Sunday, February 18, 2007
HOW TO PROTECT YOURSELF
Five ways to avoid being a victim of predatory lending:
If you need a loan, first check with your local community bank, credit union or a local lender with a good reputation and roots in the community.
Beware of "great deals" that come by way of the phone, mail, fax or Internet. More often they are scams.
Read all the paperwork carefully before signing anything. Show your mortgage agreement to a lawyer or housing counselor. A housing counselor can be found by calling the state's 2-1-1 information line, or by going online to www.mainehomeworks.org/homebuyprov.htm.
Know your credit score and what kind of loans you qualify for.
Beware of home improvement contractors who offer to finance work on your home.
Source: Office of Maine House Speaker Glenn Cummings
A mortgage broker recently left a message on Jennifer Richardson's home answering machine suggesting it was time to refinance again.
This time, she didn't call back.
Since she bought her one-level ranch in Lewiston six years ago for $73,000, she has refinanced five times and has incurred $58,000 in fees and penalties.
She said she now understands that brokers sometimes give people advice that is not in their best interest.
"I have been misled and taken advantage of," said Richardson, 36, who works seasonally at L.L. Bean and also as a substitute teacher. "They know it. It's almost like they prey on people."
Richardson's story is a familiar one for advocates of a bill that seeks to curb the practice of charging people exorbitant fees and interest rates for mortgages.
Because of Maine's high rate of home ownership and below-average incomes, Mainers are particularly vulnerable to predatory lending, said Carla Dickstein of the Coastal Enterprises Institute, a community development corporation based in Wiscasset. She said the state's laws aren't strong enough to protect residents from abusive lending terms, "It's an unfair playing field," she said. "The regulations have to be stronger to eliminate the economic incentive for companies to gouge people for their fees."
Thousands of Mainers have been victimized by predatory lenders, according to a study the institute released last year. The report looked at the abuse of subprime lending, the market for people whose income, debt or poor credit rating means they can't qualify for a standard home loan.
The study estimates that in 2000, Mainers lost more than $23 million in home equity to predatory lenders and that the subprime lending market grew from $320 million in 2000 to $1.8 billion in 2005.
In a one-year period ending in June 2006, 125 consumers filed written lending-related complaints with the state Office of Consumer Regulation. A fourth of those consumers said that their costs were greater than expected when they arrived at closing, according to a study the agency released in December.
Alternative mortgages were widely used in the refinancing boom during the last housing expansion. In many cases, they opened the door of home ownership for people who would not have qualified for conventional loans.
One popular mortgage, for example, is a product called the "2/28." A borrower gets a fixed "teaser" interest rate that allows them to afford monthly payments. After two years, the loan becomes an adjustable-rate mortgage, and the rate can jump up several percentage points, in some cases as high as 14 percent - for the next 28 years of the loan. At that point, borrowers can refinance again, and they may be able to get a better rate if they have managed to repair their credit.
But often their credit remains poor, and they pay more fees to refinance again to get another "2/28." That's what happened to Richardson, who had three such mortgages with different companies.
BAN ON 'FLIPPING'
Since the housing market began to decline last year and the number of defaults has risen, investors have begun to lose interest in risky loans. The industry has begun rapidly tightening credit standards.
In addition, several states, including Massachusetts, Rhode Island, North Carolina, New Mexico and Ohio, have recently imposed "onerous" new restrictions on loans, and that has also hurt the subprime market, said Jim Demers, president of the New England Financial Services Association, a New Hampshire-based trade group that represents several large consumer finance companies, such as Wells Fargo and City Financial, and also several companies involved in the subprime loan market
He said his group is not opposed to additional consumer protection, but he said the Maine Legislature has to take a "balanced" approach so that lenders don't abandon the subprime market and stop making loans to people with weak credit. If that happens, he said, many Maine families will be denied credit.
"Your highest risk people," he said, "are going to find less credit options available because lenders won't make those loans."
The bill that curbs predatory loans is still being drafted. Its sponsor, House Speaker Glenn Cummings, D-Portland, said the bill's major points are the following:
n It changes Maine law to limit the fees that lenders can charge customers.
n It bans the practice of charging penalties when people pay off their high-cost mortgages ahead of schedule and limits them for all loans.
n It protects consumers' ability to take their lenders to court, and requires all lenders to consider a borrower's income before making a loan and factor in property taxes and insurance when calculating a consumer's ability to make loan payments.
n It requires consumers who are taking out high-cost mortgages to receiving credit counseling.
n It gives the Attorney General's Office the authority to prosecute cases and creates two new enforcement positions in the state Office of Consumer Regulation.
The bill's most significant component prohibits the practice of "mortgage flipping," which occurs when brokers encourage borrowers to refinance even though they would have no financial benefit.
The victims of predatory lending are not only consumers, Cummings said.
"Good, responsible lenders are being hurt as well," he said.
Groups such as the AARP, the Maine Association of Community Banks and the Maine Credit Union League support the legislation. The Mortgage Bankers Association of Maine supports the effort but is waiting to see the bill before endorsing it, said Tony Armstrong, who chairs the group's legislative committee.
Armstrong, who is also president of Maine Home Mortgage Corp., said there are a small number of brokers in Maine who buy lists of people with poor credit and use aggressive telemarketing techniques to convince them to refinance.
VICTIMS TYPICALLY POOR
Sometimes, refinancing helps people get cash to pay off a high-interest credit card debt, he said. But at other times, the lenders are selling high-cost loans to people who don't need them.
"Our biggest concern is for consumers in the state of Maine not to be ripped off by unsavory mortgage lenders," he said. "I've been in this business for 20 years. We do not appreciate the cloud that comes over the whole industry as the result of a small number of lenders who conduct themselves with predatory techniques."
Some lenders who generally support a crackdown on predatory lending also worry that the bill could be too restrictive. One area of concern is the proposal that would prohibit brokers from making refinancing deals that have no benefit to the customer. Many Maine mortgages are quickly resold to other financial institutions on what is known as the "secondary market."
But the "no-benefit" kind of determination would be so subjective that companies in the secondary market might stop buying Maine mortgages, said Mark Walker, an attorney for the Maine Bankers Association. Laws that tighten up the supply of money would make loans more expensive, he said.
Cummings said he's certain that Maine can learn from the experiences of other states and craft a bill that protects consumers without hurting the secondary market.
The victims of predatory lending practices are often poor people or familes who are faced with a financial crisis, such as mounting medical debt, said Dickstein, of CEI.
About 65 percent of subprime loans are taken out so the borrower can pay off other debts, according to the CEI study. But the study found that at least 15 percent of the subprime mortgages in Maine between 2003 and 2005 went to families who could have qualified for conventional mortgages.
John Rappette, 43, of Bridgton said his real estate agent steered him to a broker who sold him a subprime loan as well as a second mortgage that had an even higher rate. He refinanced three times and ended up paying $26,000 in broker fees and penalties. A local banker later told him that his credit score was high enough to have qualified him for a conventional loan that would have had a much lower interest rate.
"I got taken for a ride," Rappette said. "They strip your equity from right under your foot, and you don't even know it."
Staff Writer Tom Bell can be contacted at 791-6369 or at:
tbell@pressherald.com
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