Tuesday, May 3, 2016

Predatory lending in the context of home ownership continues in 2016 under another name



   Almost five years ago I wrote an essay about predatory lending practices that targeted African Americans and other communities of color.  Mortgage originators relaxed their standards to offer subprime mortgages, and in some instances, engaged in fraud so that they could make more loans at high rates of interest and therefore make more money.  Many consumers of color who qualified for prime or low-interest mortgages were offered only subprime, high-interest loans.  People of color who did not qualify for low-interest mortgages were offered subprime loans even though they had no or low incomes and no assets.  Lenders told these consumers that they would be able to pay off their mortgages as housing prices climbed.  But the housing bubble burst and housing prices plummeted.  Predictably, many borrowers could not repay these predatory loans.  The mortgages, however, had been pooled together to create securities that were sold to investors.  Banks and lenders were able to transfer foreseeable risks that borrowers would default on the underlying mortgages to investors who purchased the securities.  These are risks that should have been anticipated by lenders and the experts who advised them.  These risks were understandably unforeseen by borrowers with no economic expertise.

     Billions of dollars in wealth were drained from African American and Latino families when banks foreclosed on the homes of consumers who were victims of this predatory lending.  Communities were infested with unsightly, abandoned homes. Investors who purchased mortgage-backed securities lost billions.  Predatory lending harmed local, national, and global economies and helped to precipitate the economic downturn of 2008.

     In that article I described how banks and other financial institutions targeted people of color, and African Americans in particular, for high-interest predatory mortgages.  For example, a former Wells Fargo credit officer revealed in a sworn statement that the bank targeted African American borrowers for high-interest loans they could not afford because of the pervasive perception at the bank that African American customers were not savvy enough to figure out that the loans offered them were predatory.  Another loan officer admitted that African Americans who qualified for prime loans were targeted for subprime loans.  Yet another Wells Fargo loan officer revealed that African Americans were called “mud people” and the predatory loans offered them were labeled “ghetto loans.”  Loan officers targeted black churches also.  And, when loan officers referred borrowers who qualified for low-interest loans to the subprime division, they earned bonuses and higher fees. 

     In the aftermath of the predatory mortgage lending that targeted African Americans and Latinos, and even after the passage of the Dodd-Frank Act enacted, in part, to address this misconduct, the predatory practices used in the mortgage context werereplicated by the auto industry.  Auto dealers often connect auto buyers to lenders.  The dealers are allowed to engage in discretionary pricing when setting interest rates and there is evidence that dealers charge consumers of color more for their auto loans than they charge similarly situated white consumers.  As was true in the mortgage context, these predatory loans are assigned to other institutions.  When it was created, The Consumer Financial Protection Bureau covered auto lenders but only if they do not assign the loan.  The creation of the CFPB under Dodd-Frank left unprotected those consumers whose auto loans were assigned.

     The stunning audacity of this type of economic discrimination in the auto industry becomes even more outrageous when we consider the Bush administration’s decision to bail out Chrysler and General Motors along with the banks and other financial institutions near the end of the twenty-first century’s first decade.  The justifications for bailing out car companies were identical to the pro-bailout arguments made for the banks.  The argument was that like the banks, Chrysler and GM were too big to fail.  If they failed, massive layoffs at the two companies and the firms that supply them with goods and services would exacerbate the economy’s demise.


     Even more disturbing is the fact that predatory conduct in the context of home ownership continues in 2016 under another name.  On April 18, 2016, the New York Times reported on a relatively new practice that targets low-income homebuyers who are now unable to get mortgages because they lost homes in the recent downturn, and because banks now adhere to lending standards.  The deals allow home sellers to provide consumers with high-interest, long-term loans that are known as contracts for deed.  If the consumer can repay the loan in installments on time, he or she will own the home.  But two things make it unlikely for borrowers to be able to pay on time.  First, the interest rates are exorbitantly high.  Once again we see the terribly familiar practice of imposing interest rates that make repayment difficult if not impossible.  Second, many of the homes are in a state of disrepair and consumers need to spend money to make the home inhabitable.  When a would-be homebuyer defaults on the contract for deed, the lender may convert the contract to a month-to-month tenancy.  Even worse, the laws that protect homeowners who default on mortgages from eviction do not apply in this context.

3 comments:

  1. As long as people need money, there will always be someone to lend it to them... for a price. Like it or not, but credit scoring is the best indicator we currently have of someone's credit-worthiness: using their past use of credit as an indication of their future use. The higher the risk that a lender isn't going to be repaid then the higher the interest rate that the lender will charge. The best way to combat those seeking to exploit borrowers is to put the borrowers in a position in which they have the option to go elsewhere if the rate offered by a lender isn't the best they could get. That comes from effective money-management and education.

    Ryan Holden

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  2. I was amazed because the title says "predatory." It caught my attention and here I am reading this article. Thanks for the post.

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  3. Thank you for sharing such great information. It has help me in finding out more detail about house loan calculator

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