Published: May 19, 2000
HOMEOWNERS BEWARE
OF LENDING TRAPS
By Harold D. Pope
President, National Bar Association
When spring arrives, homeowners focus
on sprucing up their houses. Unfortunately, some minority and low-income
homeowners enter disastrous loan contracts that turn the American dream
of homeownership into a nightmare.
Minority and low-income homeowners--often
equity rich and cash poor--are targeted by subprime lenders that extend
credit to high-risk borrowers ineligible for conventional loans. Promising
quick cash, predatory lenders lock unsuspecting homeowners into high-interest
loans that drain equity and can lead to foreclosure.
Predatory lenders include high-rate,
high-fee creditors; payday or check-advance outlets; check cashing services;
rapid refund tax services; pawnbrokers; and unscrupulous home repair firms
that offer easy access to credit. Some predatory lenders charge annual
interest rates exceeding 700 percent.
Subprime home improvement and home
equity loans, which increased tenfold from 1993 to 1998, are among the
most frequent traps for minority and low-income homeowners. "Unequal
Burden: Income and Racial Disparities in Subprime Lending in America,"
a recent study by the U.S. Department of Housing and Urban Development,
found that subprime home loans are five times more likely in black neighborhoods
than in white neighborhoods. In addition, homeowners in high-income black
areas are twice as likely as homeowners in low-income white areas to have
subprime loans.
The growing market for subprime loans
represents a $200 to $300 billion industry. In the absence of traditional
financial institutions, consumers in minority communities rely instead
on finance companies and other less regulated lenders. Rising bank fees,
discriminatory lending, and increased personal debt also limit minority
access to mainstream credit and financial services.
Predatory lenders do not commit outright
fraud. Contracts spell out the terms and conditions of subprime loans.
Some contracts even warn that consumers will lose their homes if they
miss loan payments. But many consumers don't read the fine print that
details inflated interest rates, excessive loan fees, balloon payments,
pre-paid credit insurance charges and stiff penalties for default.
With minimal consumer protection or
enforcement, predatory lenders can charge unlimited interest. Consumer
education programs as well as legal and regulatory changes are needed
to protect vulnerable homeowners.
However, the consumer's best bet is to avoid predatory lenders. Beware of creditors who solicit door-to-door, pressure for a snap decision, or offer to lend up to 125 percent of the home's value over a toll-free number. Question and weigh interest rates, loan fees, penalties and insurance requirements. Offers that seem too good to be true probably are. Don't sign on the dotted line until you have read the entire contract, even the fine print. If necessary, ask a lawyer to review the contract with you. Remember: Contracts are binding. Your home is too valuable an asset to lose with the stroke of a pen.
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