Suppose you let a finance company talk you into refinancing your home to consolidate your credit-card bills but you end up owing them thousands of dollars more than your house is worth.

That’s what happened to Gary and Elizabeth Coy of Apple Valley, MN. They’re among the millions of consumers who got trapped into predatory loans that cost them a lot of money because of high rates, excessive fees, credit insurance and huge prepayment penalties. The Coys could not refinance themselves out of the mess because they no longer had any equity in their home.

The Coys took out two mortgage loans from Household Finance, one for $132,859 including $10,670 in settlement costs and $6,527 in credit life and credit disability insurance. Why the insurance? Because a Household Finance representative told them that they had to have it—although they didn’t have to. The interest rate was 12.49 percent.
The second loan was for $25,000 at 21.75 percent interest. The couple had good credit. Their total monthly payment on both loans was $1,895, but had the Coys financed the loans at the market rate of 7 percent, their monthly payment would have dropped by more than $800 to just $1,027. Their total payoff to Household Finance was $164,235, but the house was only worth between $140,000 and $150,000.

Such predatory loans have been exploding across America since the 1990’s, fueled by greedy lenders who, with their fast pitches, exploit women, the elderly, and the less credit savvy. They don’t just sell high-cost mortgages, they also peddle “payday loans” and “car title loans” through checkcashing, and other places where 300 percent to 400 percent annualized interest rates are common.

Don’t confuse “predatory loans” with “subprime loans,” which charge higher rates to people with poor credit. Many subprime offers aren’t predatory, but all predatory lenders charge subprime rates.

They get away with it for two reasons: They never tell borrowers they might qualify for better deals at lower rates from conventional lenders. The predatory crowd includes big famous-name lenders as well as hole-in-the-wall charlatans. Ironically, one study shows that 71 percent of subprime borrowers have a credit rating of A- or better. Another study states that between 35 percent and 50 percent of applicants would qualify for a regular loan.
The problem is that predatory loans aren’t federally regulated other than by the weak Home Ownership and Equity Protection Act (HOEPA), a part of the Truth in Lending Act. What few laws there are come from cities and states with 101 bills pending and 21 that were killed. The problem, according to one source is that, “there’s a lobbyist for the lenders in every state capital, paying off legislators with campaign finance cash to vote against the bills.”

In the past two weeks alone, antipredatory bills were killed in Florida and Colorado, with vested interests saying that the laws would “hurt legitimate lenders without helping defrauded borrowers.” That’s a bunch of hogwash.

Yet the abuses go on, and the predatory loan industry, including big Wall Street investment houses and banks that the lenders sell their loans to, continues to rake in billions of dollars as the little guy gets defrauded with rates of up to 20 percent and more. Correcting this situation is going to be a long educational process, and it’s going to take time. The average Joe can’t control the legislatures the way he’d like.

Helping Yourself:

• Don’t fall for lenders’ fast-talking pitches by mail, telephone or a knock on the door. They’ll say anything to get you to borrow, starting with a small loan with high monthly
  payments.
  
  
• Always shop around among reputable outfits.
  
  
• Never sign anything—nothing, ever—until you’ve had a third party look at the contract.
  
  
• Check out the www.acorn.org Web site to start educating yourself on predatory lending.