For some, the fees and terms of a home loan are confusing. And in some extreme cases, lenders take advantage of unaware homebuyers who are saddled with loans they can't afford or face hidden fees on their loan. "Predatory lending" is not illegal in Minnesota. A bill to ban predatory practices died in the Minnesota House this year after heavy lobbying by banking institutions.
Inside the glass door of her three-season porch, Sylvia Barron, 67, has taped a small, hand-written sign, whose carefully-penned black-marker letters read "no solicitors." For this East St. Paul resident, the sign is her last defense against those who she says are taking advantage of her.
Barron is a homeowner who works at a local knitting factory and makes $9.95 an hour. In 1996, she took out a mortgage for $43,000 to buy her house. Her monthly payment at that time was $298. Since then, she says, a total of six different lenders have persuaded her to refinance or take out second and third mortgages.
She now owes more than $105,000, has a monthly payment of almost $1,000, and may lose her house.
Her two most recent mortgages were with the Indiana-based Conseco Finance Corporation. "It started out clear when I was first in it," says Barron, "but then when you go through all this so many different times, you get confused. But I think that by Conseco, I was taken advantage of."
Conseco Finance solicited Barron after they got her name from a charge card. Barron took out second and third mortgages totalling $31,000, which included more than $3,000 in fees.
After Barron missed some of her monthly payments, she was served a notice from Conseco informing her her house would be placed for a sheriff's sale. She turned to the community advocacy group ACORN. ACORN representative Jordan Ash says he had seen many cases like Barron's.
"For most of us, owning a house is our only major source of wealth," says Ash, "and that rising in home values is a way to build wealth, and what predatory lenders do is basically steal that wealth."
Sitting with Barron on her porch, Ash takes out letters he has written on her behalf to Conseco, asking the company to renegotiate payment terms that Barron can afford. In each of their responses, Conseco refused to negotiate the terms.
ACORN counters with media attention. On this day, Ash has called Conseco to tell them a reporter is interviewing Barron at her house. Midway through the interview, a public relations specialist and a lawyer from Conseco show up at Barron's house. In the conversation that ensues, Conseco lawyer Daniel Collins defended Conseco.
"Why would you refinance somebody to a higher interest rate? She wasn't looking for that," Ash says.
"When somebody is interested in obtaining that much cash, and they are very very persistent about obtaining that, we are not going to say 'no' if they financially qualify," countered Collins.
But Barron says she wasn't insistent. "He had called me because I got a Menard's card," she said. She also said Collins showed up at Barron's home to help her fill out paperwork.
According to an ACORN study in October 2001, people in low- and moderate-income neighborhoods are five times more likely than homeowners in upper-income neighborhoods to receive a sub-prime loan -- like the loan Barron received -- when refinancing. In fact, according to the study data, sub-prime lenders account for approximately 25 percent of all refinances made in low- and moderate-income census tracts, but just 5 percent of the refinance loans made in upper-income census tracts.
Ron Ellwood, who works for the St. Paul-based Legal Services Advocacy Project, says Sylvia Barron is a typical victim of predatory lending practices. "If it's difficult for you and me and the average person to understand the documents they sign when they're getting a loan, can you imagine what it's like for somebody with less than a high school education for example? It's the combination of unscrupulous people taking advantage of unsophisticated people," says Ellwood.
In 1994, Congress passed the Home Ownership Equity Protection Act, known as HOEPA. HOEPA was intended to protect consumers who take out high-cost loans. HOEPA defines a high cost loan as one that is currently at 13.6 percent annual percentage rate or higher. This means that loans above this interest rate qualify for protections from certain predatory practices. Some states found HOEPA to be too weak, and since the act passed, seven states and a number of cities around the country have enacted stricter laws to deal with predatory lending.
Minnesota is not among them.
In the 2002 legislative session, Sen. Sandy Pappas, DFL-St.Paul, sponsored a bill that would have lowered the current HOEPA trigger by more than 3 percentage points, preventing lenders from giving loans with a current 10.4 percent annual percentage rate or above to borrowers whose overall debt is more than 55 percent of their income.
Pappas says during the final hours of this year's session, lobbyists and lawyers from banks around the state lobbied against the bill. The bill passed the Senate, but did not get out of the House. "I couldn't understand why responsible bankers that don't engage in predatory lending practices were so concerned with this bill," says Pappas, "because it would have outlawed practices they say they don't do."
Steve Johnson, the director of government relations for the Minnesota Bankers' Association, says the Senate bill would have prevented consumers with poorer credit from getting loans they want.
"Now if you're classifying more loans and putting more bars and things in the way to get these loans, those people may have a harder time getting those," says Johnson, "so I think there's a balancing act between passing a new law and the ability of a consumer to get a specific loan for a home or whatever they choose to get."
Johnson says in 1999, Minnesota bankers agreed to the 21 Standards of Conduct Law; a law that provided guidelines for banks to follow to prevent predatory lending practices.
Legal Services Advocate Ron Ellwood says the guidelines don't do enough. "there are practices which are unconscionable, they really are abusive, but they are not illegal," says Ellwood, "and that's what it all boils down to."
As for Sylvia Barron, it appears she'll hold onto her home for now. Conseco has withdrawn its request to the Ramsey County sheriff to sell her it. Conseco is currently negotiating with ACORN on new payment terms for her mortgage.More Information