When the Predators Come Knocking

Ninety-year-old Jessie Montano has owned her house on Chicago’s South Side for 26 years. She had fully paid off the mortgage years ago. Now, she is losing her home because of the practices of a predatory lender called Regional Mortgage Lending.

The term “predatory lending” is used to describe subprime mortgage loans — high interest loans for people with bad credit who cannot get standard loans — accompanied by a host of deceptive or unethical practices. These practices include slapping customers with hidden, exorbitant fees and taxes; selling properties at prices far higher than they are worth; repeated unnecessary refinancing of loans (known as “flipping”); and persuading customers to take out loans they have no realistic ability to repay. Predatory lenders often work with realtors who sell houses that are structurally unsound. When the need for drastic repairs on the house becomes obvious, the predatory lender will conveniently show up with a tempting loan offer.

Predatory lending frequently leads to foreclosure on homes, since borrowers are often unable to make the high payments they have been tricked into making.

Low-income, elderly people are frequent targets of predatory lenders. African-Americans and Latinos are disproportionate victims, as are Native Americans. A recent survey by the National American Indian Housing Council showed that 68 percent of Native Americans surveyed have been victims of predatory practices, including interest rates as high as 25 percent on home improvement loans and mobile home loans. Racial discrimination and an extreme lack of mainstream banking services on reservations makes Native Americans particularly vulnerable to predatory lending, as noted in hearings before the Senate Banking Committee on the issue in late July.

Much of the time, victims are talked into loans for holiday shopping, home renovations or other non-essential costs.

Montano was hoping to buy her grandson a car before he went off to the University of Illinois at Champaign, partly so he could more easily make the trek back to Chicago and visit her and other family members. Several years ago, she did a $60,000 reverse mortgage on her house for money for repairs and expenses. A reverse mortgage is a program tailored for seniors in which they are able to collect the equity on their property while they are alive; the loan is paid back through the sale of the house after they die.

In 1998, Montano says, she started getting calls from Regional asking if she wanted more cash.

“I wanted money to give to family members and to buy my grandson a car,” she says. “He is such a wonderful kid.”

The broker, whose full name Montano does not know, convinced her to get a $76,000 conventional loan on her reverse mortgage. Basically, the policy meant buying out the reverse mortgage and supposedly providing her with $16,000 or so in cash. But as is typical with predatory lenders, the various complicated taxes and fees involved in the transaction were not revealed to Montano, and she ended up with only $2,300 in cash. She used the money to buy her grandson a used car, and ended up with debts of $737 a month to pay off the loan and interest. Her income, from Social Security, is only $875 a month. With Montano unable to pay the loan off, Regional moved to foreclose on the loan.

"I didn’t understand what I was getting into," says Montano, noting that predatory lenders from numerous companies are still calling her. “I listened to the wrong people.”

“This has really grown astronomically over the past seven or eight years,” said Gale Cincotta, a long time community activist and leader of the National Training and Information Center (NTIC), who recently passed away. “People are being scammed all over. In 1993, we were dealing with a few hundred foreclosures (in the Chicago area) from predatory lending. Now we’re dealing with over 5,000.”

As with payday loans, predatory lending companies change names and locations and seemingly go out of business frequently. But they are increasingly being bought up by major financial institutions drawn by the tempting potential profits.

In November, Citigroup, co-chaired by former U.S. Secretary of the Treasury Robert Rubin, won approval to purchase The Associates First Capital Corp., in a $31 billion merger. The Federal Trade Commission says The Associates is notorious for making predatory loans, charging in a March 2001 federal suit that The Associates has engaged in “systematic and widespread abusive lending practices, commonly known as predatory lending.” As of last fall, The Associates was facing more than 700 lawsuits regarding predatory lending, involving a total of $19 million.

Despite outcry from countless community groups and statements of concern or opposition from the Federal Deposit Insurance Corp. (FDIC) and the New York State Banking Department, federal authorities permitted the merger. Consumer advocates say this sets a dangerous precedent of mainstream investment in predatory lending. Many believe the Citigroup-Associates merger set the stage for ChaseManhattan Bank’s purchase of Advanta, another company with a history of alleged predatory lending.

Lending industry representatives point out that not all subprime lending is predatory, and complain that the whole industry is being stigmatized because of the actions of a few.

At hearings regarding proposed anti-predatory legislation in Illinois this spring, Jeffrey Setzler of the National Home Equity Mortgage Association says that he is “highly offended” at being lumped in with unethical lenders. “Rather than being predators, our lenders have made loans available to millions of Americans who wouldn’t otherwise have gotten them,” he says.

Illinois’s anti-predatory legislation, which was passed this spring, includes requirements that lenders verify a client’s ability to repay the loan; prohibit fraudulent and deceptive practices; ban loan flipping; provide for independent review of loans; provide counseling to loanees before any loan is made; and other measures.

North Carolina, South Carolina, New York, Philadelphia and at least 20 other states and major cities recently have passed or are in the process of considering strong city or state anti-predatory lending regulations or legislation.

But in every case industry lobbying groups strongly oppose proposed anti-predatory lending regulations.
Al Wood, president of the Illinois Association of Mortgage Bankers, says that low-income people will actually suffer because of anti-predatory regulations that impede even honest subprime lenders.

“Unfortunately, if these [Illinois] rules pass, people would not be able to enjoy the same benefits they enjoyed when [subprime] loans allowed them to buy their homes,” he says. “These regulations would strangle a vital segment of the industry.”

— K.L.