Predatory lending practices have plagued the poor since Biblical times. Advocacy groups have been fighting to bring the mistreatment of the working class and the poor by unscrupulous lenders to the attention of legislators. But due to the tremendous growth of the subprime market, spurred by lenders arguing the benefits for the lower class, the abuse of the poor has increased.
As the number of Americans experiencing the American dream rises, the number of predatory lenders ready to pounce on and take advantage of these consumers is also on the rise, before and after the purchase of a home. Legislatures have sought to prevent predatory lending practices, which are primarily aimed at the less fortunate. In 1994, Congress passed the Home Ownership and Equity Protection Act (HOEPA) as an addendum to the Truth in Lending Act (TILA) to try to remedy predatory lending practices.
TILA requires disclosure of loan information so that borrowers can easily comparison shop among lenders. But Congress discovered that these disclosures were insufficient to prevent predatory lending problems and passed HOEPA to address the insufficiencies.
But unfortunately for targets of predatory lending, HOEPA did not solve the problem. After the passage of HOEPA, the industry of subprime mortgage lending actually grew from a $35 billion industry in 1994 to a $140 billion industry in 2000. And as the industry grew, so did predatory lending practices. Congress responded in 2001 by amending HOEPA to require additional disclosures, place certain substantive limits on home equity loans, and expand the types of loans covered by the legislation.
Historically, federal laws preempted state usury ceilings and regulations regarding balloon payments, negative amortization, and prepayment penalties prior to the passage of HOEPA, causing states to become less involved with the regulation of lending markets. But after 1994, states were allowed to enact more protective provisions. State legislatures quickly began addressing predatory lending by passing more specific laws with harsher penalties than that of HOEPA.
But as financial predators constantly evolve and find new ways to take advantage of people who desperately need a loan, consumers must still remain aware of these predators after the initial purchase of a home. This is because consumers often fall behind on their payments, creating more opportunities for them to be taken advantage of.
So-called equity stripping schemes are advertised to people behind on their mortgage payments and desperately in need of a solution. People are lured by promises of receiving quick cash, remaining in their home while someone else makes the mortgage payment for a period of time, and all the while restoring their credit. But instead of the consumers' troubles vanishing, it is often the equity built up in their home that vanishes.
The deeds of these houses are turned over to a straw person, who quickly takes out another mortgage on the home, pocketing the cash, and stripping the equity from the home.
As mentioned, the number of Americans falling behind on their mortgage payments, thus exposing themselves to the threats of predators, is on the rise. The Mortgage Bankers Association recently disclosed that nearly 19% of all loans to less-creditworthy consumers, or 1.1 million mortgages, were either delinquent by more than 30 days or in foreclosure.
Schemers often check the property foreclosures as they appear at the county clerk's office. These troubled homeowners are contacted either by phone, mail, or by knocks on their door, and then the scam begins. With mortgage rates on the rise, more homeowners are falling behind on their payments and finding that they cannot refinance, making the victims of these schemes more plentiful.
These foreclosure rescue deals vary in execution, but they all capitalize on two things: borrower desperation and mind-bogglingly complex mortgage loan documents. In fact, a recent study published by the Federal Trade Commission found that nine out of ten borrowers could not identify upfront fees on mortgage loans and half could not specify the amount they were borrowing. Predators take advantage of complicated terminology coupled with a consumer's fear of losing the largest investment of their life.
As lower income citizens chase the American dream, predators are following closely behind. State governments have taken notice, but predatory lending remains a big problem in this nation. Society has an obligation to protect its members who are the weakest among them and, hopefully, with the passage of laws with tougher penalties and the attention drawn to the problem, the number of predatory lending victims can at least be curbed.
In a related matter, federal and state regulators announced a coordinated effort last month designed to weed out deceptive or unfair practices at some of the nation's largest subprime mortgage lenders.
The pilot program, to begin in October, will target about a dozen of the most active firms offering subprime mortgages. The pilot program includes the Federal Reserve, the Office of Thrift Supervision, the Federal Trade Commission, the Conference of State Bank Supervisors, and the American Association of Residential Mortgage Regulators.