Taming the Banking Predators

by Jake Lewis

What's robbing a bank compared to owning one, famously asked the playwright Bertrold Brecht.

What can citizens do when the banks start robbing them -- and the political system fails to protect them from corporate abuses?

The Association of Community Organizations for Reform Now (ACORN) is writing some dramatic answers in its nationwide assault on banks, finance companies and other credit merchants who are ripping off low- and moderate-income and minority home buyers in a sophisticated shell game called predatory lending.

Instead of depending on non-existent initiatives by Congress and federal regulators, ACORN launched a grassroots campaign in 1999 to expose predatory lenders and educate citizens and community leaders about deceptive and destructive credit practices which threaten the stability of low- and moderate-income and minority communities.

ACORN is in a unique position to lead the charge against the lending predators. Since 1970, ACORN has been in the forefront of community organizing. In those early days, ACORN struggled just to keep its telephone bills paid. Today, ACORN has 150,000 member families organized in 700 neighborhood chapters in 40 cities across the country. It has become a grassroots force that big banks and elected officials ignore at their peril.

In the early days, the fight was against discrimination at the loan windows of the nation's banks -- raw discrimination that stifled housing and small business development in African-American neighborhoods. Banks openly maintained maps with bright red lines encircling neighborhoods with large minority and low-income populations to designate areas where loan officers were instructed to discourage or avoid home loans and other investment.

But blatant "redlining" became more difficult in the wake of the civil rights movement, the passage in the 1970s of fair lending and fair housing laws and requirements of the Community Reinvestment Act for banks to help meet the credit needs of their entire service areas. And discriminatory lending patterns became more visible after passage of the Home Mortgage Disclosure Act (HMDA), which required banks to reveal by census tract where they made loans.

Ineffective enforcement by bank-friendly regulators has taken the teeth out of much of this body of law, and today low- and moderate-income and minority citizens still find the credit deck stacked against them. Under regulators and a Justice Department largely guided by a 'see no evil, hear no evil" approach to lending abuses and neglect, the credit merchants have become bolder with new discriminatory scams which threaten to become as destructive to low-income and minority neighborhoods as redlining.

Modern Day Credit Nightmares

The latest credit nightmares for minority and low-income communities are intertwined with subprime and abusive predatory lending practices characterized by high interest rates, excessive fees, costly financing of unnecessary credit insurance, balloon payments and outlandish pre-payment penalties imposed to prevent borrowers from escaping abusive credit contracts. Predatory lenders use door-to-door solicitations, phone calls and mailings to badger homeowners into refinancing their existing loans to obtain cash. This is a tempting idea for families on low and moderate incomes and strapped for cash, but an expensive remedy laced with high interest charges and fees which ultimately strip away what little equity remains in the house. Strapped by impossible credit terms, the final chapter of the predatory lending experience is frequently bankruptcy and foreclosure -- events that not only devastate working families, but rip apart low-income and minority neighborhoods.

Where "redlines" on maps in bank offices once were used to identify neighborhoods for loan officers to "avoid and discourage," they now mark prime target areas for predatory lenders who see profit in borrowers left at the mercy of an costly subprime credit market. Instead of "redlining," the banking industry is shunting minority and low-income families away from mainstream bank loans into the more expensive subprime market -- a market that is increasingly the spawning ground for predatory lending practices.

Subprime lending has its place in the credit markets. It frequently is the only credit available to families with poor credit histories. Unscrupulous lenders, however, are using deceptive tactics to convince home buyers that the only credit available is 'sub prime" with its higher interest rates and fees. As a result, home buyers with so-called "A" credit ratings are being led to believe falsely that they have no choice -- it is subprime credit or no credit is the message that the credit merchants constantly hammer home.

Typical of the victims is Joey Olvera, a truck driver from San Antonio, who told a State Senate Committee in Texas that his lender lied to get him to accept two high-interest subprime loans.

"They were saying that we had bad credit," Olvera said. "But it turned out our credit is good. When you apply, they rush you through. Later on, when you sit down and check into it, it turns out to be something else."

Subprime lending has soared since the early 1990s. In 1993, financial institutions made just over 100,000 subprime refinance and home purchase loans. By 2001, the number of subprime loans had risen to over a million and the number continues to increase, according to an ACORN study, 'separate and Unequal -- Predatory Lending in America."

The study found that the most dramatic increases had occurred in minority communities. Subprime lending accounted for 51 percent of all refinancings made in African-American neighborhoods, compared with just 9 percent of such loans in predominantly white neighborhoods.

Both Fannie Mae and Freddie Mac, the giant secondary market operators, confirm ACORN's claim that overwhelming numbers of minority borrowers who could qualify for loans at prime rates are pushed into the subprime market. In separate estimates, Fannie Mae and Freddie Mac have estimated that 35 percent to as many as half of all subprime borrowers could have qualified for lower cost mortgages -- meaning a whopping number of consumers are being cheated at the loan windows of the nation's financial institutions and forced into the costly fee-ridden world of high interest rates and high fees.

As ACORN's study noted, the subprime lenders portray their role as helping families realize the "American dream of homeownership." But ACORN is quick to point out that the vast majority of subprime lending is for refinancing and equity loans, not for mortgage originations.

In its battle to get the attention of bank regulators and the Congress, ACORN has collected hundreds of horror stories illustrating the subprime refinancing scams. Maude Hurd, the national president of ACORN, has cited chapter and verse of the subprime horrors in an effort to get regulators to crack down on the scams.

In a letter last fall to Comptroller of the Currency John (Jerry) Hawke -- who regulates federally chartered banks -- she laid out some stark examples of the predatory nature of many of the refinance loans in the subprime market.

Here's one of the cases she put on Hawke's desk:

"An elderly and disabled couple in Arizona were at the Wells Fargo Bank's home mortgage branch in Arizona when an employee asked if they owned their home, and suggested they could refinance with Wells. At the Wells Fargo office, they were told they would get a loan with an interest rate between 6 and 7 percent and with monthly payments of a little more than $600. Instead, Wells sold them a loan with an interest rate of 8.5 percent, pocketing almost $4,000 in fees paid directly to the bank, in addition to third party fees. The monthly payments on the loan on the loan were $727, but these did not include taxes and insurance, which bring the couple's monthly total over $860. The couple is struggling to make these payments -- which are more than one third higher that they were promised."

Taking on the Predators

ACORN's long experience in organizing communities has given the organization a great advantage in identifying victims of predatory lending. ACORN's local block captains, chapter leaders and organizers are known in the neighborhoods and this has encouraged victims to come forward with their stories. In turn, ACORN has been adept at getting these stories to local media, city councils, state legislators, members of Congress and regulators.

While ACORN members have become familiar faces in legislative halls and city council chambers, some of its most effective work has been in direct "in your face" confrontations with lenders who have ripped off borrowers in various predatory lending schemes.

Faced with continuing abuses by Ameriquest, a stand-alone subprime lender, ACORN launched an active campaign against the company that included demonstrations, pickets and sit-ins at Ameriquest's offices, as well as separate actions at Wall Street firms that supply Ameriquest with their financing. In addition, ACORN filed complaints with the state attorneys general, the Federal Trade Commission and the Department of Justice and took their story to members of Congress, federal regulators and the Department of Housing and Urban Development.

Caught in this buzz saw of direct action, Ameriquest threw in the towel in July 2000. After three months of tough negotiations with ACORN, Ameriquest signed an agreement to make loans available to borrowers on fair terms. In addition, the company agreed to invest $360 million in an ACORN pilot program in 10 cities. In these cities, Ameriquest agreed to make subprime loans with no pre-payment penalties, no credit insurance, a limit on points and fees at 3 percent of a loan, interest rates below the market standard, and loan counseling for every potential borrower.

In 1999, ACORN released a study condemning Citigroup for its pattern of making high cost subprime loans in minority and low-income communities without regard to actual credit ratings of the residents in those neighborhoods. In late 2000, Citigroup made matters worse by acquiring Associates, with a record of abuses as a subprime lender. The company had long been on ACORN's target list of bad actors, particularly for its aggressive marketing of single premium credit insurance that was rolled into high interest rate subprime mortgages.

When the U.S. Federal Trade Commission (FTC) brought action against Citigroup, Citibank and its new acquisition -- Associates -- ACORN was in a position to provide FTC with documented evidence of predatory lending abuses by the company. Ultimately, FTC imposed a $240 million fine on Citigroup and its affiliates.

One of ACORN's biggest victories in the predatory lending wars involved Household International and its subsidiaries Household Finance and Beneficial -- now owned by HSBC Holdings. Last November, Household settled a class action lawsuit brought against the company in 2002. The centerpiece of the settlement is a $72 million "Foreclosure Avoidance Program" which will provide relief to Household borrowers who are delinquent on their payments and at risk of losing their homes.

The settlement includes interest rate reductions, waivers of unpaid late charges, deferral of accrued unpaid interest and loan principal reductions. The settlement is the culmination of a three-year campaign by ACORN to change Household's predatory practices and follows Household's $484 million settlement last year with state attorneys general prompted by ACORN's findings.

ACORN's campaign against Household included a range of tactics. Central to the effort were ACORN's organizing efforts in low-income communities, where Household's victims were mobilized. This was followed by demonstrations at Household's offices around the nation that generated media focus on predatory lending practices. ACORN members from New Orleans and Miami greeted Household shareholders at the company's annual meeting in Tampa with posters, chants and giant sharks. Domini Social Investments allowed ACORN to use its proxy to get a member into the meeting and add her voice to the shareholder debate. A shareholder resolution, sponsored by Responsible Wealth and United for a Fair Economy, called for executive compensation to be tied to efforts to combat predatory lending The resolution got 5 percent of the shareholder vote, a relatively high level of support for such an effort -- something that prompted another round of media coverage of the ACORN-Household battle.

ACORN also has a range of success stories at local and state levels -- in places like New Jersey, New Mexico, Arkansas, Oakland and Los Angeles where state laws or local ordinances have given consumers weapons against the predators. Anti-predatory campaigns are building in Massachusetts, Arizona, Rhode Island, Minnesota and California.

The Preemption Threat

But the growing grassroots efforts are being threatened by Comptroller of the Currency Jerry Hawke, who has repeatedly gone into court with amicus briefs to support national banks" efforts to block anti-predatory protections. Hawke, a former bank lawyer-lobbyist, contends that the National Banking Act preempts local and state laws. Hawke has attempted to strengthen his position with a sweeping new regulation designed to preempt the local efforts.

Bank-friendly members of Congress, like Republican Representative Bob Ney of Ohio, are pushing efforts to enact new legislation that would endanger all local and state efforts to protect consumers from predatory lending practices and other scams. ACORN, along with other consumer and community groups, has been instrumental in mobilizing public opinion and Congressional support behind efforts to block Ney's pro-bank campaign.

Lisa Donner, director of the ACORN Financial Justice Center who spearheads the anti-predatory campaign at ACORN, is concerned that pro-bank members of Congress and regulators will increase their efforts to use the preemption club to blunt, if not wipe out, consumer-community gains. The preemption battlefield is clearly the next venue for ACORN and its allies in the fight for fair lending.

Donner takes pride in ACORN's anti-predatory campaign's accomplishments. But she is quick to warn that "the job of ending the predatory scams remains formidable."

ACORN has been resourceful in its four-year-old effort to sound the alarm about predatory lending and to devise a variety of means to clean up the practice. But the next round -- the fight to stop banks, their regulators and Congress from shredding consumer protections -- will be a huge test for ACORN and other consumer-community groups.

Jake Lewis is a banking specialist at the Center for the Study of Responsive Law in Washington, D.C.