- The Washington Times - Wednesday, April 12, 2000

Two congressional banking committee leaders are expected to introduce legislation today to expand federal oversight of so-called "predatory lending" practices by mortgage companies.

Democrats Sen. Paul S. Sarbanes of Maryland and Rep. John J. LaFalce of New York join a growing list of lawmakers, regulators and litigators who are taking aim at such practices, which target uneducated borrowers and pressure them into high-cost loans.

Called predatory lending by critics, this type of lending can include a variety of methods alone or in combination. Lenders may aggressively pursue uneducated borrowers and charge high fees, convince them to consolidate debt or repeatedly refinance their mortgages at unfavorable rates, or persuade them to buy unnecessarily expensive home improvements.

An increasing number of government agencies, consumers and lenders are drawing attention to unfair lending practices:

• Department of Housing and Urban Development Secretary Andrew M. Cuomo will call for legislation today to ban purchases of predatory loans by government-sponsored enterprises Fannie Mae and Freddie Mac, the nation's two largest mortgage investors.

• Pre-empting Mr. Cuomo's action, Fannie Mae yesterday and Freddie Mac on March 24 released guidelines for loan purchases, saying they will not buy loans that they consider to be predatory.

• The Office of Thrift Supervision released a notice April 4 calling for public input on how to curb unfair lending practices. The federal banking agency, which oversees 1,100 savings banks, will try to define whether states or the federal government have jurisdiction over mortgage lenders. In some cases, state regulations are stricter than OTS rules.

• Federal Reserve Chairman Alan Greenspan said in a March 22 speech that an interagency group had been formed to explore oversight of "abusive lending practices."

• At least 10 borrowers in the District of Columbia have filed suit against lenders, and the Maryland General Assembly passed legislation addressing the issue.

D.S. Berenson, a District lawyer who has represented defendants in several unfair lending cases, said the Washington area is a focal point for the issue.

"Washington, D.C., and the tri-state area is sort of a case study in what's become known as predatory lending practices" because of the region's socioeconomic makeup and many consumer advocacy groups, he said.

Predatory loans are typically made by subprime lenders those who make high-interest loans to people with flaws in their credit history. Of the $5.13 trillion mortgage debt outstanding nationwide, $321 billion of it or 6 percent could be considered subprime, Fannie Mae estimates.

Only a small percentage of the District company's loans are in the subprime market, a Fannie Mae spokeswoman said.

But a subprime loan is not necessarily a predatory loan, noted Robert O'Toole, senior staff vice president for residential finance at the Mortgage Bankers Association of America. Statistics are not kept on predatory loans.

"I think it's important to separate lending to high-risk individuals from what we call predatory practices the inclusion of a lot of fees, the refinancing, the cold calls," he said.

Important market

Mr. O'Toole said mainstream banks entered the subprime market in the 1990s, when the mortgage industry became more competitive. At the same time, mortgage lenders and brokers with shady lending practices became "more blatant," Mr. O'Toole said.

Jeffrey Levin, president of Monument Mortgage in Largo, Md., said the subprime market serves an important role because it allows more people to get loans.

"When people have gone to 10 different banks and none of the banks approve them," they have the option of approaching a company that does subprime loans, he said.

He said the spotlight on unfair lending has given legitimate lenders a bad rap.

"Do I think we're getting unfair scrutiny? Certainly," Mr. Levin said. "For the thousand people you help, the four people who have gotten themselves problems are the ones getting attention."

But he agrees that there are unscrupulous lenders.

Ellen Seidman, director of the Office of Thrift Supervision, said the solution to curbing unfair lending practices has three parts, including educating first-time home buyers and older homeowners and better regulating lenders.

She also is encouraging thrifts to enter markets served by predatory lenders and offer better loans.

"My feeling is it's good business," she said.

Nina Simon, senior staff attorney at AARP Foundation Litigation, said regulation is key.

"There needs to be more deterrence. I think deterrence comes by making certain practices illegal," said Ms. Simon, who is representing plaintiffs in several predatory lending cases.

She said that in the subprime loan market, prepayment penalties should be prohibited. She also said balloon loans those that immediately result in lower monthly payments but rise at the end of the loan should be illegal in that market.

Mr. Levin of Monument said increased regulation will result in fewer predatory loans, but the risk is that lenders will not make as many legitimate loans to high-risk borrowers.

Lenders will not be able to or will be afraid to charge high fees to make such loans worth the risk, he said.

Getting educated

Consumer advocates stress that homeowners should research before making loan decisions.

Balloon loans, "flipping" repeated refinancing and converting debt "are practices that should be engaged in after careful consideration of options," said Samuel Gerdano, president of the American Bankruptcy Institute.

The District Office of Banking and Financial Institutions is holding predatory-lending education sessions in the city's eight wards this year.

But for the uneducated, minorities and the elderly frequently targeted by mortgage lenders it's easier to trust a broker than to research.

"The average consumer is so overwhelmed by the settlement process that they're relying on the mortgage banker… . I think the average consumer thinks that someone would be treating them fairly," said David Berenbaum, executive director of the Equal Rights Center.

The center, formerly the Fair Housing Council of Greater Washington, spearheaded a suit filed in April 1998. The suit claims Capital City Mortgage Corp. of the District targeted local blacks with a pattern of fraud, including misrepresentation of loan terms and foreclosure on loans to buy properties at a discount.

William Palmore, 72, recently filed suit against Homeowners Investment Inc. of Beltsville, Md., and Ameriquest Mortgage Co. of Orange, Calif., after he refinanced his home last year.

A telemarketer solicited Mr. Palmore and his companion, Katherine Murray, telling them he could get them a 6 percent rate if they refinanced their Northwest, D.C., home. A few calls and pages of paperwork later, the couple was paying an 8.5 percent interest rate that would rise.

Jim Sugarman, the pair's attorney, said that by law, Mr. Palmore and Ms. Murray should have had three days to look over loan documents. Instead, a mortgage broker took them away after one meeting.

The suit says Homeowners Investment failed to complete home repairs and asked the couple to take out "a series of progressively more unfavorable loans while concealing the terms of the loans."

"We didn't even know it was an adjustable [rate]. Since we didn't have any experience in the business, we didn't even know what adjustable or fixed rate meant," Mr. Palmore said.

States clamp down

Both consumer groups and mortgage lenders say a better definition of "predatory lending" practices would alleviate the problem. Since unfair lending practices take so many forms, regulators have been slow to draw up criteria.

North Carolina was the first state to attempt to do so by passing a law last summer that restricts fees associated with mortgage loans. Other states, including Maryland, have followed.

The Maryland General Assembly passed legislation, which is awaiting Gov. Parris N. Glendening's signature, that requires mortgage lenders to report address changes to the Commissioner of Financial Regulation. The commission will examine such lenders within 18 months of new licenses, then every three years afterward.

District lawmakers also are focusing on the problem. S. Kathryn Allen, commissioner of the city's Office of Banking and Financial Institutions, plans to introduce a bill next month that will define predatory lending and give her office more oversight to impose sanctions.

Mr. Berenson, who is representing Washington Mortgage Services of College Park in a suit, said the problem of predatory lending is real. But he noted it is matched by the problem of overzealous suits.

"The problem is significant on both sides. There is no doubt that there is an unusual amount of predatory lending practices going on in the Mid-Atlantic region. There is no doubt that there is an unusual amount of trumped-up litigation," he said.

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