Fighting Off The Loan Sharks

Predators: Baltimore is debating whether to enact legislation on predatory lending, in which high-interest, high-fee loans are imposed on society's most vulnerable.

March 03, 2002|By Hope Keller | Hope Keller,SPECIAL TO THE SUN

When Washington implemented an anti-predatory lending law in September, it did more than stop fraudulent mortgage lending in the city. It stopped just about all lending outside the prime market.

Mortgage lenders say the law - which was suspended in November and is expected to return in some form this month - put too many burdens on legitimate lenders and further complicated the byzantine mortgage transaction.

Lenders also said they were afraid to lend when they weren't sure what practices and loan products could get them into trouble.

The Washington law "didn't really define what predatory loans were," said Gene Lugat, president of the Maryland Mortgage Bankers Association and vice president for the Baltimore area at AccuBanc Mortgages.

Although well-intended, the rush to enact the law backfired after lenders balked at the expensive paperwork and documentation it called for and the way it narrowed the means for lenders to foreclose.

"Lenders just pulled out of the market," Lugat said.

Predatory lending is as murky as it sounds. It is the underbelly of the sub-prime credit market, related to "flipping" schemes but not as high-profile. Mary Louise Preis, Maryland's commissioner of financial regulation, calls predatory lending "sort of undefinable."

The mortgage industry and consumer advocates agree on this broad definition: Predatory lending is the practice of selling high-interest, high-fee loans to people unlikely to be able to pay them back - the credit-challenged and gullible, who are often minorities, the poor and the elderly. The legacy of this lending is blight, with foreclosure upon foreclosure and entire city blocks boarded up.

Baltimore, the site of federal hearings on predatory lending in 2000, is considering whether to enact legislation of its own. It is not alone.

Dozens of states and cities have debated laws on anti-predatory lending in recent years. Philadelphia passed such a law last year, but it was "pre-empted" (i.e., killed) by the Pennsylvania legislature.

Baltimore City Council President Sheila Dixon said the city has been working with the state to determine whether new lending laws are necessary.

Last month, however, Del. Maggie L. McIntosh introduced a bill in the General Assembly stipulating that banking regulation is conducted by the state, not by localities. Though the bill does not mention predatory lending in Baltimore, its aim is to prevent the city from enacting its own banking and lending laws.

"That's what we're trying to do, so we don't get into the mess that some other cities and states have gotten into," said McIntosh, a Baltimore Democrat.

Her move has infuriated the community activist group ACORN. Last month, about three dozen members blocked the office of Del. John F. Wood Jr., a St. Mary's County Democrat who is a co-sponsor of the bill, to protest the legislation.

Mitchell Klein, head organizer for the local office of ACORN - the Association of Community Organizations for Reform Now - said that in Baltimore, sub-prime lending and predatory lending are the same thing.

"Baltimore is a disaster," Klein said. "There's collusion between city government and slumlords. Nothing is enforced. This [lending] is a scourge. It has a grip on this city that is awful."

Members of the mortgage industry urge Baltimore to look hard at Washington's experience before acting.

A law like Washington's "would take away options for consumers," Lugat said, adding that during the two months that law was in effect - from September to November - it hurt those it was supposed to help. "It's good intentions that are misdirected," he said.

Consumer advocates say there is a place for sub-prime loans. These "B," "C" and "D" mortgages carry higher interest rates and substantial fees, but they allow people who would not qualify for a market-rate conventional mortgage - "A" loans - to become homeowners or to remain homeowners by refinancing or taking out a second mortgage.

In today's market, the most creditworthy borrowers can get a 7 percent loan with no points. A point represents 1 percent of the borrowed amount and is charged to the consumer in exchange for a lower interest rate.

Legitimate lenders typically charge 9 percent to 9.5 percent for sub-prime loans, said Alan R. Ingraham, regional vice president of First Horizon Home Loans MNC Division.

But ACORN's Klein said his group regularly sees interest rates of 25 percent on refinanced loans for borrowers with poor credit.

"On first mortgages we are seeing between 12 and 20 percent. We regularly see stuff like that," Klein said.

Most of the fraud occurs in the sub-prime market, consumer advocates say. Because sub-prime lenders generally sell their loans directly to the secondary-mortgage market instead of to the government-chartered mortgage investors Freddie Mac and Fannie Mae, sub-prime loans are not as closely scrutinized as conventional loans are.

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