Thompson said she later tried to get out of the loan but couldn't find another lender to take it on. Last year, when Thompson needed a new roof, desperation drove her back to Beneficial. Once again, they told her refinancing her house was her only option. This time, even though her mortgage was extended until 2030 at 14 percent interest, she did not receive any cash for refinancing. Beneficial, on the other hand, made out pretty well. The company issued Thompson a $4,300 loan at 19 percent interest to fix her roof, and the refinancing earned the company almost $3,000 in fees. The fees included $1,800 for single-premium credit insurance (a policy in which the premium is added to the principal instead of monthly), which adds thousands of dollars to the interest payments. Consumer advocates such as Rob Schneider, senior attorney at the Consumers Union, argue that single-premium credit insurance is a scam. "Single-premium credit insurance is only sold in the predatory market," Schneider said. "Since they initially finance the cost of the insurance, the interest can easily end up doubling the cost -- with no added benefit." In Thompson's case, the blow was softened a few months later when her application was rejected by the insurance carrier, and she was issued a refund. Schneider said that an ethical banker would never have refinanced Thompson's house for a $10,000 loan. If a conventional lender had agreed to issue a loan, her options would have included borrowing against the equity of her house, without refinancing. But since Beneficial got to her first, she now pays $647 of her $1,400 monthly salary in loan payments ($534 for the mortgage, and $113 for the personal loan), leaving only $753 to support a seven-member family. If she doesn't make her payments, she risks losing her house. She will continue to pay on her mortgage until she is 76 years old; unless she refinances for a better deal, the loan will end up costing more than $100,000 in fees and interest. That's enough money to buy a whole fleet of Hyundais or put a grandchild or two through college. Thompson's story is just one example of a widespread practice known as predatory lending, which has grown exponentially in the past decade along with the so-called "subprime" lending market. Subprime lenders charge rates up to double that of "prime" interest. A few weeks ago, for instance, the prime rate was 4.75 percent, prevalent mortgage rates were 6.8 percent -- and Daisy Thompson was paying 14 percent. Subprime lending can provide credit to individuals with low incomes, few assets, or poor credit history. However, critics say that lax laws allow some unscrupulous lenders to take advantage of borrowers who are desperate and inexperienced. Beneficial officials vehemently deny that their loans are predatory. They maintain that Thompson's loan is legal and fair, and that they provide a valuable service to low-income customers. "A bank would never have given a high-risk borrower like Thompson a loan," Craig Streem from Household said. "But we did. People who argue that our loans are unfair and deceptive are, in fact, saying that poor people are too stupid to make their own financial decisions. We believe that individuals should be allowed to think for themselves." That argument -- that freedom of choice exists in the lending market -- ignores the fact that minority neighborhoods have always been denied access to credit. Banks don't tend to open local branches there, so predatory lenders advertise aggressively to fill the void. Despite the 1977 passage of the Housing Financial Discrimination Act (HFDA), a bill intended to force banks to make mortgages equitably across class and racial lines, minority applicants in Fort Worth and Arlington, for instance, are still about one and a half times more likely to be turned down for conventional mortgages than whites at the same income level, according to a study by the Association of Community Organizations for Reform Now (ACORN). These would-be borrowers are then faced with a difficult choice -- turn to a subprime lender, or forgo the credit and the dream of home ownership. In minority communities in Tarrant County, ACORN leaders said, the problem has reached epidemic proportions. According to the group's 2001 study, subprime lenders account for 21 percent of refinance loans to white homeowners. The number jumps to 31 percent for Latino homeowners. African-American homeowners are hit the worst -- more than half of all their refinance loans are from subprime lenders. "Fort Worth-Arlington has been hit harder by predatory lenders than most cities in Texas -- but not by much," said John Henneberger of the Texas Low Income Housing Information Service. "The depressing reality is that we are seeing minority communities being stripped of equity across the state." |
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