Predatory
Lending
by Ralph Nader
Dissident Voice
November 22,
2002
Subprime lenders
have been marching up to state legislators around the nation with a stern
warning-"enact protections for borrowers and you will trigger a quick and
certain reduction of credit for thousands of low, moderate and middle income
borrowers."
But, the hard
facts coming out of the states with the courage to stop predatory and other
unfair lending practices are putting the lie to the lenders' scare campaign.
Last summer,
Morgan Stanley, a major financial services firm, surveyed 300 branch mangers
and loan officers from five of the largest subprime home equity originators and
independent mortgage brokers. The conclusion from these front-line subprime
operators was that predatory lending protections had not significantly dampened
loan growth.
That was the
finding for Georgia, New York and North Carolina which provide the toughest
protections as well as for Connecticut, California, Florida and Pennsylvania
which have enacted more limited protections against predatory lending
practices.
In fact, Morgan
Stanley's survey concluded that the more consumer friendly lending practices
required in these states had lowered loan costs and appear to be boosting
volume, not drying up credit.
Morgan Stanley's
survey is supported by a study of the North Carolina anti-predatory statute
conducted by the Center for Responsible Lending.
The Center said
no major subprime lenders (lenders with more than one percent of the market)
left North Carolina after enactment of the consumer protections. More
important, the organization estimated that the curbs on predatory lending had
saved North Carolina consumers at least $100 million in 2000.
Subprime
borrowers with blemished credit histories are regarded as high risk and, as a result,
predatory lenders take advantage of their vulnerability and weak bargaining
position, charging them inflated interest rates and loan points, attaching
costly "add-ons" like credit insurance, luring them into repeated
fee-ridden refinancings and unaffordable repayment plans. Some of the predatory
interest rates range up to eight percent above the average subprime rates. The
end result is often bankruptcies and foreclosures.
Consumer
protections adopted by North Carolina and a handful of other state legislatures
have been bright spots in this dismal world of predatory lending. Congress, in
contrast, has been paralyzed by massive campaign funds from the entire range of
financial interests, including predatory lenders. There have been some brave
statements for the record, but nothing even remotely akin to remedial action in
the federal legislature.
While Congress
looks the other way, the Federal Trade Commission, at least, has weighed in on
behalf of consumers. Its most noteworthy effort was a lawsuit against giant
Citigroup, charging widespread abusive lending practices and violations of the
Truth in Lending Act, the Fair Credit Reporting Act, and the Equal Credit
Opportunity Act.
Jodie Bernstein,
director of FTC's Bureau of Consumer Protection, said Citigroup's newly
acquired affiliate-Associates First Capital-engaged in a wide variety of
deceptive practices.
"They hid
essential information from consumers, misrepresented loan terms, flipped loans
and packed in optional fees to raise the costs of the loans," Bernstein
charged.
In September,
Citigroup threw in the towel and entered into a $215 million settlement with
FTC. The fund will be distributed among the victims of Citigroup's deceptive
lending practices.
Despite FTC's
effort against Citigroup predatory lending practices and the adoption of some
protections in some states, consumer across the nation continue to be
victimized by predatory and near predatory lending practices. The fast buck,
deceptive operators range from the established international giants like
Citigroup to the back alley loan sharks which are equally adept at separating
the poor and the near poor from their hard-earned money.
Knowing Congress
is a safe-haven against any meaningful federal sanctions on predatory lending,
the financial industry-ranging from finance companies to multi-billion dollar
banks-will be chipping away at what state protections have been enacted and
making sure that the idea of consumer protection doesn't spread to other
states.
In Georgia,
lenders like Chase Manhattan Mortgage Corporation, Ameriquest, Option On, and
New Century Financial Corporation are launching new attacks on that state's
Fair Lending Law, threatening to leave the state if the law isn't repealed.
Hopefully, the findings of recent surveys like those conducted at Morgan
Stanley will give state legislators the courage to stand fast on consumer
protections for borrowers.
In addition to
the state laws, consumers need the protection of a strong federal statute
against all aspects of predatory lending in all 50 states. But, the nation is
faced with one of the most corporate-oriented anti-consumer Congresses in our
history. The predatory lenders and other practitioners of deceptive and unfair
credit practices fully expect that the Congress will continue to look the other
way when consumer credit protections are mentioned.
Two and one half years ago, I asked Federal Reserve Chairman Alan Greenspan about the lack of action and he agreed that "enough was enough" on the excesses of predatory lending. Unfortunately, the Federal Reserve has taken only small steps to curb the practices. Not only the Federal Reserve, but the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision need to place a priority on ending this outrageous gouging of innocent low and moderate and middle income families.
Ralph
Nader is America’s leading consumer advocate. He is the founder
of numerous public interest groups including Public Citizen, and has twice run
for President as a Green Party
candidate. His latest book is Crashing the
Party: How to Tell the Truth and Still Run for President
(St. Martin’s Press, 2002)