Opponents of predatory lending have their eyes on California, where - as of this writing - a bill is being considered in the state Legislature that would go a significant way toward banning predatory lending practices.
By Sept. 15 the Legislature will have either set an example of how to begin protecting consumers from dangerous products, or will have chosen to allow this widespread form of legal robbery to continue in California.
AB 489 would prohibit the financing of single-premium credit insurance on all loans. Bowing to public pressure, many lenders - but not all - have already stopped marketing this abusive product in any state.
Like other features of predatory loans, this insurance is something that virtually no borrower would choose if fully and honestly informed. Such products ought to be banned for the same reason that unsafe medicines are kept off store shelves: We cannot all be experts at everything. We can, however, all see the devastating effects of predatory lending on families and neighborhoods if we care to look.
AB 489 would provide additional protections on very high-cost loans. On these, it would prohibit repeated refinancings that provide no benefit to the borrower. It would prohibit brokers and lenders from steering borrowers to loans with higher rates than others for which they could qualify. It would prohibit loans which it is clear that the borrower will be unable to repay. And it would make it illegal for the loan to finance points and fees paid directly to the lender or broker and amounting to more than 6% of the money being borrowed.
These and other abusive terms drain families of their savings and equity and lead to unnecessary foreclosures. When those foreclosures are then blamed on the borrowers' irresponsibility, the hypocrisy is staggering. Fannie Mae reports that 30% to 50% of subprime loans go to borrowers who could have qualified for prime loans. Borrowers who are preyed upon are not high-risk people; predatory loans are high-risk products - and intentionally and unnecessarily so!
One California borrower got a second mortgage with Household Finance and was charged over $2,000 in fees to get $18,000 at a 13.25% interest rate. Household never told her that in the first five years of the loan she would have to pay $1,400 as a penalty if she refinanced with another lender to a lower rate.
Now she is paying $246 monthly, but her loan principal is barely going down. After another eight years, Household can charge her the entire remaining balance as a single balloon payment. At that point she will probably have two options - lose her house or refinance the loan with Household, for more fees and more interest payments in the future.
This is unfair and destructive, but also legal. While many subprime loans are used to help people, a growing percentage of these loans are designed to make the lender rich through the exploitation of vulnerable borrowers.
Predatory lending has hurt thousands of California residents and is draining hard-earned money from the families and neighborhoods that need it most. In the worst cases, families are being forced out of their homes. The damage is amplified still further because high-cost lending is concentrated in minority communities and among seniors of all races.
Across the country, people are fighting back. North Carolina passed legislation banning predatory practices in 1999, and since then New York, Massachusetts, and Illinois have enacted regulations moving in that direction. Oakland, Calif., is currently in the final stages of approving its own local ordinance against predatory lending.
The vote in California this month will be a critical one for the future health of many American communities.
Ms. Hurd is the national president of the Association of Community Organizations for Reform Now, commonly referred to as Acorn, in Washington.