Home equity lenders have been traveling over rough terrain during the last few months as Congress and various government agencies held hearings, issued reports, and started investigations aimed at uncovering predatory and fraudulent lending practices.
The lenders are now stepping up their efforts to educate consumers and Washington lawmakers about their business as part of an effort to change the image of the industry.
"It's a more risky form of lending," said David B. Silipigno, president and chief executive of National Finance Corp., Clifton Park, N.Y. "You can't regulate it to the point that it's not worth it to be in it."
Mr. Silipigno thinks the attention the legislators are giving the industry is good for helping to "police the entire industry." But he is also frustrated by the intense scrutiny.
"I think they paint with a pretty big brush over the entire industry for the few bad apples that are in it," he said.
To be sure, there is much to paint: the industry's wide variety of lenders includes mortgage banks, finance companies, credit unions, thrifts, banks, and mortgage brokers, according to the National Home Equity Mortgage Association. And even the largest home equity companies hold less than 3% market share, the organization said.
Close to 4.1 million new home equity loans were made in 1997 averaging $65,000, the association said. About 80% of these loans are also first liens, the organization said.
About nine million households had home equity loans in 1997-either lines of credit or traditional second mortgages-according to the April Federal Reserve Bulletin. Its article on recent developments in home equity lending reported that commercial banks are the primary source of home equity loans.
In a 1997 survey of consumer knowledge and satisfaction regarding home equity credit and installment credit found that satisfaction levels exceeded 90% for each of the types of credit.
In Mid-March, Sen. Charles Grassley, R-Iowa, chairman of the Senate's special committee on aging, held hearings on predatory lending practices that target the elderly.
During the hearings, the Federal Trade Commission said that it would be focusing more attention on abusive lending practices.
In 1997, subprime lenders originated more than $125 billion in home equity loans, the FTC said. It added that lender abuses focused on three areas: equity stripping, packing, and flipping. The commission defined equity stripping as the practice of making a loan based on the equity in a property rather than on a borrower's ability to repay the loan; packing refers to adding credit insurance or other items to increase the lender's profit on a loan; flipping is when a lender encourages a borrower to repeatedly refinance a loan within a short time and charges high points and fees with each refinancing.
The commission also unveiled a consumer brochure titled "Home Equity Loans: Borrowers Beware," which explains home equity loans and the potential pitfalls.
"The predatory abusive practices that seem to proliferate in the subprime mortgage lending industry are getting worse," said William Brennan, director of the home defense program of the Atlanta Legal Aid Society.
"We think these abusive practices disproportionately impact minorities and the elderly, but that's not to say that they're not marketed to everyone else who has less-than-perfect credit," he said.
Mr. Brennan has assisted and represented homeowners that have mortgages with finance companies that entered the mortgage lending business.
Mr. Brennan said he has observed and investigated abusive practices by such companies, including home improvement scams, kickbacks paid to mortgage brokers, and balloon payments, among others, by companies that include NationsBanc's NationsCredit Commercial Corp.; United Companies Lending Corp., a division of United Companies Financial Corp.; Money Store Inc., currently being acquired by First Union; First Alliance Mortgage Co., a subsidiary of First Alliance Corp.; and three companies owned by Associates First Capital: Associates Financial Services Co.; Ford Consumer Finance, which has changed its name to Associates Home Equity Services; and First Family Financial Services Corp.
"The high interest rates and points are not justified because there is little or no risk since they are lending 80% loan-to-value on valuable property," Mr. Brennan said. He hopes that Congress and the federal agencies with oversight take steps to deal with the abuses, he said.
"The word kickback is an absolute falsehood," a spokesman for Associates First Capital said. "We pay brokers fees for services rendered." He said a federal court had ruled that a payment of fees to brokers for services rendered is "legal, accepted, and a standard practice in the industry."
Associates-in business for 80 years with 18 million customers-is "a successful, respected company. None of those facts would be true if we abused our customers, the way the critics claim. Any company as large as we are will occassionally make mistakes. When we find mistakes we fix them," he said
The home equity industry did not have the opportunity to answer the accusations leveled against them at the hearings, said Wright H. Andrews Jr., Washington counsel for the National Home Equity Mortgage Association and a partner at the Washington law firm of Butera & Andrews.
While the elderly and other Americans with small incomes have been targets of predatory lending by companies looking to produce multiple refinancings of high-interest loans, Mr. Andrews said these practices do not represent the business practices of the majority of players in the home equity lending arena.
According to the association, individuals in their early 40s are the typical home equity borrowers. People under 50 represent 65% of borrowers, and 10% of borrowers are people over 65, Mr. Andrews said.
The typical customer of National Finance Corp., a retail lender in the subprime sector with a wholesale division that purchases loans from bankers and brokers, is between 35 and 50, with an income of $40,000, Mr. Silipigno said. National Finance uses the discretion of a loan officer and loan processor to decide if a customer should have a lawyer present to protect the customer and the company, he added.
The way the system now works, too many companies are getting lumped in with the bad ones, Mr. Silipigno said. Too many gray areas in regulations and the presence of head-hunting lawyers is making it difficult to operate in today's climate, he said.
The Department of Housing and Urban Development needs to get involved and make a final ruling so there will be one uniform code to follow that will make offenders easy to spot, he added.
A mortgage reform working group formed on Capitol Hill, with representatives from a spectrum of companies involved in the home equity loan business as well as consumer groups, has been meeting for close to a year to address both consumer and industry concerns. Both HUD and the Federal Reserve have been sending representatives to the mortgage reform group's meetings, Mr. Andrews said. The group plans to propose changes in disclosure and ways to deal with perceived abusive practices.
Mr. Andrews said the type of scrutiny now faced by the industry includes an investigation by the FTC to examine unfair and deceptive practices, HUD and Fed reports looking at disclosures and recommendations for additional protections from practices like loan flipping and other foreclosure protections, as well as the Department of Justice's investigation into fair-lending issues.
In response to hearings in the Senate, Mr. Andrews said "much of the allegations are overstated. But there are some fringe players that are doing things that are not acceptable."
Meanwhile, mortgage brokers are concerned about class-action lawsuits, Mr. Andrews said. And Mr. Andrews said the industry would hire a major public relations firm to tell the story of home equity lending.
Following the Senate hearings, Sen. Grassley wrote to United States governors, to the Justice Department and to the Federal Bureau of Investigation to encourage them to dedicate resources to this question, an aide said. In California, fraud units of the district attorney are active in cracking down on predatory lending, she said.
"We are looking at some lenders who are allegedly engaged in predatory lending," said a spokesman for the Department of Justice. "To the extent that we find any violations of the fair-housing act or the equal opportunity act, we would try to settle the case or file suit," he said.
Sen. Grassley is also considering legislative options to provide mandatory or optional counsel for older Americans contemplating home equity loans, an aide said.
The issues surrounding home equity lending are likely to lead to a major battle in the next session of Congress, Mr. Andrews said.