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| Monday, Mar 10, 2003 |
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Posted on March 09, 2003 Predatory lending: Deregulation in the 190s spawned 'fringe lenders'
In 1982, the S.C. Department of Consumer Affairs supported the concept of deregulation of rates in order to make credit more freely available, but the deregulation that resulted from Act 385 in some ways opened the door to the exceptionally high-rate lenders operating today. In the early 1990s, South Carolina began to see an influx of various types of "fringe lenders" or lenders other than banks, thrifts, credit unions or traditional consumer finance companies. Title lenders and payday lenders started businesses within the past 10 years and are legally charging rates that often exceed 300 percent annual percentage rate. The reason for these rates is the failure of savvy shopping by consumers and the failure of price competition between these creditors. It is critically important for consumers living in low-income areas to have access to credit, but this access should not be based on abusive lending practices that take advantage of the consumer. Predatory and abusive lending can take many forms, but generally these lenders take advantage of people in difficult financial situations. They also look for people facing financial problems as a result of an illness, injury or natural disaster. Predatory lenders count on the consumers' lack of financial knowledge in making decisions. To complicate matters, no state agency has the authority to regulate or regularly examine home-equity, first-mortgage loans, which makes it difficult to discover when these loans may violate the S.C. Consumer Protection Code. The Department of Consumer Affairs does not see this type of loan unless it goes through a mortgage broker or a consumer files a complaint. Even if a complaint is filed, the department has no means of requiring a review of the creditor's records unless the evidence in the complaint amounts to "probable cause" to believe the code has been violated. Unfortunately, a consumer's greatest asset, a home, is left without the protections of the code. Noting that there are lenders in the subprime mortgage market who play by the rules and serve communities that might have been underserved by other lenders in the past, I address some of the abusive practices that are occurring with some lenders in the industry. Let's begin with equity stripping, packing and flipping. Equity stripping occurs when a loan is made based on the equity in a property rather than on a borrower's ability to repay the loan. As a general rule, loans made to individuals who do not have the income to repay such loans usually are designed to fail. They frequently result in the lender acquiring the borrower's home and any equity the borrower had in the home. South Carolina must limit the amount of points and fees that may be financed in a home loan. Packing is the practice of adding credit insurance or other "extras" that increase the lender's profit on a loan. Lenders often stand to make significant profits from credit insurance and, therefore, have strong incentives to induce consumers to buy it as part of a loan. Credit insurance should be escrowed like hazard insurance rather than financed, to save homeowners thousands of dollars over the life of the loan. Flipping occurs when a lender induces a borrower to repeatedly refinance a loan, often within a short time frame, charging high points and fees each time. The code must be amended to make it difficult for predatory lenders to strip equity from an individual's home through this practice. A loan should not be refinanced if there is no "net tangible benefit" to the consumer. Additional protections would include the code mandating that both the homeowner and contractor be named on any checks issued for home improvements. This would give the consumer the ability to refuse to endorse a check for incomplete work or work that was never even started. Finally, the code must require that disclosures for a manufactured home be provided to the consumer at least two days prior to the sale to have the benefit of determining whether the terms are affordable and proper, or if desired, to discuss them with an attorney. Brandolyn Thomas Pinkston is acting administrator for the S.C. Department of Consumer Affairs. |
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