Predatory Lending
... could not meet (e.g. low teaser rates that rise significantly). Charging undisclosed and/or improper fees. Pre-payment penalties. Packing—Including excessive fees and unnecessary insurance coverage in loan agreement. Foreclosing on loans to obtain properties at a discount. Single premium credit life—debt cancellation agreements. Failing to advise of the right of rescission. Mandatory arbitration. Usually predatory loans are made out to individuals that do not understand the disadvantage of these types of loans and are not aware that there are better options available to them. The Demographic of those victimized by predatory lending are older people, females and minority groups with low income. By targeting loans to those with large equity in their homes, predatory lenders are actually stripping the modest assets accumulated by low-income households. (www.trf.com/policy.predatory.lending) One of the main debates behind predatory lending is trying to figure out the cause of it. The cause seems to be attributed to federal regulations of credit. The ongoing regulating of credit has ruined the means of protection that the laws were meant for. Congress open up the door for predatory lending in 1980 by putting out two messages to federal banking agencies; 1) that deregulation of consumer credit is the optimal policy, and 2) that sound personal financial planning requires the use of home equity to secure consumer credit. “While abusive and fraudulent credit scams have always been a problem in a commercially oriented culture, the explosion of predatory lending in the past 15 years is new in the history of personal credit. The continued escalation of bankruptcy filings and continued depletion of savings and increase in debt by American families are indicative of a credit system gone awry.” (Saunders, Panel 7) In order to put a face on predatory lending the following is excerpt form a review title Predatory Lending in South Central Pennsylvania by the ACORN Fair Housing: (Let it be noted that the names have been changed to protect their anonymity.) The Allens Mr. and Ms. Allen are an elderly couple for Litiz, Lancaster County, who have been retired and living on a fixed income for a number of years. Mr. Allen is legally blind in one eye and had multiple bypass heart surgery in 1993. Ms Allen is a diabetic and has recently been diagnosed with several chronic back problems. After years of making sacrifices to make their mortgage payments, the Allen’s paid of their mortgage in 1997 with the assistance of their son. Their house has recently been appraised for $97,000. The couple received repeated calls from a subprime-lender and in 1999 were convinced to take out a home equity loan. They always paid this loan on time. In the spring of 2002, the Allen’s were again being contacted by this lender and urged to consolidate their debt, and in response they inquired about a loan that could pay for an air conditioning unit. Trusting the judgment of the loan officer, the Allens never asked about the interest rate and other details of their loan, nor did the subprime-lender tell them about any of the details. The Allens assumed that with their good credit they would get the best possible loan the lender had to offer. That May, they received and eight-year mortgage for $65,409 at an 11.1% interest rate (when ‘A’ rates were around 6.8%), which paid off the 1999 Wells Fargo Financial mortgage for $40,772 and another unsecured loan for $2,999, plus 8,900 for two other loans and a cash out of $2,350. Their monthly payments were $1,031 – over half of the fixed monthly income. The subprime-lender financed into the loan $6,541 in their own fees – more than 10% of the loan amount – plus $598 in third-party charges, $2,278 for a single premium credit life insurance policy (which the couple, given their health problems probably never qualified for, and would have been denied payment had they tried to collect), and $950 for a Home and Auto Security Plan. Altogether, this subprime-lender stripped nearly$10,000 in equity from the Allen’s on a $65,000 loan. To top it off, the subprime-lender locked the Allens into the high rate with a five year prepayment penalty for around $2,850 – six months’ interest on 80% of the amount prepaid – on a loan that last only eight years. (ACORN, Predatory Lending) This is a prime example of what predatory lending is. This elderly couple had good credit and was still charge a high interest rate. They were probably too old to understand the terms of the loan and were then charge astronomical fees. The lender then purposely uses deceptive methods to encourage the consumer to take out such a loan. The studies on predatory lending are still new and there are debates from all levels of government. Household International Household, with nearly $123 billion in managed assets, is a consumer lender that has been serving the needs of the middle-market customer since 1878. They serve customers in the United States, United Kingdom and Canada with various loan products, including real estate secured and personal unsecured loans, auto loans, and private label and general purpose credit cards. They are also the company behind such well-known brands as HFC and Beneficial. In addition, they issue numerous credit cards such as The GM Card® and private label credit cards including the Best Buy Card™. On March 28, 2003, Household was acquired by HSBC Holdings plc. As a result, Household common shareholders can elect to receive 2.675 HSBC ordinary shares (LSE: HSBA) or 0.535 HSBC American Depositary Shares (NYSE: HBC) for each share of Household common stock. Shortly after the completion of the merger, instructions were sent to all Household shareholders explaining how to exchange certificates. All Household common shareholders should exchange their shares by September 28, 2003. Shareholders that submit their exchange request after this date will only have the right to receive HSBC ordinary shares. (Household.com) Household international provides useful information on their website to educate the consumer. The following information was listed on the website to explains what an Home Equity Loan is and information about a homeowners loan: What is a Home Equity Loan? Home equity is the current value of your home minus your mortgage balance. The equity in your home grows when you invest money in it-when you remodel for example-or when your property value increases. A Home Equity Loan or Line of Credit is a return on the financial investment, or equity, you've put into your home. A Home Equity Loan or Line of Credit is a large loan at a low interest rate. Many homeowners use Home Equity loans for debt consolidation, house repairs, college tuition, or other large, substantial purchases. Home Equity Loans are usually tax deductible (consult your tax advisor). Home Equity Loan, Home Equity Line of Credit. What's the difference? A Home Equity Loan is a fixed-term loan: you are able to borrow a fixed amount of money for a fixed period of time and receive the total sum of money at the start of the loan. A Home Equity Lin...