The debt burden is hardly necessary. A 2001 Fannie Mae study found that, nationally, almost half of subprime borrowers could have qualified for a prime loan. Many of these borrowers end up tethered to debt for years, and those who can't keep up lose their homes. A study by the Coalition for Responsible Lending estimated that predatory lending costs borrowers $9.1 billion annually, through excessive interest rates (above what would be reasonable for the additional risk), hefty fees, prepayment penalties, and single-premium credit insurance. Including the cost of foreclosures would likely add billions more to the estimate. "Home ownership gives families a stake in keeping their neighborhoods clean and free of crime," Schneider said. "Predatory lending works to undermine this fundamental principle, and it is having a devastating effect on low-income communities across the country."
Given Texas' frontier past, it's surprising how well predatory lenders have flourished here. Since its early days, the state has had a reputation for holding the homestead sacred, and the original authors of the Texas constitution figured the best way to do this was to prohibit home equity loans (loans for things like cars, backed up by equity in a home) altogether. But homeowners complained that they were being unfairly prohibited from using their property as collateral for better credit, and, in 1997, voters passed a constitutional amendment overturning the ban. The new regulations still contain the most rigorous consumer protections in the country: They prohibit the refinancing of a home more than once a year, limit fees to 3 percent, and make all foreclosures subject to judicial review. They also restrict the size of loans to a maximum of 80 percent of the value of the home and require a 12-day "cooling off" period between applying for a loan and signing on the dotted line. These protections were not universally embraced. A San Antonio Express-News editorial of the time said, "Texans do not need a patrician state government to hold their hands and tell them how to conduct their personal business." Those critics can rest easy; subprime lenders have figured out a way to get around most of the protections. Although fees are limited to 3 percent, "points" are not. In a conventional loan, a homebuyer can get a lower interest rate by paying some money up front. One "point" is up-front money equal to one percent of the amount borrowed. In a subprime loan, said Schneider, points are just another name for fees, with little, if any, discernable benefit to the borrower. And what about the restriction on refinancing more than once a year? "So they come back and refinance every year," said Schneider. "This practice, known as flipping, is great for the lenders and terrible for borrowers. The fees can add up to thousands and thousands of dollars." State Rep. Lon Burnam of Fort Worth insists that regulations need to be toughened. "It is a complicated issue, and hasn't been prioritized by the legislature," he said. "But when you start looking at the numbers, it's astounding. This is white-collar crime gone berserk." The Democrat points out that southeast and northwest Fort Worth, the communities most hurt by predatory lending, are the ones that can least afford it. "This is clearly race- and class-based discrimination," he said. The legislature is slowly becoming aware of the magnitude of the problem. An anti-predatory lending bill introduced by Dallas Sen. Royce West passed last session, but even its supporters admit that it hardly puts a dent in the problem. "West tried to pass a very tough law," said Henneberger, "but he was simply overwhelmed by industry opposition. At the hearing there was Rob Schneider and I arguing for strong legislation and 21 industry lobbyists telling everyone there wasn't a problem." Ann Graham, chief regulatory counsel for the Texas Bankers Association, said that while some rogue institutions may engage in predatory practices, federally insured institutions such as banks do not. "These practices are already illegal in the state of Texas," she said. "What we need is strong enforcement of laws on the books. Further regulation will only hurt high-risk individuals hoping to get a loan." |
|
