August 5, 2000

Mortgaging Futures Consumer Advocates, Fed Officials Hit Predatory Lending At Hearing

By Kathryn Tong

Consumer advocates yesterday accused some lenders and mortgages brokers of defrauding homeowners who have poor credit.

These lenders, engaging in what is known as predatory lending, offer "subprime" mortgages featuring high interest rates and points, annual refinancing, and advertising that promises high-risk borrowers instant loan approvals.

The catch: Many of the loans include balloon payments at the end of a loan's term, or financing of fees or payments in excess of 50 percent of a person's monthly income, said consumer advocates at a public hearing at the Federal Reserve Bank in Boston.

The market for subprime lenders has grown significantly, with the number of subprime home-equity loans increasing from 80,000 in 1993 to 790,000 in 1998, according to the US Department of Housing and Urban Development.

In Massachusetts, subprime loans increased by 435 percent from 1994 to 1998, Norma Moseley, director of the Ecumenical Social Action Committee Inc., based in Jamaica Plain, testified.

Predatory lending became a prominent issue last spring when Federal Reserve chairman Alan Greenspan criticized the practice, calling it "abusive," and saying it destabilizes poorer neighborhoods.

Consumer-advocacy groups and housing-development organizations say predatory lenders prey on minorities and the elderly.

In Boston, subprime lenders made 24.1 percent of their loans to blacks, compared to the 4.7 percent given to whites, said Jim Campen, associate professor of economics at the University of Massachusetts at Boston.

The Fed, reacting to widespread reports of abusive practices, is holding public hearings at four of its regional banks to gather information on how it can combat the problem.

But one Fed governor, Edward Gramlich, cautioned at the beginning of the hearing, "What the Fed can do under its authority is limited. Lenders, banks, and consumers must also make some changes."

Under the Home Ownership and Equity Protection Act, enacted by Congress in 1994, the Fed has the authority to oversee mortgage and home-equity loans. The amendment forces lenders to provide disclosure to consumers at least three days before the loan closes, and gives consumers a minimum of six days to consider the terms before making the final decision to close the transaction.

"Instead of these hearings, the individuals in the Fed can start by asking why nothing has been done for the last five years," said John C. Anderson, an independent real estate analyst from Dorchester and a panelist at the hearing.

Unscrupulous companies will even go so far as to knock on doors in low-income communities where homes need repairs and people are on the verge of foreclosure, said Bruce Marks, chief executive and executive director of Neighborhood Assistance Corporation Association, a nonprofit Boston-based community advocacy and housing services organization.

Mortgage bankers like Steve Nadon, executive vice president of Option One bank in Irvine, Calif., suggested increased education as the solution to the problem. Other panelists argued that education would not be enough. The Fed and other government agencies need to launch a marketing campaign to caution people about the dangers of the subprime loans, consumer advocates said.

Betty Criss, a homeowner who attended the hearing, said she thought a salesman from a West Virginia-based lender was helping her out when he came to her house in 1988 to offer to fix the siding on her one-family home in Hyde Park.

Criss, who was a social worker, said she told the salesman she could not afford to have the $14,000 siding job done, based on her $34,000-a-year salary. The salesman insisted the lender would be able to loan the money at a low interest rate, so she accepted the offer because Andover Savings had declined to refinance her existing mortgage.

She got a 14 percent interest rate on her $14,000 loan, significantly more than the 10 percent offered by the salesman. Criss and her husband were also paying $600 a month for the loan, which was covering only the interest and not the principal.

When Criss called Advance to complain about the higher interest rates, she said that they were "very nasty," telling her they could "do nothing about it."

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