Volume , Number 0
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Business As Usual
Jamie K. McCallum
Slippin' & Slidin'
C. stone Brown
Queer As Your Folks
Politics of Consciousness
Z Papers on Strategy & Vision
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The Jacksonville, Florida case of Mattie Foster, a 72-year- old elderly black woman, typifies the immoral and unethical chicanery of the industry known as “predatory lending.” It began with a knock at her front door and a polite introduction by a loan broker representing a home repair company. Foster didn't know it at the time, but she was a pre-selected victim for predatory lending. She was black, elderly, and unsophisticated regarding financial matters. Just one of these three profiling characteristics could have landed a loan broker at her doorstep. Foster had all three.
The loan broker persuaded Foster to sign a loan for a new roof and carpet. According to court documents, Foster never received the carpet and the new roof leaked in the rain. However, this was the least of Foster's problems.
When the repair company arranged her loan, Foster was charged a $1,700 broker's fee in order to receive $4,380 to cover the cost of the new roof and carpet. The lender would later convince her to pay off her original mortgage, which raised her debt to $18,000. In four years Foster's debt would be refinanced four times at the urging of the lender increasing her debt to $22,000 at 18 percent interest. At each refinancing, Foster received small amounts of money—less than her closing costs. For instance, on one loan she received $25.66, but the closing costs amounted to $524.47. Her monthly payment of $385 a month was nearly half of her social security check. If she could manage to pay off the $22,000 in ten years, principal, interest, and fees would total $46,200. Still the lender was merciless, attempting to get Foster to sign a sixth loan before a local legal aid service and her daughter stepped in. Foster represents one of thousands of cash-poor/equity rich, minority or elderly homeowners who have become entangled in predatory loan scams.
Foster obtained her loan from a subprime lender that practiced predatory tactics. According to a joint report conducted by the U.S. Treasury Department and Housing and Urban Development (HUD), the subprime industry has grown from $35 billion in 1994 to $160 billion in 1999. The industry is made up of specialty lenders such as AmeriCredit and Credit Acceptance who finance late model vehicles. Other subprime lenders make loans for a variety of needs, such as personal or home equity. These lenders include the Associates First Capital, House Hold Finance, Beneficial (a HouseHold Finance subsidiary) First Alliance, New Century, Norwest, Textron Financial, (a subsidiary of defense contractor Textron), and subsidiaries of major banking firms, Citicorp, Chase Manhattan, Bank of America (formerly Nations- Bank), and Banc One. These banking firms lend money under the subprime category.
On its face, there is nothing illegal or unethical about subprime lending. Subprime lending fills a niche in the consumer loan business, serving borrowers who would otherwise be rejected by major banks. Subprime borrowers naturally pay a risk premium for a home equity, personal or auto loan. In contrast, people with good credit pay interest set by the “prime rate,” the rate major banks charge their best customers. If the prime rate, for example, is 8 percent, the subprime borrower might pay a rate 5 to 10 percentage points above prime. Subprime loans begin to exhibit predatory characteristics when the interest rate has no relation to actual risk. The interest rate is whatever the lender can get away with. Other predatory red flags include “packing” the loan with unwarranted fees, “flipping” the loan or attaching a “balloon” payment to the loan. All of these red flags allow predatory lenders to evade state usury laws, which only cap interest rates.
Balloon payments are commonly used by prime lenders to reduce a borrowers' monthly payment, with a final or “balloon” payment to make up the difference at the completion of the loan. Predatory lenders take advantage of borrowers by enticing consumers with signs that read: “Refinancing With Low Monthly Payments” but fail to disclose the balloon payment due at the end of the loan term. In some cases, if the monthly payments are too low, the balloon payment can exceed or equal the amount of the principal. In other words, a borrower could pay off a $10,000 loan, principal and interest, and still have a $10,000 balloon at the end of the loan. So what are the consequences? If a borrower cannot make the balloon payment at the end of the loan, they face foreclosure. If the borrower has to refinance the balloon, they start all over paying interest and fees.
“Flipping,” is a practice of repeated refinancing of the original loan. The New York Times reported the case of Beatrice Smith, a retired cleaning lady. Smith had her small home refinanced by NationsCredit, (a subsidiary of Nations Bank) six times in ten years, increasing her monthly payment from $267 to $417, which was more than half of her monthly social security benefits of $709.
One of the more egregious cases of flipping was the story of Bennett Roberts, an illiterate, retired quarry worker. According to the Wall Street Journal, Roberts borrowed $1,250 from Associates First Capital to purchase meat from a roadside stand in Virginia. In four years, Roberts's loan was “flipped” or refinanced 10 times, all at the suggestion of an Associates representative. The fees Roberts incurred were in excess of $29,000 plus interest and 10 points for each refinance.
“Packing” is a term used by predatory loan officers to describe a loan packed with unnecessary insurance or other ancillary products, often without the knowledge or consent of the borrower. Typical insurance products packed with a predatory loan include credit life, credit disability, or credit property. Often the insurance costs are camouflaged into the principal and interest of the loan. In most cases the insurance policies are underwritten by a subsidiary of the lender, maximizing profits.
Numerous cases of alleged “packing” are documented in the book, Merchants of Misery: How Corporate America Profits from Poverty. One case involved Wilma Jean Henderson who went to Associates First Capital to take out a small loan. Henderson was in need of a loan to pay for repairs on her 1987 Ford Blazer. She went to Associates and signed for a $2,000 loan. She later testified in court that the loan officer hastily flipped through the loan papers and rushed her to sign the loan document. It turned out that she was signing for a loan at an interest rate of 33.9 percent, with another $1,200 for auto club membership and credit insurance. Henderson also charged in her lawsuit that her signature was forged to include the auto club membership.
Henderson wouldn't be the only person to accuse Associates First Capital of packing, forgery, and deliberately rushing borrowers to sign loan papers. These lending practices were highlighted in a 1998 ABC Prime Time news investigation into predatory loan scams. Prime Time concluded that not only did these practices seem to be widespread, but they appeared to be company policy. Phillip White, a former assistant manager for an Associates branch in Alabama, told Prime Time that there was always a designated “forger” in the office. White also remembered at least “two-dozen” instances of forgery in two Alabama offices. Ford Motor Corp, who owned Associates at the time, told Prime Time they investigated White's allegations and “found nothing.”
Critics like the Association of Community Organization for Reform Now (ACORN), a national grassroots community organization, point to Associates First Capital as one of the most brazen, if not profitable predatory lenders in the country. On the ACORN. org website, consumers are warned, “Don't Associate with Associates” and ACORN devotes an entire section to explain why. If profits are any indication, the ACORN warning isn't getting through to consumers. Last year, the Associates reported $1.49 billion net profit, a 22 percent increase above the previous year's profits.
The Associates relationship with Ford Motor Corporation stretches back to 1918, when the company was founded to finance the purchases of Model T Fords. The automaker purchased the Associates in 1989. Enormous profits of the Associates attracted the attention of another Wall Street icon, Citigroup. In September 2000, Citigroup announced it would acquire the Associates for $31 billion. The deal became official in November 2000.
If conscientious borrowers have a difficult time avoiding the Associates, it may be because the company has a chameleon-like presence in the subprime market. The company also operates under the nameplates of TransSouth Financial, First Family Financial Services or Kentucky Finance. Moreover, during the past several years, the company's strategy has been to acquire smaller subprime lenders and to partner with home repair, retail, and oil companies. Some of the private retail cards that have partnered with the Associates include Radio Shack, Gateway, Goodyear, Office Depot, Office Max, Texaco, Amoco, Shell, and (BP) British Petroleum. In 1999, Associates acquired AVCO Consumer Finance, which at the time was the nation's fourth largest consumer loan company.
All subprime lenders who practice predatory tactics were put on notice when the Federal Trade Commission (FTC) filed suit in federal court, alleging that the Associates First Capital, the parent company of the Associates Corporation of North America had committed “systematic and widespread abusive lending practices, commonly known as predatory lending.” The FTC also charged the Associates with violations of other federal laws, including the Truth in Lending Act, Fair Credit Reporting Act, and Equal Credit Opportunity Act.
“What made the alleged practices more egregious is that they primarily victimized consumers who were the most vulnerable, hard working homeowners who had to borrow to meet emergency needs and often had no other access to capital,” said Jodie Bernstein, Director of the FTC's Bureau of Consumer Protection in a March 6, FTC press release.
A recent HUD study found that subprime loans account for 51 percent of home loans in black neighborhoods and that borrowers from black neighborhoods are five times more likely to be burdened with a prepayment penalty than their white counterparts. The seriousness of the long term economic impact of predatory lending on black communities has prompted Congressional Black Caucus member Stephanie Tubbs-Jones (D-OH) to refer to the crisis as a “civil rights” issue.
“Predatory Lending is the civil rights issue for this century,” says Rep. Jones. “Particularly for our community, African-American wealth is usually passed from one generation to the next and the biggest single asset is a home. And if you allow the predatory lenders to take that wealth out of our community, they're stealing wealth building from our people.” Rep. Jones's assessment is supported by a study conducted by Harvard's Joint Center for Housing. The study found that nearly 61 percent of black households have no net financial assets—and of the wealth that blacks do own 63 percent consists of equity in their homes.
If subprime lenders aren't held in check by federal and state legislation, the wealth gap between black and white Americans will continue to expand. Rep. Jones, who is on the House Banking Subcommittee, is a co-sponsor of H.R. 4250, known as the “Predatory Lending Consumer Protection Act of 2001.” Jones believes this bill can ward off predatory lenders and strengthen consumer pro- tections.
H.R. 4250 is an amendment to the 1994 Home Ownership and Equity Protection Act (HOEPA). Besides not addressing balloon payments, flipping, and packing, predatory lenders aren't bound to HOEPA unless they reach the interest rate trigger, usually around 24 percent. H.R. 4250 would lower the interest rate trigger and prohibit predatory tactics such as balloon payments, flipping, and up front fees on any credit insurance. Rep. Jones especially likes the consumer education provision in the bill.
“I realize that fighting predatory lenders begins with education and ends with opportunity. We have to provide citizens with education about their credit, equity financing and how to seek assistance when they are confused about contract details.” Z
C. Stone Brown is an independent journalist who lives near Philadelphia.