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UNFAIR
OR "PREDATORY" LENDING practices are a complex
problem. Difficult to define, predatory lending refers
to a variety
of abusive
lending
practices that may occur singly or in combination: excessive
or hidden fees, refinancing of loans at no benefit to
the borrower, offering a loan knowing the borrower lacks
the means to repay it, and using high-pressure sales
tactics to sell a loan (U.S. Department of Housing and
Urban Development [HUD] 2003*).
It is usually undertaken by brokers, creditors, or even
home improvement contractors.
Most prevalent in the subprime mortgage market, borrowers
typically use the collateral in their homes for debt
consolidation or other consumer credit purposes.
While there is little information about the scope of predatory lending (Gramlich*), it negatively impacts both
individual borrowers and communities. Racial minorities, who may have trouble
obtaining credit because of discrimination,
are one target of predatory lenders. So are the elderly, who are income-poor
but often have significant equity in their homes. (HUD 2003*).
The outcomes of unfair lending practices are severe. Predatory lending is likely
to lead to the
borrower becoming delinquent in payments or even be faced with foreclosure. Predatory
lending also harms more than the borrower. Efforts to revitalize neighborhoods
and promote home ownership are weakened when foreclosed homes occur in a neighborhood
(HUD 2000*).
Increasing consumers’ literacy about the basics of mortgage credit, how
to shop among lenders, and how to best finance household debt is a necessary
strategy for combating predatory lending. Nonprofit organizations play a significant
role in educating borrowers before they take out a loan or a mortgage, counseling
borrowers if they have trouble paying off a loan, and referring them to legal
assistance if they have been a victim of a predatory loan. Consumer education
is especially necessary for those who have little experience with the lending
market. In one survey, 12 percent of subprime borrowers stated that they were
not familiar with fundamental financial terms such as interest rate and principal
and one-third of subprime borrowers don’t know about different types of
mortgages available (HUD 2000*).
To be effective, financial education programs should:
Carefully research and
plan
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Study the extent of
lending problems in your area. What is the frequency
of delinquency in the area, and who are the most common
defaulters on loans? Is there a connection between
the defaulters and the type of loans they hold? (Clevenger
and Hopley*). |
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Build ties to local lenders and
banks. Often financial counseling is required for certain
types of commercial loans, and programs must be on
top of all the different types of loan products and
techniques used to sell them (Wiranowski*). |
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Identify instructors with extensive
knowledge of the loan market in your particular area.
Local professors and bankers might volunteer their
time (Wiranowski*). |
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Tailor the type of instruction based
on the focus of the program. Some programs offer financial
counseling in general, while others are geared specifically
toward clients thinking of buying a home or other large
purchase. |
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General financial counseling should
cover topics such as budgeting, managing credit, and
organizing debt (Clevenger and Hopley*). |
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Home ownership finance counseling
should cover the above topics and add instruction on
home selection, financing, repair, and managing home
ownership (Clevenger and Hopley*). |
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Distinguish between counseling before
the loan is made and counseling to prevent delinquency
once a loan is secured (Wiranowski*). |
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Pre-loan or “sustainability” counseling
should address basic financial literacy, budgeting
for taxes, other debts, and home repairs if applicable.
Sustainability counseling is effective in lowering
rates of delinquency, both by educating borrowers about
how to manage debt and by convincing some potential
borrowers to wait until their financial condition is
improved before they take out a large loan (Hirad and
Zorn*). Also educate borrowers about common scams,
their rights of recourse, and the three-day window
to back out of a loan contract (Goldstein*). |
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Delinquency counseling should identify
the cause of delinquency (family difficulties, job
loss, etc.), assist clients in negotiating with creditors,
and refer them to legal assistance is necessary. It
should also focus on focus on how to access resources
for loan payments and how to alter budgeting and spending
patterns (Wiranowski*). |
Outreach,
counseling, and follow-up
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Make a concerted effort
to attract clients. With the exception of some low-income
home mortgage loans, where counseling is required by
law, borrowers are often very reluctant to obtain financial
education. Sometimes this stems from a lack of time,
but often borrowers are wary of trusting advice they
receive. They may also be reluctant to admit they are
not financially knowledgeable (Clevenger and Hopley*). |
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Build trust with clients. There
is a niche for nonprofits as trust-building institutions
that help borrowers become comfortable with the risks
in the loan process (Wiranowski*). |
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Use a series of group classes discussing
general topics, followed by individual counseling in
which personal finances are discussed (Wiranowski*). |
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Provide clients with information
on the different types of loans and mortgages offered
on the market (Goldstein*). Such information may
help clients obtain better loan terms: between 35 and
50 percent of those borrowing for a home at subprime
rates actually qualify for a prime rate mortgage (Association
of Community Organizations for Reform Now*). |
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Continue to collect track records
on local lenders and loan services (Wiranowski*). |
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Develop ties to local legal aid
and bar associations (Carr and Kolluri*). |
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Build working relationships with
loan services and mortgage insurers (Wiranowski*).
Some possible partners include HUD, state housing finance
agencies, rural and community development agencies,
private mortgage insurers, and local governments. |
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If resources allow, offer a hotline
for clients with questions or concerns to get advice
over the phone (Clevenger and Hopley*). |
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Follow up on clients for one year
after the loan is made (Wiranowski*) |
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Evaluate the program, particularly
the rates of later delinquency and/or foreclosure and
borrower satisfaction with the loan (Wiranowski*). |
PREDATORY LENDING RESOURCES:
PUBLICATION FINDER
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Financial Literacy:
An Overview of Practice, Research, and Policy
Sandra Braunstein and Carolyn
Welch
A summary of financial literacy
programs, providers, and evaluation research findings.
The paper also discusses the best means, setting, and
timing for financial literacy training. Washington,
D.C.: Federal Reserve Board, 2002. |
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Personal Finance and the
Rush to Competence: Financial Literacy Education
in the U.S.
Lois A. Vitt, Carol Anderson,
Deanna M. Lyter, Jurg K. Siegenthaler, and Jeremy
Ward
An in-depth look at the major trends in financial literacy education, the challenges
faced by program managers and educators, and the dimensions of effective programs.
Also includes chapters on different program delivery models such as workplace,
community based, and cooperative extension. Middleburg, VA: Institute for Socio-Financial
Studies, 2000. |
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PREDATORY LENDING RESOURCES:
WEB SITE FINDER
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