Consider these two adages: Owning your own home is the American Dream, and if it sounds too good to be true, it usually IS too good to be true.
Advocates worry that low-income taxpayers are paying too much attention to the first and not enough to the second, as predatory lending practices promise to make them homeowners, but instead put them in far worse financial shape than they were before.
Bad lenders aggressively target low-income neighborhoods, offering loans based on inflated appraisals with high annual interest rates and payments the borrower cannot afford. The terms can practically guarantee default and foreclosure.
Predatory lending costs U.S. consumers about $9 billion annually in excess interest and fees, according to the Coalition for Responsible Lending. The Indianapolis Star reported that such practices cost Indiana residents an estimated $148 million in 2000, and the state ranked No. 2 in the nation for foreclosure rates for the second quarter of this year, according to the Mortgage Bankers Association of America.
Indiana Legal Services and other community groups, are teaming up to educate residents about predatory lending. Legal experts on a "victim rescue" team will review loans, refer cases of suspected fraud to the Indiana attorney general's office, or to other agencies, and negotiate fairer terms with the lender, in some instances. Other states and communities are working to stop unfair lending practices that target the poor.
The Wisconsin Credit Union League, for example, is helping low-income residents avoid costly ârefund anticipation loans,â or RALs, by providing a no-cost alternativeâa basic deposit account into which their IRS refunds can be deposited. The league says that the RALs can charge interest as much as 521 percent APR, siphoning hundreds of dollars from a typical refund. Credit unions, the Wisconsin Department of Revenue and the Volunteer Income Tax Assistance program, are working together to educate low-income filers, while providing free tax preparation and arranging for a quick refund at no cost.
The credit unions are also looking at the bigger issue: Low-income people are using paycheck advance services, wire transfers and other options, to handle immediate needs, instead of services from a not-for-profit credit union.
"RALs are just one example of how predatory services hurt Wisconsin," said Brett Thompson, President & CEO of The Wisconsin Credit Union League. "Just look at the payday lenders popping out of just about every strip mall. People who use them for a short term loan often find they can't afford to pay it back once the high fees and interest are applied, and take out another loan and another until they're completely mired in debt. This effect depresses a whole segment of our economy."
Some victimsâthose who used the services of now-defunct AmeriDebt and DebtWorksâshould get some of their money back. AmeriDebt founder Andris Pukke has settled two lawsuits accusing him of charging low-income customers exorbitant fees that were used to fund his own lavish lifestyle, the Washington Post reported. If the settlement is approved by a judge, up to $35 million will be deposited into a fund to pay back 300,000 former AmeriDebt customers.
The Association for Community Reform Now (ACORN) is targeting Wells Fargo for alleged discriminatory practices. Last year it filed two lawsuits that allege that it unfairly adds surcharges to loans for minority homebuyers and misleads many into accepting unfairly high rates on second mortgages.
Wells Fargo head, Richard Kovacevich, told Bloomberg news: "We are responsible lenders, and we price for risk; we don't price for race. We don't do predatory lending. And the American consumer is better off that we take that risk. We just have to get paid for it."
Norman Metzger, executive director of Indiana Legal Services, warns consumers to stay away from predatory lenders.
Referring to mailings from mortgage companies that he commonly receives, he told the Indianapolis Star, "You're pre-approved for a mortgage at 110 percent of your appraised value. What does that mean? . . . If it's too good to be true, it's probably not true.â