Big Setback for Predatory Lenders 

State and Oakland both pass legislation regulating subprime lenders

Seven years ago, Oakland homeowner Earline Goodman took out a $25,000 equity loan to help her son go to school. Wary of getting a bad deal, she took some smart precautions. She told her lender, Household Finance, that she didn't want her loan to include a balloon payment, or a final payment on the principal that's worth almost as much as the loan. She argued them out of selling her an insurance policy that she didn't need as part of her loan. But after seven years of payments, the principal on Goodman's loan never seemed to shrink; she still owes $21,000, thanks in part to her whopping 13.25 percent interest rate.

Goodman, who supports several family members on the salary she makes as a caregiver for people with mental disabilities, became increasingly uncomfortable with the terms of her loan when she learned that she would be charged a penalty if she tried to pay off her loan early, and that if she couldn't make payments, her lender could take her house. Worried, she asked Household Finance to refinance her loan. They agreed, but when all the fees for refinancing were added up, she says her total debt would actually be over $25,000, the amount of her original loan. "I'm back where I started," she sighs. "It's like they don't ever want you to pay it down. I guess it's supposed to drag on for like thirty years."

Shockingly enough, Goodman's story of endless debt is mild, at least when you compare hers to the fates of other Oakland borrowers struck by what critics call "predatory lenders." There are many legitimate lenders who specialize in giving high-interest, long-term loans to borrowers whose financial circumstances or poor credit records generally mean that they would be turned down by other banks; the technical name for this is "subprime lending." But a subprime lender becomes a predatory lender when the loan is designed to be unpayable, leading either to eternal debt or, if the borrower cannot make payments, the loss of the victim's home. Predatory loans employ a variety of tricks; some of the more common include hidden costs that dramatically inflate loan payments, interest rates that increase over time or as a penalty for missed payments, frequent offers of refinancing or debt consolidation that end up vastly increasing the borrower's debt (also known as "flipping"), or the inclusion of something called "financed credit life insurance" that is tacked onto the bill (when borrowers die, their assets go to pay off their debt, rather than to their families). It is not unheard of for predatory loans to have interest rates of between 10 and 22 percent.

In urban areas like Oakland, predatory lending is an increasing problem, and for the last two and a half years ACORN (the Association of Community Organizations for Reform Now) and several other grassroots groups have been fighting to protect people from loan scams. Many of Oakland's neighborhoods are particularly attractive to lenders who tend to prey on what ACORN organizer Brian Kettenring calls the "house-rich and cash-poor" -- generally, senior citizens in poor or minority areas. They may not have much money on hand, but they've spent decades building up equity in their homes. "Predatory lending is about the global finance system ripping off your grandmother in East Oakland; it's a wealth transfer of equity from low-income and working-class homeowners to large predatory lenders," says Kettenring.

Exacerbated by redlining, or the exodus of mainstream banks from urban and low-income areas, subprime lending has become a lucrative and rapidly growing sector of the banking industry. Nationally, the number of subprime home purchase and refinance loans has grown more than 1,000 percent in the last ten years, and many of these loans are made to people who would actually qualify for a better loan elsewhere. Both subprime and predatory lending have a strong racial component; although the overall majority of subprime loans are made to white borrowers, it's becoming the dominant form of lending in many minority neighborhoods. An ACORN study conducted in 1999 shows that in Oakland, subprime loans accounted for 36 percent of all refinance loans made to African-American homeowners and 17 percent of those made to Latino homeowners, but only 9.5 percent of those made to white homeowners. The disparity was even more apparent when the researchers controlled for income levels; 53 percent of all loans went to low-income African Americans and 44 percent to Latinos, but only 16 percent of loans to low-income whites.

Predatory lenders are notoriously aggressive about advertising in low-income neighborhoods, blanketing poor neighborhoods with fliers, cold-calling, and paying visits to people's homes. Lenders sometimes comb through public records of foreclosures and skipped mortgage payments to look for likely borrowers. "My husband passed in October 1999, and shortly after his death was announced in the paper, I started getting ten to twelve pieces of mail a day about loans. Some of them were up to $100,000," says ACORN board member Fannie Brown. "If I hadn't been with ACORN working on the situation, I would have fallen for it, too."

In conjunction with several unions, faith-based groups, and the American Association of Retired Persons, ACORN has been pushing for governmental reform to protect consumers from predatory lenders since 1999. Within the past few weeks, they have scored a double victory. Though two previous efforts had stalled, two weeks ago the California state legislature finally passed anti-predatory lending bill AB 489. Governor Gray Davis has expressed his support for the bill and is expected to sign it by mid-October. The state's change of heart was no doubt spurred by a similar, but tougher, ordinance that was unanimously approved by the Oakland City Council in July, and which was officially passed last week. Only one other state (North Carolina) and one other city (Philadelphia) have enacted anti-predatory lending laws, although several other states are currently considering it.

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