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November 07, 2002
Tables Turning on Predatory Lending?
by Calvert Foundation
The fight against predatory lending is being waged across the country by committed organizations
that are utilizing capital from investors to create critical community impact. Meanwhile, major
penalties are being handed down on predatory lenders.
SocialFunds.com --
Across the United States, individuals are at risk of being taken advantage of by "predatory
lenders" when they seek to obtain a loan, particularly a loan for purchasing a home. Typically
these potential borrowers are considered "subprime" by traditional financial institutions for any
number of reasons including a history of late credit card payments, high debt, previous bankruptcy
or other reasons and are therefore unable to secure a loan. This forces the individual to turn to
subprime lenders who agree to take on the increased risk of lending in exchange for higher rates of
interest and other fees. The potential for profit in this subprime lending market has fueled an
explosion of widespread and abusive predatory practices.
 While there is no formal definition of
predatory lending, what is often seen is an imbalance of information and experience between the
borrower and lender. The borrower typically does not have much experience with traditional
financing due to previous credit problems and therefore is more susceptible to the lender’s
sales pitch. In fact, predatory lenders specifically target more vulnerable individuals, including
older, less educated, female, frequently minority group members residing in the lower income areas
of a city. Once a vulnerable borrow is identified, the predatory lender is able to exploit the
borrower’s inexperience and incorporate a vast number of fees and hidden rates into the
conditions of the loans. Common predatory practices include:
- Misrepresenting (or
hiding) critical loan details
- Establishing repayment terms that lenders know could never be
met by the borrower, thus increasing the likelihood of default and foreclosure
- Charging
undisclosed or improper fees
- Failing to advise of the right of recision
- Foreclosing
on loans to obtain properties at a discount
- Selling foreclosed properties at a substantial
profit
In response to the rising unfair lending practices that characterize predatory
lending, many community development groups across the country have increased efforts to educate
individuals about the practices of predatory lending, as well as to lobby for changes and to
provide low cost loan alternatives.
Self-Help, a Community Development Finance
Institution (CDFI) based in North Carolina, worked to form the Coalition for Responsible Lending
(CRL) in 1999. CRL represents over three million North Carolinians in eighty organizations, as well
as the CEOs of 120 financial institutions. In 1999, CRL spearheaded an effort that resulted in the
overwhelming passage of the North Caroling predatory mortgage law. CRL now is working to strengthen
broker licensing in North Carolina, assist initiatives in other states, and help develop effective
federal regulatory and legislative solutions. CRL has also produced a report that highlights the
high cost of predatory lending entitled, Quantifying the Cost of Predatory Lending.
Self-Help and CRL are not alone in their battle to fight predatory lending. The Reinvestment
Fund (TRF), through its Public Policy and Program Assessment Department, works to collect and
measure social impact data relating to predatory lending. Recently TRF published a report sponsored
by the Ford Foundation entitled, An Approach to identify and Understand Predatory Lending,
which outlines the practices of predatory lending and the impact the practice has on borrowers. In
the report, TRF emphasizes that "predatory lending strips out the equity many lower income people
have worked many years to accumulate. It also deprives them the opportunity for the
inter-generational transfer of wealth." Beyond chronically the impacts of predatory lending, The
Reinvestment Fund has worked closely with the Philadelphia government to develop appropriate
policies to address the problem of predatory lending in the city and has testified before the City
Council on proposed legislation to end predatory lending.
While Self-Help, Coalition For
Responsible Lending and The Reinvestment Fund lobby to provide borrowers with legal protections
from predatory lending and educate others about its impacts, other organizations are fighting the
practice by providing low-cost loan to individuals who might otherwise be forced to turn to
predatory lenders. Southern Mutual Help Association (SMHA) has developed a program, "The Louisiana
Rural Loan Home Partnership," that helps individuals overcome the many barriers to homeownership.
Through this innovative program, SMHA is able to help individuals most vulnerable to predatory
lenders--those with poor credit history, limited access to capital and unfamiliarity with the
complicated financial process.
DC Habitat for Humanity (Habitat) is also working to
ensure that families who are ineligible for conventional financing do not miss out on the
opportunity to won a house of their own or fall victim to predatory lenders. By offering no-profit,
no-interest, 20 to 30 year mortgages for buyers, Habitat ensures that individuals will not be
forced to turn to predatory lenders in order to realize their dream of owning a home.
Importantly, giant financial services firm Citigroup will pay a record penalty as part of a
$240 million settlement of predatory lending charges inherited with its purchase in 2000 of
Associates First Capital. With stiff penalties being handed down by the Federal Trade Commission,
and the work of a grassroots network of community advocates and lenders, perhaps the tides have
turned in the war on predatory lending.
© Calvert Foundation
©
SRI World Group, Inc. All Rights Reserved.
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