errorThe California Legislature is currently considering a bill, AB 489, to protect consumers from some of the most extreme practices known as predatory lending. On Sept. 6, Governor Davis announced his support of the bill and his concern over the damage being done by unscrupulous mortgage lenders offering unfair and abusive terms to vulnerable borrowers.

"Americans lose $9.1 billion each year due to predatory lending practices," Governor Davis said.

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 is currently in the final stages of approving its own local ordinance against predatory lending.

AB 489 has been promoted by Senators John Burton and Mike Machado, and Assemblywoman Carole Migden, as well as by the Speaker of the Senate. The national grassroots group ACORN (Association of Community Organizations for Reform Now) has done extensive work building support for the bill and negotiating to bring it to its current form. The bill is also backed by the AARP, the California Reinvestment Committee, the Congress of California Seniors, and the Consumers Union.

The bill is a significant compromise from what some of these consumer groups believe is needed, and some lending industry organizations have dropped their opposition to it.

With the Governor promising to sign the bill, and the Senate expected to pass it, growing momentum and national attention may be enough to push it through the General Assembly. But supporters of the bill say it is by no means guaranteed.

“We may see a half dozen assembly members derail this important legislation in response to lobbying – not to mention campaign donations -- from predatory lenders,” said California ACORN Co-Chair Fannie Brown.

Brown said another possibility is that the bill will be even further compromised before passing. The current bill (which can be read at www.assembly.ca.gov) sets some restrictions on abusive practices for only the most expensive loans. And it sets one restriction on all mortgage loans, one that lending industry lobbyists are currently working to remove: the bill bans single-premium credit insurance.

Credit insurance is meant to pay off a loan if a borrower dies or becomes disabled. It is much more expensive than ordinary insurance policies and is usually good for only the first five years of a loan. “Single premium” means that instead of paying for this insurance month by month, the borrower must pay the entire cost upfront. This cost is financed into the loan so that interest is charged on it for 30 years. As a result, borrowers are out tens of thousands of dollars for something of little value that in many cases they don’t even know they’ve been sold.

ACORN has helped many borrowers obtain refunds for their credit insurance, and has demanded an end to this product’s sale nationwide. The Consumer Federation of America has called it “the biggest insurance rip-off in the country.” Bowing to public pressure, in July, Citigroup and then Household International announced that they would no longer use single-premium credit insurance on real-estate-secured loans. Other lenders already refused to use it. Fannie Mae and Freddie Mac refuse to buy loans that contain it.

On Sept. 6 Citigroup agreed to pay up to $20 million to North Carolina customers of its subsidiary, Associates First Capital Corporation, to settle allegations that Associates tricked them into buying credit insurance.

Suzanne Alexander is a California borrower who obtained a loan from Beneficial, a subsidiary of Household. Ms. Alexander’s house was long since paid off, but she had a large home-equity loan. When she needed additional money, Beneficial gave her a home-equity loan of $6,000, charging origination costs of $425 plus an annual fee of $50. The annual percentage rate was an outrageous 20.9 percent.

When Ms. Alexander’s father died and she needed money to deal with some related expenses, Beneficial made her another home-equity loan for $12,000, which paid off the previous loan and provided $5,410 in cash. Beneficial charged her 21 percent interest on this new loan and over $600 in origination fees – that’s over 10 percent of the new amount provided!

In June 2000, Ms. Alexander refinanced her larger home equity loan with Beneficial for a total of $123,648, with which she also paid off a car loan. She was charged $8,939 in origination fees and was sold a single-premium credit insurance policy for $3,191. After talking with ACORN, she cancelled this policy and received a pro-rated refund. Even though on all of her loans with Beneficial Ms. Alexander has made a combined total of 113 monthly payments and the only blemish on her payment record is a single late payment, she is being charged 11 percent on this first mortgage loan.

By lending more than the house is worth, Beneficial has been able to trap this borrower in an overpriced loan. Ms. Alexander attempted to refinance to a better rate through the ACORN Housing Corporation, but was prevented from doing so by the high loan-to-value ratio on her Beneficial loan.

Ernestine Arrington, another California borrower, had a mortgage with PNC Mortgage at an interest rate of 8.25 percent that she had been paying off for 5 1/2 years without missing a payment. In February 2000, she went to Household looking to have Household take over a debt she owed to GE Capital in which GE was charging her late fees for payments that she made on time. Ms. Arrington did not plan to and did not want to refinance her home loan, but, she says, the loan officer was very persistent and got her very confused about the whole process. She ended up with a open-end second mortgage for $10,000 (which was also the amount of her credit limit) with an annual percentage rate of 20.9% – despite her excellent credit history – and a fee of $500.

But in addition to that second mortgage, Household refinanced Ms. Arrington’s entire home loan at a much higher interest rate of 11%. On a $136,000 loan, she was charged an origination fee of over $10,000 – a fee which got her nothing but an increased interest rate. And unknown to Ms. Arrington, Household “packed” into her loan single-premium credit life and credit disability insurance policies from its affiliate, Household Life Insurance. These policies, which were financed into the loan so that they would accumulate interest, cost $3,385 for credit life and $3,705 for credit disability coverage. With ACORN’s help, Ms. Arrington was able to get a refund check on these policies of $5,381.

Ms. Arrington met with a loan counselor from ACORN Housing Corporation regarding refinancing to a better interest rate. The loan counselor pulled a credit report for her and found that she had perfect credit. Based on her credit, Ms. Arrington would have been able to refinance and receive a significantly lower rate, around 7%, which would have reduced her mortgage payment by about $400 a month. However, when Ms. Arrington put in her application at the bank and the bank did an appraisal of the house, they found that Ms. Arrington’s loans with Household were for more than the value of her home, and they were not willing to make the loan.

What happened to these borrowers was perfectly legal, and will remain so if AB 489 fails to pass or is altered before the vote.