Work to Stop Predatory Lending Practices

Date: Tuesday, January 31, 2006

By: Michelle Singletary

WASHINGTON -- The practice of predatory lending strips billions of dollars

in home equity from low-income and minority consumers each year, according

to the Center for Responsible Lending, a nonprofit, nonpartisan research and

policy organization. Consumer groups try hard to draw attention to this

problem. But it's hard to get sympathy or needed federal legislation enacted

for low-income borrowers or people with poor credit because often, the

sentiment is that these folks get what they deserve. That may be changing,

however.

In one new development, the Opportunity Finance Network, a national

organization of 167 financial institutions, has pledged to originate $1

billion or more per year of mortgages to subprime borrowers (typically

people with insufficient credit histories or a record of blemished credit)

by 2010 to combat predatory lending.

``We are developing a national responsible subprime mortgage platform to

challenge predatory lenders who are stealing wealth from homeowners," Mark

Pinsky, president and CEO of the network, said during a teleconference about

the new initiatives.

``We want to demonstrate that it's possible to be a responsible subprime, a

fair lender," Pinsky said.

In other news that I hope will also change how lenders deal with borrowers,

Ameriquest Mortgage Company, the nation's largest subprime lender, has

agreed to pay $325 million ($295 million to compensate borrowers and $30

million to reimburse states for fees and legal costs) and refrain from

practices that state law officials allege were predatory. Consumers in 49

states and the District of Columbia who obtained loans from Ameriquest from

January 1999 through December 2005 will be eligible for restitution.

Virginia was excluded from the agreement because Ameriquest did not make

loans in that state.

According to the Pennsylvania Attorney General's Office, Ameriquest

employees were alleged to have deceived thousands of consumers by using high

pressure tactics to boost their monthly quotas and commissions. Consumers

claimed the company misrepresented the actual amount of interest they had to

pay, inflated home appraisals that resulted in owners getting loans they

couldn't afford, and failed to clearly disclose fees or penalties associated

with paying the loans off ahead of schedule.

As part of this multistate settlement, Ameriquest denied any wrongdoing, but

agreed to a set of standards that the states expect other mortgage lenders

to follow. Here are some of the provisions from the settlement:

-- Ameriquest must provide clarity to borrowers orally and in writing about

all loan terms, including interest rates, fees and prepayment penalties.

-- The lender cannot enter into any nonprime-refinance loan that does not

provide a benefit to the borrower.

-- The company cannot provide incentives that encourage its employees to

include prepayment penalties in mortgages or any other fees or closing costs

-- Ameriquest has to take steps to ensure all appraisals are accurate, that

appraisers do not inflate property values, and that no employees influence

the appraisal process. The company must now use an automated system to

select appraisers from panels created by each state.

-- Personnel will not encourage potential borrowers to falsify their income

sources or assets.

I want to go back to the first item on the list -- a promise by Ameriquest

to clarify loan terms. There are short scripts in the agreement that every

homeowner or potential borrower should take with them to their closing. Even

though every borrower is supposed to get paperwork clearly stating what the

terms of their home loans are, they often don't read it or understand it. So

with the Ameriquest agreement, you now have in plain English what you should

be told verbally.

In the Ameriquest agreement, its sales staff has to say the following if a

borrower is getting a nonprime fixed-rate loan:

`The loan we have been discussing is a (insert the term of the loan) year

fixed rate loan for (insert loan amount). The interest rate is (insert

interest rate). The monthly payment is (insert monthly payment), which does

(or does not) include escrows for property taxes or insurance. Your loan

does (or does not) include a prepayment penalty.''

If you're getting a loan that has an adjustable rate, this is what you

should be told:

``The loan we have been discussing is an adjustable rate loan for (insert

loan amount), with an initial interest rate of (insert initial interest

rate). Your initial monthly payment would be (insert initial monthly

payment), which does (or does not) include escrows for property taxes or

insurance. Your loan does (or does not) include a prepayment penalty.''

You should also be told (as laid out in the Ameriquest agreement):

``Because this is an adjustable rate loan, the initial interest rate and

monthly payment I quoted you are only guaranteed for the first (insert

length of initial fixed rate period) of the loan. After that, your interest

rate can increase by up to (insert rate adjustment cap) percent each year.

But, your interest rate can never be higher than (insert lifetime cap)

percentage points over your initial interest rate.''

If the loan includes a prepayment penalty, the loan officer should clarify

the following:

``This loan contains a prepayment penalty. That means if you pay off or

refinance your loan within (insert the length of the period) you will pay a

fee of as much as (insert the amount of the fee in dollars). You may be

eligible for a loan without a prepayment penalty, but you would then pay a

higher interest rate and a higher monthly payment.''

In a news release, Aseem Mital, chief executive officer of ACCCH, the parent

company of Ameriquest, said: ``This agreement is good for consumers and fair

to the company. It provides a framework for new lending policies that

improve and enhance our ability to serve our customers and are a model for

the industry.'' I hope this agreement put all lenders on notice. Every loan

officer should repeat the simple scripts laid out in the Ameriquest

settlement. Because, truth be told, many people -- not just the low-income

or the credit challenged -- have signed loan documents with terms they didn

t understand.

Listen to Michelle Singletary discuss personal finance every Tuesday on NPR

s ``Day to Day.'' To hear her reports online go to www.npr.org. Readers can

write to her c/o The Washington Post, 1150 15th St., N.W., Washington, D.C.

20071. Her e-mail address is singletarym@washpost.com. Comments and

questions are welcome, but due to the volume of mail, personal responses may

not be possible. Please also note comments or questions may be used in a

future column, with the writer's name, unless a specific request to do

otherwise is indicated.

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