In the late 1980s, when Arnold Schwarzenegger and Jesse Ventura teamed up for the film Predator, America was deregulating and otherwise fantasizing its way into economic trouble. Soon enough, ordinary working people spied some monsters among the dollar signs. One was called consumer debt, with credit-card marketers getting top billing.
There are stealth predators, too. One made the front pages last summer, when Citigroup, an incredible hulk itself, agreed to stop selling “single premium credit life insurance.” This type of mortgage insurance requires the borrower to make an upfront, single-sum payment rather than ordinary monthly premium payments. So the borrower takes out a secondary loan to pay the upfront “premium” --- and ends up paying magnum interest. This can lead to a loss of equity, or a loss of the home altogether. As the New York Times reported, Citigroup vowed to mend its ways; but Household International, another big lender, said it would keep providing the insurance. Days later, though, Household also dropped the hot potato.
Larger dramas are playing out in the mortgage market --- especially in what the Federal Reserve Board calls “high-cost home-secured credit.”
In an explanatory note to its “Regulation Z,” the Board defines the problems and names the likely victims simultaneously: “The term ‘predatory lending’ encompasses a variety of [home credit] practices. Oftentimes homeowners in certain communities --- particularly the elderly and minorities --- are targeted with offers of high-cost, home-secured credit. The loans carry high up-front fees and may be based on the homeowners’ equity in their homes, not their ability to make the scheduled payments. When homeowners have problems repaying the debt, they are often encouraged to refinance the loan. Frequently this leads to another high-fee loan that provides little or no economic benefit to the borrower.”
The regulatory language sounds bad enough. But individual cases of this type could make a fixed-income senior’s hair go grayer.
Peter Dellinger, a staff attorney with the Public Interest Law Office of Rochester, cites one case he’s working on. (Dellinger says he can’t reveal the borrower’s or lender’s names.) In this case, he says, a family secured a home mortgage of $57,000. The 20-year mortgage was quoted at 9.6 percent interest but actually came in with a rate of 11.2 percent, he says. Moreover, he says, the couple had to pony up $9,100 in points and fees.
Then came the clincher: a lump-sum “balloon” payment due at the very end. “They’re paying $547 a month for 239 months,” says Dellinger, “and their final payment will be $42,700.” In other words, the family will pay years’ worth of high interest, only to see their equity drained off in the balloon payment.
But the bad news doesn’t stop there. The family, says Dellinger, also has taken out a $10,000 home-equity loan at 18.49 percent to pay off other creditors.
Can the family be helped? Dellinger says there’s not much room for maneuver here. “The legal tools are not very good,” he says. “That’s one of the reasons we have this problem and why we need [stronger] legislation.”
High interest rates and apparently onerous terms may compensate lenders for the riskiness of certain loans, some of which are sure to go bad. Still, the amounts that some people have to shell out are staggering. “It’s not the way it used to be, when you went down to the local banker” for an off-the-shelf mortgage, Dellinger says. In many states, he says, anti-usury laws “were pretty much abolished in the early 1980s.” Without these laws, he explains, lenders have been able to jack up interest rates greatly.
Of course, the availability of legitimate “subprime” or higher-interest loans has good effects, too. Such loans allow people with low incomes or checkered financial histories to get credit. In the old days, they may simply have gone without --- another sort of burden.
The world of finance has two minds about predatory lending --- at least about how stringent the laws should be. But in New York, no one denies that such lending is a widespread problem. It could hardly be otherwise in a state with declining cities and large low-income populations.
That’s why the coalition New Yorkers for Responsible Lending was formed. NYRL’s nearly 100 members include local organizations like the Group 14621 neighborhood association, Housing Opportunities Inc., and Rural Opportunities; and statewide organizations like AARP (formerly known as the American Association of Retired Persons) of New York, the League of Women Voters, and the New York Public Interest Research Group.
For the past year, NYRL has made a special push to get strong anti-predatory legislation passed in Albany. But competing bills (S.5005 in the Senate, and A.7828 in the Assembly) ran aground. The Assembly did pass one version almost a year ago, but that died in the Senate. This year the Assembly took up the bill again, but the Senate adjourned last week without taking action.
The Rochester-based ESL Federal Credit Union is an influential member of the NYRL coalition --- but was somewhat on the fence regarding the legislation. “As responsible lenders, we feel it’s important to give support” to anti-predatory lending bills, says ESL general counsel Tim Pryor. Nonetheless, he says, ESL doesn’t want a law on the books that’s “inordinately broad.” In other words, ESL, like many lenders, doesn’t want to prevent legitimate high-rate loans from being made --- loans that could help certain high-risk borrowers get what they need.
But high-risk borrowers, like all others, need special protection. And there is some already. For example, as an AARP backgrounder explains, a federal law known as HOEPA, the Home Ownership and Equity Protection Act, has been in place since 1994. HOEPA, says the backgrounder, covers loans whose “annual percentage rate (APR) is 8 points higher than the rate on a Treasury bill for the same length of time.” At this moment, any loan that carries 13 percent interest or more would be considered high-interest and thus would fall under HOEPA’s protective umbrella. Among other things, HOEPA requires lenders to disclose crucial information about the loan before a borrower signs on the dotted line, and it puts limitations on balloon payments.
Trouble is, HOEPA covers only carefully defined high-interest loans --- leaving any predatory practices associated with lower-interest loans untouched. Bill Ferris, New York State legislative representative for AARP, says HOEPA “is a very good law.” But, he says, “it doesn’t capture part of the market where a lot of bad things are happening.” The bad things, according to an AARP fact sheet, include excessive brokers’ fees or points; huge balloon payments; and “flipping,” or serial re-selling to add yet more fees and points.
Hence the need for a strong state law.
To help prevent such abuses, anti-predatory-lending groups like New Yorkers for Responsible Lending want a strong provision in state law for “assignee liability.” HOEPA contains such a provision, but again, HOEPA doesn’t cover all the loans out there.
What is assignee liability? Essentially, it means that a lender who buys a problem mortgage can be held responsible for the legal defects written into that mortgage by the original lender. (This is no mere detail, since the defects may include serious things like deceptive trade practices or outright fraud.) With assignee liability in the legal toolbox, a borrower can make claims against the current owner of a predatory mortgage. Without it, the borrower is limited to making claims against the originator of the mortgage --- and the originator may be difficult to pin down, or even impossible to find.
As you can imagine, assignee liability would also give financial institutions in the so-called “secondary” loan business a powerful incentive to police their own ranks. Peter Dellinger of the Public Interest Law Office of Rochester sums up: “Assignee liability becomes a critical tool for making institutions behave.”
Unlike NYRL, the New York Bankers Association isn’t so interested in a strong assignee-liability provision. “We totally concur,” says Bankers Association general counsel Roberta Kotkin, “that anyone in the loop has to have appropriate culpability but we’re concerned the language [in proposed legislation] will chill the secondary market.” As a counterweight to regulatory moves, the Bankers Association is pushing a set of “Home Lending Best Practices” among its members. The voluntary guidelines speak of “full enforcement of existing laws and regulations” but do not address legal reforms.
The state legislature is not in session right now. An aide to Senator Rick Dollinger says S.5005 could be taken up when the Senate goes back to work this week. But there are more high-profile items to be dealt with, says the aide --- like the state minimum-wage hike.
So don’t expect the predatory lenders to meet the legislative equivalent of Ventura and Schwarzenegger very soon.