August 4-10, 2005

city beat

Illustration By: Hyacinth Hughes

The state Legislature is finally poised to put a muzzle on predatory lenders.

by Alex Dubilet

When Bridget Hinton and Clifton Glover decided to buy their house on North 17th Street for $18,000, they thought it would be a perfect fit for their growing family. The couple paid $10,500 upfront and agreed to pay $230 a month until the five-bedroom house was paid off. The biggest challenge seemed to be making the yellow-bricked row home off Lehigh Avenue livable again. It had stood uninhabited for years.

A year later, the owner demanded the rest of the money, but Hinton and Glover couldn't come up with $6,000 on short notice. "We sold everything we could to get the money," Glover remembers, standing in the middle of their dimly-lit living room. "We didn't have anywhere else to go."

Their only option, the realtor told them, was to take out a mortgage. That's when their nightmare began. The broker told them that the smallest mortgage they could take out had to be closer to $40,000. At the time, Hinton sensed something was not right, "If I gave her $10,500 already, why am I about to have $38,000 mortgage?" But they were told to take it, or move out. So they signed the papers. Only later did they realize how severely they were victimized.

Glover and Hinton's case is frighteningly common. Predatory lending, as the phenomenon has come to be known, emerged out of the deregulation of the Reagan years, but has only really taken off in the past decade. Predatory lenders target borrowers with flawed credit histories or what is known as the "subprime market" — specific groups like minorities groups or the elderly, explains Ira Goldstein of The Reinvestment Fund, the leading research nonprofit on the issue.

Taking advantage of the borrower's inexperience, lenders convince them to take out disastrous mortgages or refinance their existing homes on horribly disadvantageous terms. Exorbitant and undisclosed fees, unjustifiably high points, prepayment penalties and loans packed with life and disability insurance are common tactics. More often than not, the result is foreclosure. Now, with a foreclosure crisis on their hands, Pennsylvania's legislature might finally take action to curb the widespread abuses of predatory lending.

Foreclosure was also the crisis point for the Hintons. Last year, after staying afloat for more than three years, they fell behind on their inflated mortgage payments. Not too long after, they received the foreclosure notice in the mail. That's when Hinton went to see Carnell Bellamy of Northwest Counseling Services, a Philadelphia housing agency. "They took [them] to the cleaners," Bellamy says, "I imagine the broker, the realtor and the seller were working together." The mortgage form was full of fraud, not even showing the down payment. Somehow the seller received twice what she was owed, while Hinton and Glover got credit for only a fraction of the money they paid.

"There are neighborhoods where one in five transactions are predatory," says Goldstein, pointing to neighborhoods all across Philadelphia that have been particularly hard-hit, from Kingsessing to West Oak Lane to Port Richmond. "I would say probably of those predatory loans, eventually easily half to two-thirds wind up in foreclosure."

Or, as Irv Ackelsberg of Community Legal Services, a leading advocate on the issue, says, "It is very sick, immoral, low-life creeps … that are robbing good, unsuspecting people of the little bit of wealth that they have."

Philadelphia City Council tackled the issue of predatory lending back in 2001, after it was exposed in the Daily News. Resisting strong lobbying from the mortgage industry, Council, under the leadership of Councilwoman Marian Tasco, unanimously passed what advocates considered the strongest anti-predatory lending law in the country. But victory was short-lived. That summer, the state Legislature pre-empted the law, replacing it with a watered-down version that left many Philadelphia residents vulnerable to unscrupulous lenders.

In 2003, the state revisited predatory lending in earnest. The Reinvestment Fund was hired to study the issue and the findings, released earlier this year, were disturbing. Pennsylvania's subprime foreclosure rate was a whopping 11.9 percent, making it fourth worst in the nation, with the leading explanation for it being abusive lending practices.

Sometime after the state House reconvenes this September, the Department of Banking is expected to introduce a package of five bills that, it says, will curtail many of the most egregious offenses of predatory lending. The legislation will end prepayment penalties (penalties for paying back mortgages early), require licensing of individual brokers, and make regulation of violators easier. This way, the state can keep a firmer grip on lenders who repeatedly prey on borrowers.

But advocates are not sure that is enough.

"We don't really agree that the regulation will be all that helpful," says Brady Russell, Pennsylvania legislative director for the advocacy organization Association of Community Organizations for Reform Now (ACORN). "We really want to see laws that will actually provide guaranteed consumer protections.

The proposed end to prepayment penalties is one such protection, but if the banking industry comes out strongly against it, Russell says that it might not become law. To protect consumers, ACORN is advocating for a legal definition of subprime loans and mandatory pre-closing counseling for those loans that exhibit a variety of negative "trigger" characteristics.

"Buying a home is the biggest financial decision," Russell says. "If you don't provide financial literacy then, when are you going to do it?"

Forcing lenders like Hinton and Glover to get counseling prior to signing a mortgage can go a very long way to eradicating predatory lending at its roots. Even though opportunities for consumer education on the issue have multiplied — Philadelphia has a "Don't Borrow Trouble" hot line and a number of housing counseling agencies all across the city to tackle the issue — most victims don't realize that such help exists until they are in foreclosure.

A resolution for Hinton and Glover might also be in the works. Having staved off foreclosure, Bellamy has just handed over their case to the Pennsylvania Human Relations Commission, which has successfully prosecuted recent predatory lending cases.

Meanwhile, back on 17th Street, life goes on. Glover explains how the financial quagmire and the constant uncertainty have stalled all of his plans for home improvements. He imagines finishing his son's second-floor bedroom, enlarging the bathroom for himself and Hinton and fixing the leaking roof. Then he stops. "But, I don't want to do anything if they are going to take the house. I don't know what to do," he says. "So now we just [take it] one day at a time."

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