A Plague of Lenders

by Joy Simmons

In parts of Los Angeles, it's a seller's market when it comes to housing prices. And not just in upscale areas such as Brentwood and Toluca Lake where homes have always been priced in the stratosphere. In modest sections of town such as Mid-City and quiet streets off the Miracle Mile, realtors are listing one-story dwellings on busy cross streets for $600,000 to $700,000 without batting an eye.

But in other parts of the city, a different kind of housing story is playing out. In low-income and minority neighborhoods, particularly South Central and East L.A., the insidious practice of predatory lending occurs on a daily basis. This is where people, many of whom are either retirees or where all able-bodied members of a household pool their moneys to pay the house note, are the target of financial predators.

Predatory lending actually encompasses a gallery of onerous behavior conducted on the borders of legality in the sub-prime lending market. The definition of predatory loans might vary, but the term generally refers to high-rate loans that are aggressively marketed by lenders using high-pressure, misleading and often fraudulent sales tactics.

Consistent features of this type of lending are such things as unreasonable balloon payments, negative amortization, and charging borrowers 3 to 6 points higher than the prevailing rates. Too often the borrower is forever playing catch up; barely satisfying the interest payments and putting nothing toward the principal.

Sub-prime lenders claim they take a higher risk on those without middle or upper income credit levels, but these rates are applied across the board no matter the credit rating of the subprime borrower. But this is merely an indication of the avaristic nature of these types of lenders. A federal agency report revealed that at least 35% of borrowers who obtained a sub-prime loan could have qualified for a prime or reasonable rate loan.

Some predatory lenders make loans based solely on a homeowner's equity, even when it's crystal clear that the homeowner will not be able to afford their payments. And so what does the lender reap? Many times it's getting possession of the house that they will then turn around and sell for a substantial profit. Then there's the prepayment penalties assigned to these loans. It's estimated that some two-thirds of subprimes compared to less than 2% of conventional prime loans have this fetter attached. Unnecessary and repeated refinancing of a loan, referred to as 'flipping' is another characteristic of predatory lending.

For example, there was an elderly borrower who got a $15,000 loan for some home repairs. Within 10 years the loan was refinanced, 'flipped', nine times resulting in a $108,000 debt with little or no benefit to the borrower and substantial fees and interest going the broker and lender. When the equity is depleted the flipping stops and foreclosure looms.

A Department of Housing and Urban Development (HUD) study found that in predominately African American neighborhoods, subprime loans accounted for 51% of home loans in 1998, contrasted with only 9% in predominantly white areas. And these differences occurred regardless of the income level of the borrower.

The prevalence of predatory lending in the minority communities threatens the economic stability of its' victims and in turn the stability of the community.

There is an obvious need for protection for borrowers who are being manipulated or misled into accepting loans that result in financial harm. Meaningful safeguards are warranted to prevent these unconscionable lending practices. Some policies are in place to curb predatory lending at the federal and state level but their effects are limited.

The City of Los Angeles has stepped up to the plate and is drafting an ordinance to prohibit predatory lending and protect he financial security of its citizens. These efforts, along with educating the public, can provide needed tools in preventing abuses in the sub-prime lending industry.

Joy Simmons is the Directing Attorney of the Consumer Law Unit of the Legal Aid Foundation of Los Angeles.

A somewhat diffferent version of this commentary ran in the Thursday, November 14, 2002 Los Angeles Daily Journal..

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