July 19, 2006 – More than a decade after the enactment of federal legislation to protect communities preyed upon by deceptive home-loan schemes, disadvantaged families and their advocates say they are facing even more challenging terrain in laying the foundations of home ownership.
At Federal Reserve hearings held in several cities in June and July, advocates for low-income communities and communities of color have warned the nationâ€™s chief financial regulator that government oversight must catch up with the evolution of an exploitative financial industry.
Local and national fair-lending groups say predatory lenders and their practices â€“ which involve misleading consumers into loans with unfair terms â€“ are growing in size and sophistication.
Sarah Ludwig, executive director of the New York-based Neighborhood Economic Development Advocacy Project (NEDAP), told The NewStandard that new forms of exploitative lending enable loan marketers to â€œperpetuate neighborhood poverty and inequality and find new ways to give communities a raw deal and exploit them.â€� Consumers are often duped into these bad deals, she added, through manipulative, aggressive marketing.
According to a 2001 study by the research and advocacy organization Coalition for Responsible Lending, predatory lending cost communities an estimated $9.1 billion, primarily through exorbitant fees, penalties and other charges.
Community groups find that historically underserved consumers like immigrants, the elderly and women continue to be especially hard hit by predatory lenders.
Advocacy organizations are urging tighter restrictions on â€œsubprimeâ€� loans â€“ high-cost loan products geared toward people with relatively poor credit ratings. Originally touted as a way to give people access to credit for which they would otherwise not qualify, the subprime loan market expanded by roughly 25 percent annually between 1994 and 2003, according to federal figures.
The marketâ€™s biggest sellers include high-cost adjustable-rate mortgages, which start out with low rates that can rapidly appreciate. Similarly, in a related category of â€œexoticâ€� lending products, â€œinterest onlyâ€� loans allow consumers to defer payments on the principal loan amount â€“ often only to face soaring costs down the line.
Though not all such loans are predatory, community groups report that the riskiest products are destabilizing a growing number of low- and moderate-income households. Groups are also finding that historically underserved consumers like immigrants, the elderly and women continue to be especially hard hit.
Reform advocates trace the explosion of the subprime market to the limited scope of federal regulations. They point to the Home Ownership and Equity Protection Act of 1994, which primarily covers only to the costliest home-refinance loans. It ignores the companies and practices many critics consider the must unscrupulous.
In calling for more comprehensive national regulations, NEDAP and other groups point out that many predatory loans are doled out not by federally regulated, nationally chartered banks, but through relatively unsupervised brokerages, non-federal banks and consumer-finance companies like Ameriquest..
Fair-lending advocates argue that the steady expansion of these minimally regulated companies reveals gaps in the Community Reinvestment Act of 1977, which required mainstream banks to target their services toward historically underserved, low-equity communities. Groups say that the Actâ€™s lax enforcement and narrow coverage has left low-income and minority communities abandoned by mainstream credit systems and at the mercy of financial predators.
For Martha Jimenez, 32, of Antioch, California, false hopes and a familiar language led her, her sister and her brother-in-law into two predatory loan deals.
Studies suggest that certain groups are being â€œsteeredâ€ toward higher-cost loans, even though they may qualify for better deals, because of their background and the demographics of their neighborhoods.
In a testimonial drafted with the help of the California-based group Housing and Economic Rights Advocates, the family charged that the contract, written entirely in English, contained costs never negotiated in the initial discussions, which were all held in Spanish. The document allegedly tacked on additional property-tax and insurance payments, broker fees and a heavy â€œprepayment penalty,â€� to be assessed if the household attempted to escape from the loan by refinancing.
Today the family is saddled with an interest-only loan, scheduled to tick up over time, which will add $700 per month to the initial payment terms after two years. Under a second home-equity loan, monthly payments are continually adjusting, rising from about $460 to $670 after just over a year.
Jimenez, who recently spoke out about her experience at a Federal Reserve hearing in San Francisco, told TNS that she knows others in her community who have been roped into similar schemes. In her view, predatory lenders lure Latino immigrants by offering to liaise between them and financial institutions that seem complex and inaccessible. People have â€œa lack of confidence in [their] financial capacity to go to the institutions that might give them better offers,â€� she said. â€œSo you go to a person who gains your trust, and allow the person to go to those intimidating entities that you feel you cannot go to.â€�
The industry is reluctant to provide access to financial counseling, but advocates say people only want the power to make informed financial decisions.
Patterns of racial and ethnic inequality are mapped out even more starkly in a study of lending practices in Las Vegas, Nevada. Researchers with the National Community Reinvestment Coalition (NCRC), which represents consumer groups and community banks, found that in areas where over 80 percent of the population was people of color, about 36 percent of mortgages were subprime.
Yet where the population was less than 10 percent people of color, the prevalence of subprime mortgages dropped below 7 percent. Such trends persisted in studies of other cities, even after controlling for credit background and other economic conditions.
According to the NCRC, the data suggest that some minority groups are being â€œsteeredâ€� toward higher-cost loans, even though they may qualify for better deals, because of the demographics of their neighborhoods.
Aside from documented bias, organizations advocating tougher fair-lending laws see a deeper problem feeding the predatory-lending crisis: anemic financial infrastructures in low-income and minority communities.
Peter Skillern, executive director of the advocacy group Community Reinvestment Association of North Carolina, said predatory lenders capitalize on the absence of more ethical, accessible financial establishments. Mainstream banks focused on prime lending, he said, â€œarenâ€™t aggressively seeking to make loans in underserved markets, and that does to some extent create a vacuum, where subprime lenders come in and provide that higher-cost, poor-quality loan.â€�
Activists note that some large banks profit indirectly from the communities they fail to serve, through corporate ties to local lenders that are known for predatory practices. Peter Bray, executive director of the local community-development organization New York City Financial Network Action Consortium, argued that the mainstream banks â€œdonâ€™t want low-income families as banking customers for the spectrum of banking services that they offer higher-net-worth customers. But they have discovered that [low-income people] are a rich source of profit when it comes toâ€¦ predatory-type loans.â€�
To address what they see as structural inequalities in the banking system, critics are calling for an overhaul of existing federal regulations on lending practices, and an expansion the Community Reinvestment Act to impose stronger obligations on lenders to offer fair credit.
Some states have attempted to plug gaps in federal fair-lending laws. New York, West Virginia and North Carolina, for instance, have restricted prepayment penalties like those attached to Jimenezâ€™s loan. Last week, Rhode Island enacted the Home Loan Protection Act, which is supposed to rein in some of the most egregious practices and impose tighter consumer protections based on a loanâ€™s cost.
But an analysis by the NCRC found that 43 states lack strong legislation against predatory lending, leaving about 80 percent of the countryâ€™s population vulnerable to mortgage scams.
Fair-lending advocates have pushed for a national â€œsuitabilityâ€� standard for brokers and lenders, which would require loans to meet guidelines of fairness with respect to borrowersâ€™ financial circumstances.
Some industry groups, however, oppose the idea of actively helping clients make sound financial choices. In comments sent to federal regulatory agencies earlier this year, the trade group Consumer Bankers Association contended that suitability measures would be â€œoverly paternalisticâ€� and would impracticably â€œforce all lenders to become financial planners.â€�
Federal regulators, meanwhile, have taken a similar hands-off approach to controlling predatory lenders. In 2003, the federal Office of the Comptroller of the Currency, which supervises national banks, ruled that under the existing statutes, nationally chartered banking institutions were not subject to state and local laws barring predatory practices.
Frustrated by the distance between the regulatory system and financially vulnerable communities, some local groups are seeking to empower families to steer their own economic futures. In New York, for instance, the Action Consortium has tried to foster alternative credit systems, helping community-development credit unions pool resources to build their lending capacity.
Still, Ludwig of NEDAP said that in the burgeoning mortgage market, these neighborhood operations are limited by their relatively small financial capacity. â€œThey canâ€™t keep up with the ocean of need thatâ€™s out there,â€� she said.
Kevin Stein, associate director of the fair-lending organization California Reinvestment Coalition, said that as long as lenders face no obligation to provide a fair deal, working families will stay chained to a second-class financial system. â€œYou donâ€™t have the money for your childâ€™s education, you donâ€™t have enough money for retirement, you donâ€™t have enough money to start a business and to get further ahead,â€� he said. â€œAll of that gets jeopardized if a bad loan is made.â€�