by Ralph Nader
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 Americaís 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. Martinís Press, 2002)