June 2004 Profitwise News and Views

Predatory Lending— A Grassroots Perspective
By Tyler Uetz

Iowa Citizens for Community Improvement (CCl) is a multi-issue, statewide nonprofit organization with a 28-year history and nearly 2,000 dues-paying members. CCI was founded in 1975 in Waterloo, Iowa, by people who wanted to address local problems and improve their community. Since then, CCI has expanded to include urban members from Des Moines and family farmers and other rural citizens from across the state. Iowa CCI's purpose is to empower and unite grassroots people of all ethnic backgrounds to address problems in their community and win positive social, economic, and environmental justice.

Because of CCI's work with the Community Reinvestment Act (CRA), banks and mortgage companies have made over $70 million in home loans in Des Moines' low- and moderate-income neighborhoods in recent years. CCI has partnered with local lenders on many initiatives in efforts to preserve and improve Iowa neighborhoods. Despite many successes, CCI has seen an increasing number of complaints from its constituency regarding predatory lending in the last several years.

Predatory mortgage lending is not just a problem - it is a threat to neighborhoods and families all across the country. CCI first became aware of the issue after learning of Des Moines families defrauded by unscrupulous home improvement contractors. Typically, a contractor originates a loan for the homeowner to cover the cost of improvements, takes full payment for the work from the loan proceeds and then does not satisfactorily finish the improvements. As CCI researched individual situations, they began to learn about other types of predatory financing scams. Families complained of bait and switch tactics, over-appraisals, higher than promised monthly payments, excessive fees, hidden balloon payments, and harassment by lenders. Following are summarized situations of several CCI clients:

• A borrower was invited to refinance with his existing lender, and was then charged a $4,000 prepayment fee.
• A borrower, during the sales presentation for a mortgage loan, was promised that his payments included amounts to be escrowed to cover taxes and insurance. He had to pay taxes and insurance in arrears when it turned out that the sales person's assertions were false. The same lender then offered to refinance the loan, triggering a $3,500 prepayment penalty.
• One lender refinanced a borrower from an 11.5 percent fixed rate loan to a loan with an adjustable rate beginning at 11.975 percent.
• A homeowner borrowed $49,000 for home improvements. After 15 years of payments, the loan terms called for a balloon payment of $48,000.

CCI has addressed predatory lending by organizing families to stand up, speak out, and fight back against the companies who have abused them. CCI formed the Predatory Lending Task Force in October, 2000. Through media exposure, meetings with government officials, such as Iowa Attorney General Tom Miller, and applying direct pressure to predatory lenders, CCI has been able to repair individual loans and begin setting lending guidelines for individual companies.

One task force member had received a loan from a lender to finance some home improvements. She had not been shopping for a loan, but was offered a refinance with cash out for improvements. She discovered at closing that the payments were higher than she had expected, but because she had been working with the loan officer for so long, she proceeded with the closing. After about a year, the homeowner began having difficulty making her monthly payment. Not wanting to get behind she approached another lender to discuss a refinance. The interest rate offered her was 13 percent, and she felt that she could get a better deal. But other lenders refused her because her home had been over-appraised in connection with the existing loan and there was no equity left. She had no idea what to do and could not afford an attorney. In this situation, there appeared to be very few laws to protect her. Fortunately she found CCI and joined the task force. After meeting with the Iowa Attorney General, the Iowa Division of Banking, and visiting the lender's offices with 104 friends, the homeowner and CCI were finally able to meet with an official of the lender who had the power to change her loan terms. Her loan principal was reduced by $25,000, her interest rate was lowered to 8 percent. Her monthly payment went from $940 down to $450.

Only because grassroots people came together was this particular homeowner able to save herself from foreclosure and financial ruin. She prevailed because she was not intimidated by a lender who had created an abusive relationship and attempted to blame her for her financial troubles arising from the loan.

In addition to fixing her loan, this lender repaired other loans and signed a partnership agreement which set standards for their loans in the state of Iowa. The lender vowed to:

• Cap points and fees at 5 percent
• Stop selling Single Premium Credit Insurance
• Cease originating loans with balloon payments and negatively amortizing loans
• Cease bait and switch marketing
• Ban rapid refinancing of high-cost loans, often referred to as flipping
• Restructure loans with problematic and unfair terms

This lender continues to meet with CCI to monitor the progress of the agreement. CCI has been even more successful in dealing with another mortgage lender. CCI and this lender have been in negotiations for several months and are close to reaching an understanding on a partnership agreement with provisions similar to those outlined above.

This progress has been possible only because of the strength shown by victims of unfair treatment by their lenders. Typically, predatory lenders try to make families feel responsible for their own situation, trying to instill a sense of guilt or shame and thereby discouraging borrowers from acting on their own behalf. This behavior on the part of lenders has the secondary effect of keeping abusive practices from becoming widely recognized by consumers.

Through education and publicity, CCI has helped victims to break through the negative self-perceptions, and to act. Community groups and traditional lenders must work together to inform the public. The negative effects of improvident loans and predatory loans can be far-reaching; heavy financial stress of any kind on a household can impact relationships and even physical health.

CCI is proud of its long relationship with traditional lenders. CCI holds classes throughout the year to prepare people for homeownership, and to teach potential homeowners how to find a competitive mortgage. CCI also participates in statewide anti-predatory lending forums, credit and home buying seminars, and provides ongoing financial literacy training. Our members are dedicated to preserving homeownership and Iowa communities.

Recent changes to the Home Ownership Equity Protection Act (HOEPA) have been applauded by many as one step that was needed to help curb predatory lending. But HOEPA only works for a limited portion of loans. The majority of problems that CCI has seen were not HOEPA issues. Predatory lenders often know the HOEPA triggers and are careful not to cross the line.

There are, however, additional measures that could greatly increase our ability to fight predatory lending. Iowa CCI and groups all across this country have worked together for many years to ensure that the Community Reinvestment Act has been used to the benefit of our neighborhoods. But times have changed, and certain adjustments would perhaps go a long way toward helping the fight against predatory lending.

First, CCI believes that the Home Mortgage Disclosure Act (HMDA) data needs to be modernized. By including points, fees, interest rates, and credit scores in HMDA reported data, community groups and regulators could get a better idea of which institutions may be engaging in abusive practices. Some predatory practices are committed by lenders who are CRA regulated banks.

Second, CCI would like to see subprime affiliates and subsidiaries of CRA regulated institutions included in the depository's CRA exam. Institutions currently have the option of choosing whether or not to include affiliate and subsidiary lending activity in their CRA exam. For example, a financial institution can own a lender that engages in predatory practices and use those loans to enhance its CRA rating. This is contradictory to the purpose of CRA. Not all credit is good credit. We need to make sure that loans going into low- and moderate-income neighborhoods are sound loans.

To fail to take measures to combat predatory lending is to leave many of our most vulnerable populations without adequate protection, and to subject low- and moderate-income neighborhoods to abusive lending practices that ultimately result in neighborhood decay and the financial destruction of individuals. We at CCI are committed to helping prevent such an outcome.

For additional information go to www.iowacci.org.

Tyler Uetz is the predatory lending organizer for the Iowa Citizens for Community Improvement (CCI). For four years at CCI he has organized victims of predatory lending to fight back against predatory lenders by negotiating with the lending institutions to fix and correct predatory loans and change the companies' lending practices. Before joining CCI, Mr. Uetz worked on local and national political campaigns.