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.