Deceptive lending bills spark fight
By ANITA KUMAR, Times Staff Writer
TALLAHASSEE -- It all started when David and Claudette Hill got a $3,000 check in the mail from a company they had never done business with before.
The Hills needed the money for a down payment on a second car, so they deposited the check. They knew it was a loan, but didn't know all the terms. When the company called to discuss details, the Hills were persuaded to get a second mortgage on their Pinellas Park home.
They were financially strapped and hoped they could get some cash and cut their monthly bills in half.
Their first mortgage carried a 7 percent interest rate. The second went for 11 percent. Finally, they got a third mortgage at 18 percent.
Then Mrs. Hill was diagnosed with lung cancer, they got behind on payments, declared bankruptcy and now face possible foreclosure on their house. "We thought we were getting rid of our problem," Mrs. Hill, 45, said. "We were just so naive to their tactics."
Consumer advocates say the Hills' story is a classic case of predatory lending, in which a company traps desperate people in high-priced loans through deception and pressure, often leaving them with nothing.
The Legislature, following the lead of other states, is considering a crackdown on the escalating problem, which costs Floridians millions of dollars in fees and high interest rates each year.
But a fight is brewing.
Consumer groups want strict standards and are taking companies to court. The banking industry, meanwhile, is fighting to protect the multibillion-dollar low-income loan business, which exploded in the 1990s.
"People are losing their homes," said Benjamin Ochshorn of Florida Legal Services, which serves low-income people across the state. "And there's not enough regulation of how these mortgages are made."
Thousands of consumers each year are falling prey to aggressive sales tactics, including repeated phone calls, unannounced visits and direct-mail appeals that can include enticing checks.
Consumer advocates say the companies target the elderly, minorities and those who don't speak English well because they are more likely to have poor credit and in need of money.
Some borrowers pay tens or even hundreds of thousands of dollars more than they would with another mortgage. Some end up owing far more than their house is worth. Others go bankrupt or lose their homes.
Legislators sponsoring bills to more closely regulate lending have spent the past two weeks behind closed doors with consumer and financial lobbyists working on a compromise.
Some of the many proposals on the bargaining table: Forbidding balloon payments and payments that don't reduce the principal, requiring independent loan counseling, forcing companies to consider whether a borrower can actually repay a loan and requiring delivery of loan documents at least 72 hours before closing.
"I think we are going to get something through this year," said Sen. Kendrick Meek, D-Miami, who is sponsoring a consumer friendly bill. "But if we're going to dance around this issue and pass a flimsy bill, I'm not going to have any part of it."
The debate could boil down to a philosophical question: How far should the state go in protecting consumers from themselves?
For years, people who didn't have a lot of money had almost nowhere to go if they wanted to refinance their homes. That changed during the mid 1990s when companies realized they were missing out on a lucrative market.
Some started catering solely to those with poor credit.
That's also when consumers started to complain about questionable tactics and unreasonable prices.
"The problem is no longer getting access to credit but the terms of credit," said David Beck, spokesman of the Coalition for Responsible Lending, a nonprofit group formed in 1999 to help tackle lending problems. "Companies discovered there is money to be made in helping people refinance their loans."
The number of these type of loans grew 10 times between 1993 and 2000. In 2000, it was a $140-billion business compared to $65-billion in 1995.
Hundreds of companies, large and small, offer loans to people with low incomes "subprime lending."
Those businesses include subsidiaries of major banks, such as Citigroup, and finance companies, such as Household International which owns Beneficial, one of the leading providers of loans for low-income people and the company that loaned the Hills money.
Some finance companies join forces with home improvement companies whose sales staff goes door to door to sell homeowners on fixing roofs or cleaning gutters. Later, the owners are persuaded to refinance their mortgage, sometimes more than once.
Businesses decide who to target based on a consumer's neighborhood, race, house value, but not how much a person can afford to pay.
One study based on federal data showed that in 2000 almost 50 percent of these loans were made to blacks, about 26 percent to Latinos.
The elderly, who eight out of 10 times own their homes debt-free, also are targeted.
Potential borrowers usually are strapped financially and fall for the sales pitch without reading the contract. Some hidden problems: costly upfront fees, high-interest rates of up to 25 percent, balloon payments and unnecessary insurance.
Questionable practices cost borrowers nationwide an additional $9.1-billion in 2000, reports the Coalition for Responsible Lending. Florida homeowners lost $526-million on 70,0000 loans in 2000, the group says.
"There is a tremendous amount of deception involved," said Lisa Donner of the Association of Community Organizations for Reform Now (ACORN), which has offices in St. Petersburg and Tallahassee. "And the consequences of any mistakes are really high."
Both consumer groups and the financial industry have declared predatory mortgage lending as a top priority. Both have bombarded lawmakers with facts and figures. Both offer vastly different solutions.
Consumer groups want an aggressive law that would apply to the greatest number of loans and allow the attorney general to enforce new regulations.
The financial industry wants to mirror federal law, applying the regulations to a much smaller number of loans and enforced by the state Department of Banking and Finance.
It also would prohibit local governments from passing their own ordinances. Generally, Republican lawmakers in the GOP-controlled Legislature are backing the bills that are more to the liking of the financial industry.
"The bankers say the federal law is enough," said Lyn Bodiford, AARP's state legislative representative. "We say, 'No it's not.' "
Some of the restrictions being considered would apply to all home loans. Some would apply to loans with those that exceed specific interest rates or fees.
They include prohibiting the financing of fees above 3 percent, forbidding refinancing a loan unless the new loan has reasonable, tangible benefits to the borrower, and forbidding late fees of more than 5 percent of the amount past due.
The state Department of Banking and Finance regulates the industry but can't enforce new federal predatory lending laws. That falls to other U.S. agencies, such as the Federal Trade Commission.
More than 30 states, cities and counties have taken up legislation since 2000. Some states, including North Carolina and California, have passed laws.
Miami considered an ordinance last year but state legislators wanted a statewide law to prevent a mish-mash of regulations.
Predatory lending became a big issue after a 1998 U.S. Housing and Urban Development study showed that borrowers in low-income, predominantly black neighborhoods were far more likely to get high-cost mortgages than others.
Consumer groups haven't stopped lobbying for stricter laws. They have sued Household in New York and California, where the company agreed to pay $12-million to settle allegations by state regulators that it overcharged borrowers.
Craig Streem, a Household spokesman, said the company found that some allegations from consumer groups, including ACORN, are not true. He said they always disclose terms of loans in a way that is consistent with state and federal regulations.
"We do not set out to make predatory loans," Streem said. People "may not like some of the terms but that doesn't make them predatory. . . . We try as much as we can to do the right thing."
In recent years, Florida lawmakers have tackled title and payday loans, but mortgage lending is a much bigger business affecting more people.
"We're not in an adversarial position," said Anthony DiMarco, a Florida Bankers Association spokesman. "We both want to stop the bad guys."
Don't get taken
Tips to avoid predatory mortgage loans:
Know your legal rights.
Don't be pressured.
Make sure you can afford the loan.
Read the fine print.
Never sign blank forms to be filled in later.
Be careful about using a home equity loan to consolidate credit card debt.
Get help from a consumer credit counseling agency or nonprofit housing counselor.
Find out what the monthly payment will be and if it will change.
Ask what the annual percentage rate is and if it is fixed or adjustable.
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From the Times state desk
From the state wire