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
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
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.