Banking

Clamping down on predatory lending

by Kristen Lombardi

After years of fighting for the banking industry's attention, activists critical of how big banks do business in Boston neighborhoods have finally been noticed -- by the country's biggest bank.

On August 5, the Federal Reserve System will ask neighborhood activists, along with bankers and consumer advocates, for advice on how to regulate the "predatory practices in the home-equity lending market." The Federal Reserve Bank of Boston, located on Atlantic Avenue, will play host to one of four day-long hearings nationwide. The events are meant to focus on ways the Fed might amend existing laws or create new rules to limit home-secured loans that activists describe as "unethical," "immoral," and "doomed to failure."

The latest round of hearings comes on the heels of an explosion in "sub-prime lending," as it's known: lending to people with bad credit at higher-than-average interest rates. In 1999, for instance, there were 150 billion sub-prime loans written across the country, up from 20 billion such loans in 1993.

Though sub-prime lending itself isn't necessarily a problem, it encourages a slide toward an immoral and possibly illegal area: predatory lending. The term refers to lenders who target vulnerable populations and then charge excessive fees or penalties that make homeownership close to impossible for those families. Because sub-prime lending is on the rise, many fear that the more flagrant predatory practices are as well. Here's how it can work: a lender sets up loan terms for a borrower with conditions the borrower -- usually low-income -- can't possibly meet. When the borrower falls behind on payments, the lender forecloses on the property. The lender typically makes a profit from this when the property is sold at auction.

"Originators of these loans make them sound enticing," explains Norma Moseley of the Jamaica Plain-based Ecumenical Social Action Committee, which helps residents get out of these types of situations. "It isn't until after the fact that they realize they've been suckered."

The topic has become especially hot on Capitol Hill in recent months. Last May, the House Banking Committee held a series of hearings on predatory and sub-prime loans, at which congressmen listened to one horror story after another from people -- mainly the elderly, the poor, and real-estate novices -- who ended up snookered by lenders. Many spoke of having to declare bankruptcy and losing their homes because they couldn't keep up with high interest or repayment rates.

Then, in late June, the Treasury and the Department of Housing and Urban Development issued a joint report, "Curbing Predatory Home Mortgage Lending," in which they decried the practice as "unscrupulous" and "abusive." The report includes legislative and regulatory steps to check the growing predatory-lending trend, such as requiring that creditors urge high-risk loan applicants to seek counsel before signing anything.

Still, such shoddy lending practices are hardly new. Back in 1994, responding to similar complaints about abusive methods used by lenders making home-secured loans to "house-rich but cash-poor borrowers," Congress enacted the Home Ownership Equity Protection Act of 1994, or HOEPA. The legislation has imposed limits on high-cost home loans and has bestowed power on the Federal Reserve to prohibit lending practices and mortgage loans if deemed necessary.

But even though the Federal Reserve released its own report, in 1998, on to use this newfound regulatory power, it has yet to act. "The Reserve hasn't tried to stop fraud in the market," charges John Anderson, a real-estate researcher who has worked to expose illegal and unethical lending in Boston.

Anderson, who has been invited to speak at the Friday hearing, says the Federal Reserve has a pattern of turning a blind eye to FleetBoston's historical relationship with developers who sucker inner-city residents in Dorchester, Roxbury, and Hyde Park by encouraging them to buy homes at inflated prices and then profiting from foreclosures. Despite scathing investigations by the Boston Globe and the Boston Business Journal, Anderson says, "the Reserve has allowed these bogus lending practices to continue."

Anderson, though, plans to use Friday to his advantage. "I'm going to ask [the Reserve], `What's the point?' " he vows. " `You haven't done anything about fraud in the market yet, so why do anything now?' "

Of course, as the issue of predatory lending gains attention, the spotlight will shine on the Federal Reserve and its record -- which perhaps explains the board's recent round of hearings. More-optimistic activists like Ada Focer, who used to be a Massachusetts banking regulator, also point out that the current momentum at the federal level could push the Reserve to act in a way that makes a difference.

Then again, it might not. After all, Focer explains, "predatory lending is such a big money-making machine there isn't much incentive to curb the practice." She continues, "Even if a [certain] percentage of loans goes bad, nobody gets hurt except the borrowers."

The Federal Reserve is accepting public testimony about predatory lending until September 1. Written comments can be mailed to Jennifer Johnson, Secretary, Board of Governors, Federal Reserve System, 20th Street and Constitution Avenue, Washington, DC 20551. Or e-mail them to regs.comments@federalreserve.gov.