me,” says Mario, who cleans office buildings for a living. In June 2001 the Lunas borrowed against the equity on their home in Inglewood, just outside Los Angeles, purchased in 1996 for $107,000. Household added in $3,500 in credit insurance to the loan, with $11,000 in up-front fees known as “points,” and when they balked at the latter, Luna says, the Household representative told them no one else would finance them and implied that the payments on the 10.8 percent loan would eventually drop. That hasn’t happened.

“With interest and everything, I’ll have to pay a half-million dollars on this house over thirty years,” Luna sighs. He is trying to refinance with another bank and lower his $1,400 monthly payment.

Opponents call the practices that the Lunas endured “predatory lending,” where unsuspecting borrowers are set upon by highly sophisticated hunters who prey on their desperation. The lending industry has other terms to describe their methods–flipping, stripping, packing, steering–just some of perhaps a dozen ways to get borrowers so mired in debt that they become permanent income streams for the lender.

But over the past five years, a movement has been building to take on predatory lending–and the financial institutions that profit from it. Advocates pursue a range of tactics, from local ordinances that ban municipalities from doing business with abusive companies, to state legislation outlawing the most egregious practices, to pressure on regulatory agencies. The Association of Community Organizations for Reform Now (ACORN) has targeted Household Financial Services, the nation’s largest mortgage lender, with a national direct-action campaign, and has encouraged local divestment as well.

The fight is particularly tough because activists must not only be able to wield political clout but also rewrite complicated lending rules designed by financial institutions largely for their own benefit.

Predatory lending concentrates on what’s called the subprime market, which refers not to the interest rate but to the credit rating of the borrower. Lenders say they’re just giving people with blemished credit records access to credit, and that sky-high interest rates–24 percent is not unheard of–are necessary to offset the risk. Most advocates concede that the risk of lending to borrowers with poor credit justifies a higher rate, but not that high. “They use it as an excuse to exploit,” says William Brennan Jr., program director for the Home Defense Program of the Atlanta Legal Aid Society. “Even 10 percent is outrageous, and some of these people are being charged 13, 14, 15 percent.”

A recent study by ACORN reveals both the class and racial dimensions of the problem: Nationally, subprime loans made up 57.5 percent of refinance loans to low-income African-Americans, 31.1 percent for low-income Latinos and 25.5 percent for low-income whites; and 54.3 percent for blacks of moderate income, 33.5 percent for moderate-income Latinos and 24 percent for whites of comparable means.

A typical loan can average 10-13 percent in the subprime market, but predatory practices will pack them with extra fees and unnecessary insurance, all financed at high interest by the lender, with high-percentage prepayment penalties that tether a borrower to the loan, or balloon payments that will force them to borrow still again, charged a few thousand dollars in “points” each time. Such repeat refinancing, with no benefit to the borrower, is called “flipping” the loan. Default can mean the loss of a home.

Predatory lending pumps wealth out of communities that can least afford it and into the coffers of some of the wealthiest companies in the country. The transfer amounts to $9.1 billion annually, according to a study by the Durham, North Carolina-based Self-Help Credit Union. Subprime lending has boomed by 1,000 percent since 1992–a surge fueled in part by relatively new practices that transfer mortgage money straight to Wall Street in the form of mortgage-backed securities [see sidebar on page 29].

Ideally, Congress would pass legislation to outlaw predatory lending practices, and activists praise Maryland Democratic Senator Paul Sarbanes for drawing attention to the issue as head of the Senate Banking Committee with a series of hearings in 2001. He introduced strong pro-consumer legislation in January of this year, while Democratic Congressman John LaFalce introduced a comparable bill on the House side.

But Margot Saunders, an attorney with the Washington, DC-based Consumer Law Center, notes, “We won’t get a bill through Congress unless the industry wants one to pre-empt all these state laws.” This past April, the Georgia state legislature passed the strongest state-level predatory-lending bill ever. “Georgia is now setting the stage,” explains Atlanta Legal Aid’s Brennan, who spent hundreds of hours reviewing the legislation to make sure it was strong enough to vanquish the worst abuses. “The industry is talking about going to Congress–they call it balkanization, all the different state laws.”

The struggle around pre-emptive legislation is central to the predatory lending fight. The past three years have seen activists gain ground locally, putting in place ordinances at the city or county level that attack predators and their practices. Banking interests have responded with attempts to pre-empt them at a state level–which they have done most recently in Colorado, with a weak law that putatively addresses predatory lending practices but would override stronger local legislation. The tactic has also been used in Florida, Pennsylvania and Ohio. Hence the possibility that the industry backlash against the Georgia legislation could move the pre-emption fight to Washington.

Ohio Republican Bob Ney is expected to announce a legislative proposal at the annual meeting of the National Association of Mortgage Brokers in Cleveland in late June, and insiders say that the industry is likely to be pleased. But the short time left on this session’s clock makes it unlikely that a measure will move forward in Congress this year, and Sarbanes is expected to stand staunchly against any legislation that would counter his.

Meanwhile, the battle continues to rage in the states, with activists racking up some impressive victories. North Carolina first broke ground in 1999 with a law that consumer advocates then called the most comprehensive in the country, and California followed, albeit with less muscular legislation. But Georgia’s bill is modeled on North Carolina’s and outmatches it. Like the North Carolina bill, it essentially tightens a federal law passed in 1993, the Home Ownership and Equity Protection Act (HOEPA), which defines abusive loans as those with interest rates 10 percent or more above comparable Treasury rates the day the loan is issued. That now hovers at 5 percent; so a loan could have an interest rate as high as 15 percent before being considered a bad one. In addition, points and fees can be as much as 8 percent. Certain abusive practices are prohibited in loans over those thresholds–a good idea, activists say, but a high bar. The pre-emptive state legislation promoted by the industry is usually similar to HOEPA, while also including a poison pill that automatically overrides stronger local measures.

The new Georgia law defines a first mortgage as high-cost– the range in which predatory practices are most common–when its interest rate is 8 percent or more than the current prime for Treasury bonds; 10 percent above for second mortgages. Loans with points and fees that exceed 5 percent are also defined as high-cost. Either the interest rate or the fees can “trigger” the outright prohibition of many abusive practices, such as balloon payments.

Essential to the victory was the coalition pulled together by State Senator Vincent Fort, whose 2001 anti-predatory lending legislation was sandbagged by colleagues in cahoots with the Georgia Mortgage Bankers Association. The alliance, which included AARP, the NAACP, the Georgia AFL-CIO and the Atlanta Labor Council, convinced Governor Roy Barnes that it was worth his while to support a strong anti-predatory measure. Barnes was a wild card–as an attorney, he had won a $115 million judgment against Fleet Finance in 1993, but his ownership of a community bank worried advocates about where his loyalties might lie. Yet Barnes brought his clout to bear on behalf of the legislation Fort had promoted last year, and this time it weathered a blistering assault from industry.

The tactics in the battle between antipredator activists and their industry opponents are escalating: The fight in Georgia was far more contentious than the one around North Carolina’s 1999 law. Because it was a first, the industry was not up in arms, and North Carolina’s unconventional coalition even included lenders. By 1998, Self-Help Credit Union, founded in 1980 to bring credit to capital-starved communities–mostly African-American–had seen many of their clients refinance with a notorious lender, Associates First Capital (the Associates). With eighty-eight branches throughout North Carolina, “just one predatory lender like the Associates was doing more harm than all the good we had done over all that time,” recounts Eric Stein, Self-Help’s research director.

So Self-Help founder and CEO Martin Eakes took the lead in founding the North Carolina Coalition for Responsible Lending, which included the NAACP, AARP and other lenders, banks and credit unions with sound lending practices who didn’t want their names sullied by the predators. The North Carolina Credit Union League and the North Carolina Bankers Association endorsed the bill. Self-Help’s Stein says that there’s been a drastic drop in the number of victimized clients coming to their credit union, and a marked reduction in flipping, since the law passed.

The industry was on its toes by the time a state-level proposal started moving forward in California in 2000. ACORN had already campaigned in Oakland to pass an ordinance that outlawed major abuses. The American Financial Services Association filed suit against the city, and the industry was on high alert when a coalition that included ACORN, AARP, the Consumers Union, the Congress of California Seniors and the California Reinvestment Committee moved forward on a bill. The state bill is weaker than the Oakland legislation, with higher percentage rates allowed, so the industry pushed–unsuccessfully–for language that would pre-empt the local ordinance. AFSA also tried this tack in court, but in November the judge denied a preliminary injunction, ruling that the ordinance will stay in effect until all appeals are exhausted.

The California law has received lukewarm praise from some advocates, who are critical of a section that assigns liability only to the broker who sold the loan, leaving no remedy for borrowers whose loans are sold to other companies. “We’ve been very clear all along that this bill does a lot of things very well, but it is modest and a first step,” responds ACORN organizer Brian Kettenring. It prohibits one of the industry’s biggest abuses, credit life insurance, a product advocates call worthless and which the lender rolls into a loan and finances at a high fee. Most lenders have stopped promoting it, but the legislation puts the prohibition into law.

Legislative counterattacks by the industry have drawn blood in several states–like in Pennsylvania. After a yearlong fight, in 2000 the City of Philadelphia passed the “limousine of ordinances,” in the words of ACORN organizer Jeff Ordower, with both regulatory and divestment features. Banking interests went to the state legislature, which outlawed the Philadelphia measure and added an exemption for mortgage lending from the state fair-practices law. ACORN has now drafted model legislation for the state and hopes to inject the issue into the November governor’s race.

But in Illinois antipredators leveraged a legislative failure into a double victory. The National Training and Information Center (NTIC) and the Illinois Coalition Against Predatory Home Loans provided the pressure and political cover for State Representative Dan Burke to introduce a bill in January 1999 to stop predatory practices. The coalition even elicited a promise of neutrality from the Illinois Bankers’ Association, but the industry went on to crush the legislation, which would have banned prepayment penalties and excessive fees and points. At the same time in Chicago, however, both grassroots pressure and his own abhorrence of abandoned housing led Mayor Richard Daley to introduce an antipredatory ordinance. Daley is the kind of mayor who tends to get what he wants; the ordinance passed unanimously. Militant action by the NTIC affiliate network, National People’s Action, kept the heat on. Meanwhile, coalition members had been meeting with Governor George Ryan about state regulations against predatory lending. Ryan, who had been looking to Chicago for cues, introduced regulations in December 2000 after the local ordinance passed; they were approved by the legislature in April 2001.

Fights are ongoing in New York State, where a coalition led by AARP is promoting antipredator legislation and trying to beat back industry attempts to assign liability only to the broker who sold the initial loan. In New York City, an ACORN-backed initiative that would stop the city from doing business with banks that securitize the loans is moving through the City Council–a potentially staggering blow on Wall Street’s home turf. And activists scored a mid-June victory against an attempt to weaken a measure making its way through the New Jersey legislature.

Ohio is faced with an interesting fight: The industry interests have passed a law that in effect reiterates the weak HOEPA standards while it pre-empts local legislation, but the City of Cleveland went ahead and passed a stronger anti-abuse law anyway. Toledo is gearing up to do the same. These are city governments that have seen predatory lending-linked foreclosures devastate whole areas of their cities, says Kathy Keller of AARP, one of 200 member organizations in the Ohio Coalition for Responsible Lending, which has mobilized members at the state and local levels. Any new ordinances will undoubtedly be taken to court by the industry, leaving it up to a judge to determine whether they will take effect.

The National Association of Consumer Advocates’ Ira Rheingold says that the antipredatory movement has passed at least one milestone–it has defined the debate. “With predatory lending, we were able to define it before the banks could respond,” he says. Atlanta attorney Brennan concurs that activists have ratcheted up the political pressure, citing Bank of America’s cessation of predatory practices last year. “All the advocates can take credit for getting the Bank of America out of that business,” he says.

But the industry is not about to quit. Citing “the specter of predatory lending,” leaders at the National Home Equity Mortgage Association’s annual meeting in March asked members to pony up $365 a person to the NHEMA’s political action committee to “keep our legislators focused on what their job is–and that’s promoting free enterprise,” according to NHEMA’s president.

In the meantime, Mario Luna is working with ACORN to refinance his home, and has testified before the Los Angeles City Council–which is considering an anti-predatory lending law–about abusive lending practices. “I don’t know what’s going to happen,” he says. “At least now I have someone who can advise me about my situation… I’ve begun to feel much better.”