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Ralph Nader > In the Public Interest > Predatory Lending

Payday loans, refinancing schemes and other forms of predatory lending have left many low and moderate income neighborhoods as financial wastelands. Sleazy lenders and the fast-buck merchants seem able to carry out their rip-offs with little or no effective opposition from authorities.

It may be infrequent, but every now and then there are thin slivers of light that give these neighborhoods renewed hope that someone is paying attention to the scams and is willing to help punish the bad actors who prey on the poor and the unsuspecting consumers.

One of these bright spots was furnished recently by Mel Martinez, the Secretary of Housing and Urban Development. Moving to enforce the long-unenforced Real Estate Settlement Procedures Act (RESPA), the HUD Secretary obtained more than $2,250,000 in payments for violations involving illegal kickbacks and referrals in connection with home loans. The settlements include agreements with First American Corporation, Transamerica, Conseco Finance Corporation, ARVIDA/JMB Partners and Central Pacific Mortgage Corporation.

The money from the settlements will be used to provide consumer housing counseling and education, refunds to homebuyers, and payments to the government. Since the first of the year, HUD has brought 38 other smaller cases and obtained monetary settlements from lenders found in violation of the anti-kickback provisions of RESPA.

Secretary Martinez’s efforts to improve enforcement of RESPA have roots in his former job as a CountyCommissioner in Florida. He proudly describes his battles in Florida to stop lending and real estate abuses. So, there is reason to hope that the Secretary will be encouraged to move forward from his recent successes to launch a full-scale nationwide campaign by HUD against lending and related housing scams. The Secretary, I believe, would agree that HUD’s effort to date is only a beginning.

There is also some light visible at the end of the tunnel on “payday lending” in at least two states, Indiana and North Carolina. A decision by the Indiana Supreme Court eliminated the ability of payday lenders to charge fees that translate into an annual percentage rate of about 420 percent.

In North Carolina, consumers were successful in getting the legislature to reject efforts by the lending industry to reenact a free wheeling pay day lending law that had expired under a “sunset” clause. The language eliminated by the sunset would have allowed fees that would have been tantamount to a 420 percent interest rate on an annual basis.

In North Carolina and Indiana, the legislative and court victories curbed abuses by small payday lenders. But, the big interstate operators found a loophole. The larger payday operators may “partner” with out-of-state banks to circumvent state law under the “doctrine of exportation.” This allows a bank chartered in a deregulated state to ignore the usury law in the borrower’s home state, wiping out that state’s ability to protect its citizens.

[Under “payday lending” the lender cashes a consumers’ check and holds it against his next paycheck, often charging interest rates of 400 to 500 percent or more. And many lenders continue to allow the debt to be rolled over past the next pay day as interest charges mount]

As encouraging as the actions are at HUD and in Indiana and North Carolina, predatory lending remains a huge–and cruel–problem nationwide. It is sapping the resources of already poor families and placing at risk the efforts to rebuild inner-city neighborhoods and depressed rural areas.

The Congress spent six years rewriting the laws that govern the nation’s financial corporations. When the bill was finally enacted in 1999, the sponsors called it “modernization,” but it was little more than a Clinton-signed lucrative giveaway to the biggest banks, securities firms and insurance companies. Efforts to provide protections for consumers against predatory lending were tossed aside as unnecessary in this new financial world. Consumers didn’t even get the crumbs. As a result, the scam artists have been emboldened to extend their ripoffs across more of the population.

BOSTON, MA. 02110