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Guest Commentary January 3, 2002
Let's Eliminate Predatory Lending
The Honorable Maxine Waters
I've introduced the "Protecting Our Communities From Predatory Lending Act," much needed legislation to prevent predatory lending. This year, my home state of California became the third state in the nation to pass a law regulating predatory lending practices. Reverse redlining or predatory lending encompasses a number of lending practices that target minority communities, employing interest rates and service fee charges that are significantly higher than those prevailing in white communities. Such predatory lending practices are prevalent in many areas across the country and federal action in this area is long overdue.
Home equity loans have historically been the privilege of the middle class and wealthy, who generally have high credit ratings, income, and home equity. However, beginning in the 1980s, non-depository finance companies -- lending institutions other than commercial banks, thrifts, and credit unions -- began to provide home-equity loans to lower-income communities, which were not served by mainstream lenders.
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Persons in low-income communities typically have little disposable income, but may have substantial home equity as a result of paying down their mortgages or through the appreciation of their property values. This equity can secure sizable loans. While offering loans to low-income and minority communities can benefit these communities, predatory lending practices, which oftentimes use the borrowers' home as collateral, have milked the last drops of wealth from many of these neighborhoods, leading to increased poverty and public dependence.
My bill adds important protections to the law that will save many people from losing their homes. [It] would prohibit the industry from making false, deceptive or misleading statements or engaging in unfair or deceptive acts or practices, and prohibit blank terms in credit agreements that are filled in after the consumer has signed. In addition, it would prohibit prepayment penalties and the financing of credit insurance.
[The "Protecting Our Communities From Predatory Lending Act"] will prohibit the "flipping" of consumer loans, in which the borrower refinances an existing loan when the new loan does not have a reasonable, tangible benefit to the consumer. This practice of flipping often costs the consumer thousands of dollars in fees and frequently leads to foreclosure. My bill will eliminate the practice of charging fees for services or products not actually provided. It will also prevent collusion between lenders and appraisers or home improvement contractors by prohibiting direct payments to home improvement contractors without a consumer cosignature and prohibits creditors from influencing the judgement of an appraiser.
[It] will remove the shroud of secrecy that currently surrounds the application process by requiring that a consumer receive disclosure of his or her credit score and an explanation of the methodology used to calculate the credit score, if one is used by the lender. ...
Finally, my legislation will prohibit steering consumers into loans with higher risk grades than the consumer would qualify for under prudent underwriting standards. This is merely the latest in a long line of practices that have targeted minorities and low and moderate income families, shutting them out of the American Dream of homeownership.
This problem is getting worse, not better. According to an ACORN study, Separate and Unequal 2001: Predatory Lending in America, which was released last month, African-American homeowners who refinanced in the Los Angeles area were 2.5 times more likely to receive a subprime loan than white homeowners were and Latinos were 1.5 times more likely to receive a subprime refinance loan. And this is not merely a function of income: Upper-income African-Americans and middle-income African-Americans were more likely to receive a subprime loan than low-income white homeowners when refinancing. Middle-income Latinos were also more likely to receive a subprime refinance loan than low-income whites.
We must continue to scrutinize predatory lending practices and protect American consumers who are easy targets for the predatory lending industry. Congress and federal agencies must recommit our efforts to ensure that greater opportunity to credit access means an increase in quality of life, not an increase in predatory lending and foreclosure.
Maxine Waters, a Democrat, represents the 35th Congressional District of California in the U.S. House of Representatives. The above commentary has been adapted from a speech Rep. Waters delivered on the floor of the House, March 19, 2002. To contact her, Click Here.
The above column has been distributed by PoliticsOL.com.
