Preying on predators

This is another sad story about housing. It’s a colorful story, all about red lines and brown skin, gray areas and greenbacks. We told you one like it last year. And there’s a good chance we’ll tell you another one next year, despite the best efforts of area nonprofit groups and a Sacramento city councilwoman.

The story begins with Emma Jones, who paid $35,900 in 1979 for a comfortable, three-bedroom house in the Meadowview area. Jones and her husband could have done better, but they didn’t want the higher payments. They were excited to be living the American Dream, owning a nice corner house with a big back yard and a great kitchen.

Then came the divorce, medical bills, a $20,000 balloon payment and the end of the fairy tale. Jones’ credit went into a free fall. Struggling to keep her home out of foreclosure and to pay her back taxes and insurance, Jones got a second mortgage and later refinanced her loans.

Today, more than 20 years after she bought her house, when Jones might be sitting pretty on a hefty equity, her monthly house payment is $1,066 at 12.87 percent interest, not including taxes and insurance, which run her another $700 a year. She owes $68,000 on her principal—almost twice the original price—and close to $8,000 on an escrow balance.

At 59, retired on disability, Jones baby-sits some of neighborhood kids to make ends meet, and her 77-year-old mother has moved in to help cut costs. But at the end of the day, in a low-lit room with a cold Pepsi and sometimes a rented movie, Jones tries to shutter out the thought that dogs her waking hours: she might lose her house.

“I’m just digging a hole deeper and deeper,” Jones said. “The thought came to me that I should sell and move, but I’ve been here so long that I’m a fixture here. I know my neighbors and they know me. I’m very comfortable here, my mom and I.”

Studies show there are many Emma Joneses in Sacramento, and many more throughout the country, whose problems stem from “predatory” subprime loans. Emma’s poor credit was probably the reason for her high interest rates—which lenders charge to compensate for the potentially greater risk they’re taking. In fact, subprime loans can be good for rebuilding credit after a foreclosure or bankruptcy.

But Jones’ loans also carried high origination fees, hefty pre-payment penalties, an unexpected balloon payment and mortgage insurance—all things she admits she didn’t understand when she signed the papers.

“The older I get, the more I find out about how life makes us feel inadequate when we have to ask questions,” Jones said. “That’s stupidity on our part. If we don’t know, it’s stupid for us not to ask. If we don’t know, we don’t know.”

Not all subprime lenders are “predatory”–an oft-used term state and federal regulators have yet to formally define. Activists use the word to describe those who lend money to someone without regard for their ability to repay, pad the loan with high fees, require the purchase of mortgage insurance and saddle borrowers with onerous conditions such as balloon payments and penalties for early repayment.

Sub-prime lending has increased 900 percent in just seven years, from less than 100,000 such home loans issued in 1993 to almost 1 million last year, according to the latest study by ACORN, the Association of Community Organizations for Reform Now.

“The rise in subprime and predatory lending has been felt most acutely in minority communities,” according to the recent ACORN study, “Black, Brown or Poor? You’ll Pay More,” which documents how more than half of all refinance loans are made in black neighborhoods, among other findings.

ACORN has been at the forefront of focusing public attention on the twin problems of predatory lending and “redlining,” which is when banks refuse to make loans or even locate branches in communities considered to be bad financial risks—communities that are poor and usually composed mostly of minorities.

The two tactics feed off one another, because once an area has been redlined—making it difficult for its residents to obtain market rate loans—then it sets up a captive audience for subprime lenders, many of which are owned by banks themselves.

An ACORN study of Sacramento revealed blacks earning more than $63,000 were denied conventional loans more often than whites earning less than $26,500. Latinos, who make up 11.4 percent of the population here, received only 4.2 percent of the conventional home loans.

“The reality is clear” to Kevin Stein of the 300-member California Reinvestment Committee in San Francisco. “Subprime lenders are doing more of their business in low-income communities, and their loans are basically worse loans. And the institutions that own them know all this—they know that people in certain areas are more apt to deal with their low-income subsidiary.”

ACORN’s findings are even supported by a recent U.S. Department of Housing and Urban Development study, which found growing evidence that people are being steered to subprime loans when they should qualify for a prime loan with a lower interest rate.

Yet even if the reality of redlining and predatory lending is clear, the regulatory means of dealing with the problems couldn’t be more murky. With rapid consolidations in the financial sector, outdated banking laws and difficulties in defining terms, reformers have made little progress in spurring a government crackdown.

Conventional banks began gobbling up subprime lenders in the mid-1990s when the industry became a cash cow. Once a subprime lender makes a loan, it’s usually sold quickly to make more money so the lender can make more loans, explained ACORN researcher Valerie Coffin in Washington, D.C.

The loans can be sold to another financial institution, such as the quasi-public Fannie Mae and Freddie Mac, or they’re sold as mortgage-backed securities on Wall Street and end up packaged into mutual funds. Because many mortgage companies are classified as nonfinancial institutions, they can be exempt from the rules and reporting requirements imposed on banks.

The rise of subprime lending by entities not considered “banks” has also limited the reach of the Community Reinvestment Act of 1977, the primary federal law aimed at preventing redlining. That law requires banks to serve their entire communities and requires regulators to consider a bank’s record in doing so when it applies to expand.

Matthew Lee, executive director of the New York-based lending industry watchdog Inner City Press, said federal regulators are more concerned about the overall economy than individual victims of predatory lending practices.

“The bank regulators’ main job is almost to be cheerleaders for the banks. Take the Federal Reserve Board. Its main concern is the economy and bondholders. It’s not going to be a rabid consumer-protection advocate. It views banks as central to the economy,” Lee said.

Yet the bankers say their positive outreach efforts shouldn’t be diminished by those who want to paint banks that own subprime lenders with a broad “predatory” brush.

“Subprime lending is a very small part of what we do,” emphasized Wells Fargo spokesman Larry Haeg. The company’s emphasis is on building lifelong customers, he said, and subprime financing is usually not the way to do that.

Even though groups such as ACORN blast major banks like Wells Fargo and Bank of America as enablers for the subprime subsidiaries they own, the bankers themselves are quick to condemn predatory practices. How can that be? Call it a semantic dilemma.

“From a banking industry point of view, one of the biggest dilemmas is defining redlining, predatory lending and subprime lending,” said Susan Banashek, spokeswoman for the California Bankers Association, a California lobbying group. “I don’t know that [the terms] are clearly defined, and that’s part of the struggle. Before you can take actions to remedy … a problem, particularly predatory lending, which is such a terrible practice, first you have to make sure who’s doing what.”

And under the broadest definitions of redlining and predatory lending, everybody’s doing it. Or, with all the consolidations in the financial sector, at least everybody is connected to someone who’s doing it. That’s what Sacramento officials are now finding out as they try to craft an ordinance that would cut the city’s ties to businesses involved in predatory lending.

“If there are any in Sacramento, I think we want them to know that it’s an immoral practice, and we’re not going to do business with people who make poor people homeless,” said City Councilwoman Lauren Hammond, who proposed an ordinance that would bar the city from doing business with any lender that engages in or owns a subsidiary that engages in predatory lending.

The concept was unanimously supported Sept. 26 by the City Council, which directed the city attorney to draft an ordinance that will come back to the council sometimes this winter. Yet Hammond’s criteria could cut the city’s ties to Bank of America, the city’s main bank, which owns at least one subprime lender, Jacksonville, Fla.-based EquiCredit.

Bank of America spokeswoman Betty Reese would not comment on the proposed Sacramento ordinance, but said generally, “These types of municipal ordinances risk chasing out the most responsible lenders and leaving those markets to entities with fewer or none of the consumer safeguards that banks provide.”

Reese added, “Bank of America is concerned about abusive and deceptive lending practices in the subprime mortgage industry. These are not practices we engage in or condone.”

Yet when The Florida Times-Union in Jacksonville conducted a survey of local property records, it found EquiCredit loans with interest rates higher than 13 percent, and with “balloon payments at the end of 10 years that almost equaled in size to the original loan.”

Still, with all the consolidations in the financial sector, there are few large banks without ties to subprime lenders. So Sacramento Treasurer Thomas Friery has found himself in something of a quandary over Hammond’s proposal, arguing that moving the city’s $1.5 billion portfolio would be “tremendously fiscally costly” to Sacramento.

“So I think we would have to look at this very carefully,” Friery said. He also praised Bank of America as “a responsible community leader,” and said that if Hammond has a problem with the lending practices of companies owned by Bank of America, “we’d have to talk to them, to find out if they’d change it.”

That’s the point, said Brian Kettering, a Sacramento activist with ACORN, which supplied Hammond with background material and proposed language for her measure: “The assumption is that … if Bank of America subsidiaries are engaged in predatory lending practices, that they would make the necessary changes so that they could continue to do business with the city.”

“This would not put Bank of America in any financial harm,” Kettering added. “This is the way the industry is going—in the direction of negotiating fair lending agreements to end their own abusive practices. This is the trend.”

With government proving so far ineffective in curbing predatory lending practices, nonprofits have become more aggressive in their efforts to bring about reform, and those tactics have yielded some victories.

“The parts of the country in which nonprofits have been advocating have been able to get some changes,” said Lee, whose group has been able to convince five banks to open branches in the beleaguered South Bronx. “It’s almost like enforcement of the law has devolved.”

Other groups, including ACORN and the California Reinvestment Committee, are stepping into the breach and have notched up some noteworthy results.

“We’re poised to be able to transform an entire industry that’s destroying communities,” Kettering said. “It’s going to be a long, hard-fought process, but we’re fighting the war on so many fronts, and we’re winning in many of them.”

ACORN was able to persuade one of the largest subprime lenders in the country, Ameriquest Mortgage of Orange County, to come to the table in March after ACORN complained to the Federal Trade Commission of unfair business practices. In July, the two parties announced that Ameriquest will make $360 million in loans over the next three years to homebuyers with low incomes and poor credit histories as long as they complete an ACORN credit-counseling program.

“We did some things which I think are pretty revolutionary,” said Adam Bass, senior executive vice president at Ameriquest. His company now gives borrowers seven days instead of the conventional three to review their loans. And loan disclosure statements are written in what Bass called “plain English—Here’s your loan, here are the terms, this is how much you’re borrowing, this is how much you’re paying us—simple, plain disclosures.”

ACORN’s approach to the problem has involved negotiations with subprime lenders and education and outreach programs that counsel people such as Emma Jones. And sometimes, the approach involves direct political action against problem lenders, as ACORN recently demonstrated in Sacramento.

Protesters stormed the Florin Road offices of Household Finance Corp. Nov. 9, refusing to leave until a letter was faxed to the company’s CEO in Illinois demanding Household stop its alleged predatory lending and meet with ACORN’s national staff to talk about a solution. Household did not return SN&R calls seeking comment.

“We are concerned that Household Finance is too often charging excessive fees, mandating ridiculously high interest rates, flipping loans and engaging in deceptive lending practices,” the letter stated, later adding, “While too many of your loans have been stripping us of our wealth, Household made profits of $1.5 billion in 1999.”

The advances made by ACORN and other groups could bolster efforts to strengthen state and federal laws governing predatory lending practices. Past efforts—such as last year’s California Senate Bill 2128—have come under heavy fire by banking interests and either been killed or amended to the point of impotency. ACORN plans to push hard for reform when the California Legislature convenes in January.

“It will be a meaningful bill that will have real reforms of the predatory lending problem and that will probably be more aggressive in making sure that legislators do what their constituents want rather than what their big contributors want,” promised Kettering, mindful of that fact that only one state, North Carolina, has passed an anti-predatory lending law.

Meanwhile, the California Reinvestment Committee, a coalition of about 300 members statewide, has launched a four-city examination of predatory and subprime lending in Sacramento, Los Angeles, San Diego and Oakland. The goal is to compile more data as ammunition in the fight for meaningful legislation, but also to convince Wall Street to back away from supporting predatory lenders.

So what about Emma Jones? Like a growing number of homeowners and buyers, Jones has seen the wisdom of loan counseling. She has joined ACORN and hopes to navigate her choppy financial waters and emerge with her credit and homeownership still afloat.