The Legal Fleecing Of Poor Minorities

Corporations that prey on the poor and elderly

Third-age home

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Daisy Thompson, a 48-year-old African American Headstart teacher with a round, friendly face and smooth dark skin, sits at the living room table of her modest two-bedroom home in South Dallas. Her daughters cook meatloaf and cornbread for dinner, while her four grandchildren wriggle in and out of her lap, stretching out their blue Kool Aid-stained tongues and hamming for a laugh.

Thompson gives a weary, appreciative smile, but as her eyes lower to the mortgage refinancing papers stretched out in front of her, her expression sinks into confusion and despair. "I used to think that I would be leaving this home for my family," she says with a sigh. "Now I will just be leaving them a mountain of debt."

It only took a blown engine and a half hour with the loan officer from Beneficial, a subsidiary of lending giant Household International, to convince Daisy to turn her home from an asset into a burden. In 1998, when Thompson's four-year old Hyundai rolled to a stop with a loud knock and a plume of smoke, she was left without any way to get to work. When Thompson realized it would take a few thousand dollars to replace the engine, she called Beneficial, whose flashy brochures had appeared regularly in her mailbox. Filled with smiling customers and bright, bold slogans like "We're here to help you," the brochures seemed to provide an answer.

But when the Beneficial loan officer arrived at her house, Thompson found out the loan would come with a steep price. He told her that she didn't qualify for a personal loan, but she would be able to borrow $10,000 by rolling all her debt together and refinancing her home at 18.5% interest. Thompson, who at the time had only seven years left on her mortgage, felt like she didn't have any other choice. "He smiled a lot, looked me in the eyes, and told me that he was here to help me with my financial situation," she recalls. "I needed to get to work, I didn't know what to do. I just signed it."

Thompson says she later tried to get out of the loan, but couldn't. So last year, when she needed a new roof, desperation drove her back to Beneficial. Once again, they told her refinancing her house was her only option. This time, even though her mortgage was extended until 2030 at 14% interest, she did not receive any cash for refinancing. Beneficial, on the other hand, made out pretty well. They issued Thompson a $4,300 personal loan at 19% interest to fix her roof, and the refinancing earned the company almost $3,000 in fees.

The fees included $1,800 for single premium credit insurance (insurance where the premium is added to the principal instead of charged monthly), which adds thousands of dollars to the interest payments. Consumer advocates such as Rob Schneider, Senior Attorney at the Consumers Union argue that single premium credit insurance is a scam. "Single Premium Credit Insurance is only sold in the predatory market," says Schneider. "Since they initially finance the cost of the insurance, the interest can easily end up doubling the cost - with no added benefit." In Thompson's case, the blow was softened a few months later when her application was rejected by the insurance carrier, and she was issued a refund.

Schneider says that an honest banker would never have refinanced Thompson's house for a $10,000 loan. If a conventional lender had agreed to issue a loan, Thompson's options would have included borrowing against the equity of her house, without refinancing. But since Beneficial got to her first, she now pays $647 of her $1,400 monthly salary in loan payments ($534 for the mortgage, and $113 for the personal loan), leaving only $753 to support a seven-member family.

If she doesn't make her payments, she risks losing her house. She will continue to pay off her mortgage until she is 76 years old, and unless she refinances for a better deal, the fees and interest will add up to more than $100,000. That's enough money to buy a whole fleet of Hyundais, or put a grandchild or two through college. Thompson's story is just one example of a widespread practice known as predatory lending, which has grown exponentially in the past decade along with growth in the so-called "subprime" lending market. Subprime lending, which features an interest rate as much as twice that of prime loans, can provide credit to individuals with low incomes, few assets, or poor credit history. However, critics say that lax laws allow unscrupulous lenders to take advantage of borrowers who are desperate and lack experience.

Borrowers end up tethered to debt for years, and those who can't keep up lose their homes.

The debt burden is hardly necessary. A 2001 Fannie Mae study found that 35 to 50 percent of subprime borrowers could have qualified for a prime loan. Many of these borrowers end up tethered to debt for years, and those who can't keep up lose their homes. A study by the Coalition for Responsible Lending estimates that predatory lending costs borrowers $9.1 billion dollars annually through excessive interest rates (above what would be reasonable for the additional risk), hefty fees, prepayment penalties, and single premium credit insurance. Including the cost of foreclosures would likely add billions more to this estimate.

Michael May is a writer living in Austin, Texas.
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