Predatory Lending: Historical Perspective

Atlanta Legal Aid Society
Last Reviewed: November 2003

Atlanta Legal Aid's Bill Brennan, as one of the nation's experts on predatory lending, was asked by Senator Grassley to testify at the Senate Special Committee on Aging hearing on "Equity Predators: Stripping, Flipping, and Packing Their Way to Profits." Bill was warmly received and several Senators made statements at the hearing indicating the value they placed on legal service program involvement in this area.  Bill's testimony (see text below) clearly outlines the problems of predatory lending and equity theft, how victims are targeted, and some historical perspective.  An Exhibit (updated in September 2000) presented to the Committee details how these scams work.

Bill was quoted in the New York Times,  December 13, 1997 in an article about lending practices. "We have financial apartheid in our country. We have low-income, often minority borrowers, who are charged unconscionably high interest rates, either directly or indirectly through the cover of added charges."

Testimony of William J. Brennan, Jr., Director,
Home defense program of the Atlanta Legal Aid Society, Inc. before the committee on banking and financial services, United States house of representatives

May 24, 2000

Thank you for this opportunity to address the United States House Committee on Banking and Financial Services on the subject of predatory mortgage lending practices directed against elderly, minority, low and moderate income, and women homeowners.  My name is William J. Brennan, Jr.  For almost 32 years, I have been a staff attorney at the Atlanta Legal Aid Society, Inc. specializing in housing and consumer issues.  For the past 12 years, I have served as the director of the Home Defense Program of the Atlanta Legal Aid Society.

Over the years, the Home Defense Program has provided referrals and legal representation to hundreds of low and moderate income homeowners and home buyers who have been victimized by home equity and home purchase scams, including predatory mortgage lending.  The Program is funded by the Atlanta Legal Aid Society and the DeKalb County, Georgia, Department of Human and Community Development with HUD community development block grant funds.  The Program consists of myself, a staff attorney, and a paralegal.

On a daily basis, we assist individual homeowners who have been targeted by local and national companies with abusive, predatory mortgage lending practices.  We evaluate their cases to determine whether legal claims exist.  We settle some cases without litigation and litigate others.  Most often, because of our limited resources, we assist homeowners in obtaining private attorneys to represent them in cases where the homeowners may have legal claims.  Where appropriate, we also refer homeowners to local nonprofit housing counseling and other agencies which assist them in obtaining refinancing of their high cost mortgage loans through low cost, conventional mortgage lenders or other special programs.  We refer many senior citizen homeowners for reverse mortgages.  We also participate on a regular basis in a range of community education efforts aimed at warning home buyers and homeowners against home equity theft scams, including abusive mortgage lending practices.

When homeowners come to the Home Defense Program with sub prime mortgage loans, my job is to conduct an investigation and determine whether they have any legal claim.  In a few cases, a strong legal claim exists that will result in a settlement that cancels the mortgage.  In other cases, legal claims exist that will result in a settlement that may give the homeowner some cash and a restructured mortgage loan with a lower balance, lower interest rate, and lower monthly payments that the homeowner can afford.  In too many cases, the loan is full of predatory and abusive lending terms, but I can find no legal claim.  Homeowners who are not eligible for a reverse mortgage or low cost refinance are bound to those high cost, abusive mortgages with no legal recourse.  When they cannot make the payments, they go into default and lose their homes and all their equity.

The financial services industry (including banks and thrifts, local and national, large and small mortgage lenders and finance companies) has evolved a system of financial apartheid in our country.  Many people with A credit are provided with fairly low cost loan products with little or no abusive practices.  On the other hand, people with B and especially C and D credit (and some of those with A credit) are often egregiously overcharged and subjected to abusive lending practices.  Moreover, these high cost, abusive loan products are marketed disproportionately among our elderly, minority, and low and moderate income communities.  The rationale that risk justifies exploitation is bogus.  As Philadelphia Community Legal Services attorney Irv Ackelsberg points out, it is as though society has dealt with the problem of inadequate access to productive credit by drowning low income households in destructive debt.

Devastating Impact on Individuals, Families and Communities

The impact of predatory mortgage lending has been devastating on individuals, families and communities.  Because these mortgages are grossly overpriced and contain abusive, predatory terms that further drive up the cost, many families are struggling to make their monthly mortgage payments.  Too often they forego paying for other important necessities such as food, medicine, utilities, and property taxes in order to keep their homes.  When they fall behind on the mortgage payments, they face foreclosure.  Many inevitably lose their homes and are kicked out on the street.

Predatory Lending Practices

Based on my 32 years at the Atlanta Legal Aid Society, 12 years as director of the Home Defense Program, and hundreds of sub prime lending cases that have come through my program, I have never seen a sub prime mortgage lender not engage in one or more of three distinct categories of predatory lending practices.  Here is what they do.

I.  They overcharge on interest and points.

Predatory mortgage lenders charge egregiously high annual interest and prepaid finance charges (points) which are not justified by the risk involved because these loans are collateralized by valuable real estate.  Since these companies only lend at 70-80% loan-to-value ratios, they have a 20-30% cushion to protect them if they have to foreclose.  They usually buy in at the foreclosure auction sale, evict the former homeowner, and sell the house for enough to pay off the loan and often generate additional profits.  This assertion may be tested by ascertaining the net profits sub prime mortgage lenders earn.  If the risk were great, losses would be high.  High losses would be reflected in diminished profits.  In spite of this, profits in fact are great.

These profits are reflected in the trading values of these lenders.  For example, two years ago Ford Motor Company sold its sub prime finance company subsidiary, Associates Financial Services, to stockholders for $25.8 billion.  First Union purchased The Money Store for $2.1 billion.  The CEO of GreenTree Financial received $102 million in total compensation for 1996 and $65 million in the previous year.  More recently, Bank of America offered NationsCredit, one of its sub prime mortgage lending subsidiaries, for sale for $1 billion.  “BOA Is Asking $1 Billion For NationsCredit Unit,” National Mortgage News, May 15, 2000, p. 1.  According to the article, NationsCredit currently brings in $5 million per month.  EquiCredit, the other sub prime mortgage lending subsidiary owned by Bank of America, makes $30 million per month.  In an article entitled "Loan Sharks, Inc.," Thomas Goetz reports that:

Sub prime companies say their interest rates are so high to compensate for the greater risk these borrowers bring. But a welcome side effect of high rates is the profits that traditional banks can't hope to match.  According to Forbes, sub prime consumer finance companies can enjoy returns up to six times greater than those of the best-run banks. Corporate America hasn't failed to notice.

Village Voice, July 15, 1997 at 33.

II. They perpetrate other profitable abuses.

Predatory mortgage lenders purposely engage in other abusive lending practices that effectively allow the lenders to collect hidden, indirect interest and thereby increase and enhance profits. 

Examples are:

·            Loan flipping;

·            Packing the loan with overpriced single premium-financed credit life, disability and unemployment insurance;

·            Balloon payments;

·            High prepayment penalties;

·            Using scam home improvement companies to generate originations;

·            Paying kickbacks to mortgage brokers to generate originations; and

·