Speech to Mortgage Banker's Association
Marcia Lillich, 5/17/2001

(Speech is 20 minutes exactly. Describes our agency, foreclosure statistics, initiatives around the country, specific predatory practices, formal definition and suggestions for the group)

I was invited here today because I'm chairman of the Chattanooga Predatory Lending Taskforce, and director of the Housing Info Line which receives a lot of complaints about loans and lenders. This is a relatively new type of call for us, only cropping up in the last 2 to 3 years. In our 10-year history we mainly have handled questions from renters and landlords, calls from homeless, disabled, and elderly people, calls from homeowners with a neighbor or sewer problem or whatever, and people who want to get into position to qualify for a mortgage loan.

The Housing Info Line is the operating entity of the Community Housing Resource Board, known as the CHRB, which formed in 1982. One of our earliest and most productive Board members was Marilyn McDonald of Collateral Mortgage, whom most of you know.

About 4 years ago she brought to the Board's attention the horror stories emerging from victims of "B and C lenders". At that time the Info Line received very few calls from homeowners who had their mortgage with a sub-prime or finance company. In 1996, for instance, we had only 8 calls from borrowers who had refinanced with this type of lender and who were delinquent and facing foreclosure. The Tennessee Department of Financial Institutions—who is the official receiver of complaints on lenders—had very few as well.

In the last 5 years however, things have changed very rapidly. Sub-prime lending to uneducated unwary people proved to be a very lucrative business in the mid-to-late nineties, and the sub-prime market share soared. This explosion in sub-prime lending is a trend fed by a growing number of financially illiterate Americans and their abuse of credit.

HMDA data shows that—across the nation—refinancings by sub-prime lenders increased 10-fold from about 80,000 in 1993 to about 800,000 in '98.

The number of sub-primes doing business in the state of Tennessee grew from 220 in 1993 to over 1200 in 1998. The Tennessee Department of Financial Institutions told us they've been so busy licensing that they haven't the time—or staff—to investigate complaints. Smarmy lenders have congregated in Tennessee because of very low licensing requirements and legislative action by surrounding states to restrict high cost loans.

In Chattanooga alone, the number of sub-primes has grown by at least 500% since 1990, to well over 200 companies.

Foreclosures have increased commensurately.

In Atlanta, during the 3 years between 1996 and 1999, foreclosures by sub primes rose by 232%.

In Chicago, in the 2 years between 1993 and 1995, foreclosures soared almost 5000%, mostly in minority neighborhoods, and mostly on high-cost loans. Whole neighborhoods were boarded up.... neighborhoods that the city had revitalized....., causing the city and the state of Illinois to react with laws and ordinances.

The number of FHA single family foreclosures has also been rising ....doubling in 5 years between 1994 and 1999, according to a report from HUD's Attorney General. The mounting evidence of predatory lending led HUD to remove some lenders from its approved list for not using FHA loss mitigation programs, and to institute a massive fraud alert program.

Here in Hamilton County, foreclosures are rising rapidly as well; in the first six months of 1998, 177 homes were foreclosed compared to 292 in the first six months of year 2000 ....approximately a 60% rise in 2 years.

As you may know, a strong predatory lending bill was introduced in our state legislature in May but died an early death in committee due to lobbying by the Mortgage Bankers Association and lack of support from other quarters. Georgia recently passed a weak bill, but North Carolina enacted very strong legislation supported by a coalition of hundreds of businesses and non-profits, including the MBA. That state - and many cities across the country - are forming task forces and using federal grants to wage ad campaigns warning the public about land sharks.

HUD, FDIC, the Federal Trade Commission, the Federal Reserve and many other regulatory agencies are all taking steps to curb predatory lending practices, not only because of the devastating effects on families, but because they see 20 years of community development efforts being undone in a few short years.

In Chattanooga, the Predatory Lending Taskforce will produce a radio and TV ad campaign to alert homeowners to the plague of leeches trying to lure them into expensive refinancings.

You Good Guys out there—it is time to separate yourselves from those unscrupulous lenders...possibly sitting beside you... and those who spend fortunes lying to the public on T.V.! Separate yourselves from the finance companies using deception and fraud to get home-loan business! The public doesn't know the good guys from the bad guys and as long as this fuzziness exists, lower-income uneducated American homeowners will continue to unwittingly trip into the quicksand where slimy lenders suck them dry and spit them out.

The typical victim is a middle-aged woman or elderly couple who has refinanced or got a second mortgage for home repairs or debt consolidation within the last few years. They got the loan when they were desperate and in a financial bind, from a lender that probably should not have made the loan, and now a few years later they are often in a much worse situation!. They have struggled silently to keep up payments but are about to be foreclosed; they have exhausted every financial resource.

About half of these callers live in rural counties and about half live in the city. Most earn low-to-moderate incomes and have minimal education. Many of the older folk are naïve, gullible and trusting. Most have been in their home from 12 to 20 years. Usually there's been a life disruption—illness, accident, job loss, retirement, disability, death of a spouse etc that results in loss of income. You all are quite familiar with these desperate cases and how badly they want to hang on to their home with the leaky roof, in spite of the growing financial burden

I've had calls from some of you mortgage lenders who are trying to find ways to help these sad people who have been impoverished by sub-prime lenders who should have refused to make the loan, rather than get the borrower even deeper in the hole!! Predatory Lenders are like ravening sharks!

.... Greedy shysters who know that the combination of desperation and lack of financial know-how makes people and easy mark!

Who know how to target-market their aggressive ads to certain neighborhoods and demographic profiles.
Who know how to data-mine the Deeds Office for vulnerable homeowners and potential victims.
Who know that only a fool gets a home loan thru a finance company!
Who know when the payments are unaffordable and unsustainable!
Who know the interest rate is higher than warranted by the FICO score!
Who know is it unwise to wrap credit-card debt into a long-term mortgage!
Who know it's unconscionable to pay off lower-interest loans
Who know they are charging high and unnecessary fees!
Who know they are putting that big pre-payment penalty in their pocket, and that the stupid borrower isn't even aware that he's paying a penalty!
Who know that two-thirds of debt consolidators are back in over their heads within a year or two!

And you who know—whether you admit it or not—that the owner is destined to lose the home sooner or later.

It's quite common to hear from people whose loan balances exceed the value of the home because of inflated appraisals by a few crooked appraisers. It's not uncommon to find people with artificially lowered payments and negative amortization. It's extremely common to find owners who think their payment is lower because of a refinance, and then are surprised when they get tax bills and must suddenly come up with a lump sum for homeowners insurance

Deception! .... Lies Upon Lies!,..... Sins of omission!..... and the terrible guilt that eventually catches up with those whose greed has made them blind and careless predators on weaker human beings.

Lenders complain that there is no definition of predatory lending! So how can we know what to do? We don't know what's expected of us!

Well, the Interagency Banking Commission has provided a definition which is available as a handout at the door.. and it's not at all hard to understand:

(Read from Hand-out)

In January 2001, the federal banking agencies issued guidance on sub-prime lending and put forth a definition for abusive lending practices:

Such practices appear to have been designed to transfer wealth from the borrower to the lender/loan originator without a commensurate exchange of value. This is sometimes accomplished when the lender structures a loan to a borrower who has little or no ability to repay the loan from sources other than the collateral pledged.

For purposes of this guidance, sub-prime lending refers to programs aimed at borrowers with weakened credit histories, typically characterized by payment delinquencies, previous charge-offs, judgments or bankruptcies. This term may also include borrowers with questionable repayment capacity evidenced by low credit scores or high debt-burden ratios.

When default occurs, the lender forecloses or otherwise takes possession of the borrower's property (generally house or automobile). In other cases, the lender may use the threat of foreclosure/repossession to induce duress upon the borrower for payment. Typically predatory lending involves at least one, and perhaps all three, of the following elements:

• Making unaffordable loans based on the assets of the borrower rather than on the borrower's ability to repay an obligation;
• Inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinances (flipping); or
• Engaging in fraud or deception to conceal the true nature of the loan obligation, or ancillary products, from an unsuspecting or unsophisticated borrower.

(......END OF READING FROM HANDOUT......)

I know this has been quite a harangue and that most of you established lenders would not engage in the practices I've described. But many originators working on commission are sorely tempted of course to make a few more bucks off the ignorance of the consumer. Financial illiteracy is rampant. Why not take advantage of it? (Pause……) Because you're a better person than that. Because there are things more important that money. A lot more important.!!!!

Things honest lenders should do:

If your business is home loans, separate yourselves from smarmy sub-primes and all finance companies. Establish an identity that is clean and above-board.

Support financial literacy bills. Public schools need to teach us fools how to read money! I will work with your steering committee to keep up with pending legislation

Tell the Truth

Advise borrowers to talk the terms over with a wise family member or a counseling agency such as Housing Info Line or Consumer Credit Counseling Service.

Self-police your industry

Join the Predatory Lending Taskforce in sponsoring workshops on refinancing home loans

Don't "help" people make a move that is devastatingly foolish.

Refer people up when you know they can qualify for a lower cost loan

Refer people to reverse mortgages rather than home equity loans

Disclose the real costs of refinancing, don't hide them

Encourage people to clear up credit and wait to qualify for a better loan deal

Don't do balloons or credit life insurance Don't pocket your own prepayment penalty

 

 

Thank you for inviting me, paying such good attention, and for not hurling pebbles!