Looking out for lending abuses

HUD Credit Watch tightens its review

Power to bar offenders

An industry veteran denounces the predators

October 27, 2002|By Anne Lauren Henslee | Anne Lauren Henslee,SPECIAL TO THE SUN

Questionable industry practices have taken top billing in the latest fight for minority, elderly and low- to middle-income homebuyers, and the government is trying to do something about it.

"Predatory lending comes into play where you have people with marginal incomes who can't get financing because there is a credit problem or there is an income problem, and the banks just won't give them financing," said James Crockett of James Crockett Realty Co. in Baltimore. "Then they have to seek secondary financing, or subprime financing, and that's where the predators come in."

Predatory loans result when a lender misleads or coerces a borrower into taking out a home loan (including a home equity loan or refinancing) at excessive costs and without regard to the homeowner's ability to repay the loan, according to FDIC Consumer News, a publication of the Federal Deposit Insurance Corp.

The elderly and middle-income consumers are most vulnerable, the FDIC warns, and the consequences often involve harassing collection tactics, schemes to refinance at higher rates or fees, or foreclosure on the property.

"There is money available for people to buy, but the requirements of the lenders and the discrimination of the lenders prevent them from being able to buy," Crockett said. "They use regulations to discriminate against buyers, and they just disqualify a person from buying a home. ... I'm talking about individuals who have jobs, they have money, but banks just won't finance them.

"You would think that a person with marginal income, who had mediocre credit, a lending institution would be amenable to making a loan to them at a reasonable rate to prevent a foreclosure," he said. "But it's just the opposite. They charge higher interest rates to that person, and then they acquire the property, and then they turn around and sell it ... and they make a profit."

A surge in homeownership has brought with it an increase in lending abuses. In response, the U.S. Department of Housing and Urban Development is stepping up measures to prohibit lenders from illegal activities that can cost borrowers their homes.

HUD's Credit Watch Termination Initiative is expected to affect more than 21,000 home offices and branches of FHA-approved lenders nationwide.

HUD established Credit Watch in 1999, originally focusing its efforts on lenders whose default and claim rates exceeded 300 percent of the average rates.

Barring lenders

This month, however, HUD began focusing on lenders whose rates are 275 percent of the local average. The default and claim rate for Maryland is 2.14 percent, and 4.66 percent for Baltimore.

The provisions of Credit Watch give HUD the authority to bar lenders from issuing FHA-insured mortgages if their default and claim rates on loans are 200 percent of the average rate for that area and if that rate exceeds the national default and claim rate. Defaults are loans reported as 90 days or more delinquent by the servicing lender. Claims are HUD/FHA loans that were terminated.

To date, through Credit Watch, HUD has terminated lending approval for 120 branches nationwide and placed 219 branches on warning status.

Even giant corporations have found themselves under scrutiny. Case in point: Citibank Corp. agreed last month to repay customers $215 million to settle charges that Associates First Capital Corp., a company it acquired, had manipulated borrowers into buying inflated mortgages and credit insurance.

In Baltimore, HUD terminated lending approval for the local branches of Bankers First Mortgage Co., Capitol Mortgage Bankers and Harbor Financial Mortgage - all for what the department deemed predatory or unscrupulous lending practices.

The state has adopted measures of its own. In June, Gov. Parris N. Glendening signed into law a bill to pre-empt Maryland's cities and counties from enacting their own predatory- lending legislation.

Although regarded as industry-friendly legislation, it includes provisions that lenders must follow when originating loans carrying an interest rate 7 percentage points higher than a Treasury security or comparable security.

As the Credit Watch program shifts into high gear, HUD expects more sanctions to follow, as well as greater safeguards to prevent consumers from falling prey to other illegal lending practices. Some wonder why it has taken so long.

Crockett has been in the real estate business for nearly 50 years. He borrows from his own experience when relating how, though times have changed, discriminatory and unfair trade practices remain.

He believes that it has become more difficult in recent years for minorities and lower-income families to buy their own homes, despite government incentives purporting to help increase minority ownership.

Lisa Covington, a home-health aide, owned a modest, two-bedroom home in central Philadelphia. When she and her family moved to Maryland, she sold her house and began looking for a new one in North Baltimore.

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