Curbing Predatory Lending Practices
The news media suddenly is doing a great job of publicizing predatory lending. Front page stories and editorials in the New York Times and a companion piece on the “20-20” news program aired by the American Broadcasting Company have put a national spotlight on the sleazy credit merchants.
This is a welcome development for consumer and community groups that have been sounding the alarm for years about unscrupulous lenders that prey on low and moderate income families, elderly citizens and other unsuspecting consumers. Many of the victims have been forced into foreclosures and bankruptcies when they were unable to meet the outrageous fees, high interest rates and other charges tacked on home equity loans and the refinancing of mortgages.
The New York Times and ABC cited a case where one lender First Alliance Corporation had tacked $13,000 in fees on to a $47,000 home equity loan that also included a provision for the interest rate to increase a full point every six months. Another borrower found that the fine print of her $45,000 loan contract required payments totaling $90,000 over 15 years plus a final balloon payment of $41,000.
The mortgage scams are but one of the areas of credit ripoffs that plague inner city neighborhoods. An estimated 22 million Americans do not have banking accounts. This leaves these citizens easy prey for check cashing firms, liquor stores, loan sharks and other costly “underground” financial operations. Manyof these citizens are victimized by so-called pay day loans issued primarily by check cashing firms. These loans often carry interest rates of more than 500 percent (APR) and are rolled over from pay day to pay day. Then there are the long-standing rent-to-own scams where payments often total three and four times the real value of the merchandise, typically items like television sets, VCRs and furniture. Missing a single payment can result in the merchandise being repossessed along with the loss of all the money that has been paid on the rent-to-own contract.
Behind this shady world of predatory lenders and deceptive practices are prominent Wall Street investment firms that provide much of the basic wherewithal the capital to fuel the scam operations. The New York Times reported that investment banks have sold $316 billion of bonds for sub-prime lenders since 1989.
Last year the Congress rewarded these same Wall Street firms with a legislative package that will allow major investment houses to merge with banks and insurance companies to form giant conglomerates which will dominate the nation’s financial system. Through months of hearings, the Senate and House Banking Committees never asked any questions about the links of investment houses with predatory lenders. They were too busy meeting every demand of the financial lobbyists.
Even if this stream of money from Wall Street to the predatory lenders was cut off, it would be difficult to end the ripoffs and scams or to close down the underground world of finance without viable practical alternatives that will meet the credit needs of low and moderate income citizens andneighborhoods. Alternatives that will let them escape the clutches of the scam artists.
Congress and the Clinton Administration need to promote Community Development Credit Unions in inner cities. These special credit unions, designed specifically for the needs of low-income citizens, are controlled by their members. They make small loans and they are increasingly moving into mortgage lending. They are eligible for technical assistance and low-interest loans from the National Credit Union Administration and can accept deposits from non-members. Unfortunately, there are only about 400 of this type of credit union nationwide. We need thousands if the predatory lenders are to be checked.
The Equal Credit Opportunity Act, the Home Mortgage Disclosure Act and the Community Reinvestment Act, all products of the 1970s, have improved the access to credit by low and moderate income and minority neighborhoods. But, they have not been a cure-all. We still have redlining and discrimination and less than adequate levels of investment.
Federal regulators, assigned the duty of enforcing these laws, have been too craven and too cozy with the banks to clamp down hard on institutions that short change their communities.
Congress, with leaders like Senate Banking Chairman Phil Gramm in control, not only has done nothing to prohibit the ripoff tactics employed by predatory lenders, but has tried its best to limit the effectiveness of CRA and fair lending laws laws, which if properly enforced, could do much to push scam credit operatives out of inner cities.
While it was handing out favors in the last session to banking, securities and insurance interests, Congress turned down efforts to “modernize” CRA so that community investment efforts could keep apace with the changes in the financial world. In fact, a bi-partisan Congressional majority and the Clinton Administration went the other way and accepted Gramm’s amendments which weakened community investment efforts.
With its anti-CRA bias and its failure to support adequate programs for affordable housing, Congress is probably the best friend that the predatory lenders have in their corner. Congress sets the table for the ripoff artists.