Predatory Lending

“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.