At a hearing replete with a disguised witness and videotaped testimony from a hospital bed, a Senate committee on the problems of the elderly leveled a blistering attack Monday on unscrupulous home equity lenders.
Elderly witnesses complained of hard-sell tactics used to peddle loans that they did not need and could not afford. The lenders are "stripping, flipping, and packing" their way to profits, said Sen. Chuck Grassley, R- Iowa, referring to some of the favored scams.
Sen. Grassley, chairman of the Special Committee on Aging, said victims are being tricked into mortgaging their homes for the false promise of quick cash.
The high-profile inquiry comes as banks and other mainstream lenders are looking to tap the home equity held by a growing elderly population. Subprime lenders, which make higher-rate loans to consumers who cannot secure bank loans, are not subject to the same federal regulations as banks.
Sen. Grassley and Sen. John Breaux, a Louisiana Democrat who co-chaired the hearing, took pains to say that their concern was not with all subprime lenders but with "bad apples" that are taking advantage of seniors. Still, witnesses raised such well-known names as Associates First Capital Corp. and NationsBank Corp. at a press conference before the hearing.
In one instance, a home improvement contractor convinced a couple to take out a $75,000 loan by promising them monthly payments of $43. The loan actually required monthly payments of $1,000, which the couple could not meet on their monthly Social Security income of $700.
The lender forged income documents to make the loan, stating that there was a rent-paying tenant living in the home. Eventually the lender foreclosed on the home.
Perhaps most damning was the testimony of a former finance company employee who appeared with a black bag over his head and spoke from behind a translucent screen.
The salesman and branch manager, who had worked with three major finance companies, said that elderly and blue-collar borrowers were targeted because they tend to be less educated and can be confused during the closing process.
The ideal subprime borrower would be "someone elderly, hopefully a minority, less educated, living on a fixed income," who owns his home outright, he said.
The employee said there was "forgery on a massive scale" at all three companies.
Keeping a job with a finance company requires "flipping," or constantly refinancing, loans and "packing" them with unneeded products like credit insurance, he said.
"You're under tremendous pressure to meet a quota," he said. "If your numbers aren't where upper management wants them, you're fired."
Employees were encouraged to call customers every three months and refinance them into larger loans, the employee said.
The hearing came on the heels of a "Dateline NBC" report about allegedly unscrupulous practices at Associates First Capital, Dallas, the largest home equity lender.
Several news organizations were working on follow-up stories, potentially creating a public relations nightmare for an industry that has already had plenty of bad press.
Tempers ran high on the subject, with other lenders decrying the negative image the industry has been given.
"We provide such a valuable service to disenfranchised people you wouldn't believe it," said Bob Howard, chief executive of Southern Pacific Funding Corp., Lake Oswego, Ore. "We're not out here wearing white shoes and a white belt and trying to figure out how to screw over someone."
Southern Pacific, which does much of its business by phone, does not make loans to senior citizens without an in-person meeting, he said.
The National Home Equity Mortgage Association, the trade group for the subprime industry, is attempting to come up with solutions for the problems, said Jeffrey Zeltzer, executive director for the group. "Excessive flipping needs to be corrected," he acknowledged.
Despite the negative press the hearing will generate, observers do not expect any immediate legislation.
"You cannot legislate away people's carelessness with their financial situation," said Jeffrey Evanson, a Piper Jaffray analyst who covers the sector. "I've been patiently waiting for the media to have their field day on this stuff, we might as well get it out of the way."