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A sub-prime lender such as a Finance Company generally offers higher interest rate loans (risk- based lending) to borrowers who are not considered credit worthy. However, many sub-prime lenders are notorious loan sharks. Their target is largely the lower income and protected classes. Sub-prime lenders feed on their target's fear (that they are not bankable) and need (for access to credit). Families who are already home owners and have a need for debt consolidation are targeted for home equity loans and minority borrowers in need of credit are targeted for consumer loans. This article focuses on home equity loans.

The credit offers generally are high interest rate loans and include forced placed insurance, excessive closing costs, prepayment penalties, etc. The borrowers are never informed about the "extras" which are an option, and not a requirement. Often, "Truth-in-Lending" laws are blatantly violated. In some instances, loan officers have been known to forge the borrower's signature on important documents. Not only do borrowers have no way of knowing what they are borrowing, many do not even know that their rights have been violated.

An important factor to consider is the innovative lending products that sub-prime lenders have designed in response to a desperate borrowers' need--made access to credit available at monthly payments that appear attractive. The flaws in this credit delivery system are many, some already noted above. Also noteworthy, is the Finance Companies' marketing and advertising practices, "When your bank says no, Champion says yes."

Banking institutions are strictly regulated and often steer clear of such excesses directly. However, Finance Companies enjoy a luxury of lending without such tight scrutiny. How can there be profit from a customer base that is supposedly so poor that investment in this customer base is construed as a high risk? This is the argument that has been used time and time again to evade investments in lower income communities by banks. Apparently there must be some profit why else would Finance companies be so profitable? What we have seen, heard, and read is scary.

HIGH INTEREST AND HIGH POINTS
"The financing for the paint job led to a series of three loans from Associates, and the Lees soon found themselves with a $35,000 mortgage on their home. On their last loan, the Lees paid $3,588 in origination fees more than 10 percent of the total and at least five times what most borrowers would pay. They received $379 directly from the loan, but paid nearly $4,000 for credit insurance. Their interest rate: 18 percent." (Merchants of Misery). At a bank these loans are normally around 10% and 3 points.

FORCED PLACED INSURANCE
We received a complaint recently about a couple who went to Commercial Credit. They borrowed $8,890 for credit life insurance, insuring $52,000 over ten years. This was included in the loan amount, on which they paid high interest rates. For a $100,000 ten year term life insurance, monthly premium, not up-front premium, is approximately $30.00, quite affordable should one need such coverage. At a bank, you would not be forced into buying credit life insurance before your loan is approved, particularly if a housing counselor was involved in helping you buy or refinance your home. Credit life insurance is very expensive and the decreasing term policy makes it worthless. A Finance Company on the other hand has no qualms about forcing you to borrow more money at extremely high interest rates to buy this insurance from their Insurance Company. The sale pitch made here is that in the event something happens, your loan will be paid off. However, the fallacious salesmanship does not explain that you could possibly buy a million dollar term life insurance for the amount you have borrowed to buy a short-term useless small coverage policy!

ADD ONS
" The mother of seven children and stepchildren had gone to an Associates office in Montgomery, Alabama, the month before and borrowed $2,000 to fix her `87 Blazer. It was a big company, one she thought she could trust. After all, it was owned by Ford Motor Company. When she sat down with the loan officer to close the deal, she recalled, "we really didn't talk about the loan. He was talking about he was having some trouble with his car his car was one of those little foreign ones at the same time saying, "Sign this. Sign this." She testified later that the loan officer flipped through the papers so only the signature portion of the documents showed, and some of the numbers on one document had not yet been filled in until after she signed it. She didn't read anything, she said, because "I trusted him to do right."

But when Henderson went to make her first payment, she testified later, she learned that along with the $2,000, she owed another $1,200 for "add-ons" she didn't know a thing about three kinds of credit insurance and an auto club membership. And her interest rate was 33.99 percent." (Merchants of Misery).

Finance companies have traditionally sought to dupe their customers by not disclosing the full extent of the terms and conditions of borrowing money from them. In many cases, when questioned, they have allowed you to not sign. However, forgery is not uncommon either. You signature still appears on the papers!

NO DISCLOSURE
" Deborah James shushed her baby as he cried and wriggled in her arms. She was worried. She was in debt and couldn't see a way out.

"Stop Adrian," she told her son as he tried to get down on the floor. "Quit, quit, get up."

Across the table, a loan officer from ITT Financial Services was oozing concern all recorded on tape and later transcribed by ITT.

"He's just tired, that is what his problem is," the loan officer said. "I'll get you out of here buddy, just give me a little time. He can smile, give me a smile."

He pushed some papers in front of James.

"Look at that. OK, then this one right here. And this one right there. And this one right there."

She signed a few more documents, and it was over.

"If you've got any problems at all, don't hesitate to call me," he said. "I'll give you my card, so don't get behind that 8-ball anymore. You can always call me and I am sure that we got a solution."

Deborah James thought ITT was helping her dig out of debt. She was wrong. It was digging her deeper. Her problem began with a $300 bill at a waterbed store that ended up in the hands of ITT's Jacksonville, Florida, office. From there, ITT persuaded her to refinance her loan five times over two years and ratcheted her debt up to more than $4,000." (Merchants of Misery).

Finance Companies are known to "flip" the loan several times during a short period of time. In "flipping", the loan is renegotiated several times--each time it is renegotiated, consumers pay pre- payment penalties and refinance fees.

PREPAYMENT PENALTY
Most mortgage loans do not have a pre-payment penalty. In other words, if you pay off your loan before you were required to pay off, you do not have to pay additional fees. Most Finance Companies have excessive pre-payment penalties. Once hooked, near impossible to get out.

DEBT COLLECTION
In a couple of years, the loan is made so expensive that the loan soon is in default. At this point in time, collection process is aggressively instituted. With lower incomes, and the relatively high cost of borrowing, many families face cash flow problems in making their payments work. It is during these difficult financial times that lenders begin their unfair debt collection practices. Loss of a home through foreclosure, deed sign over, or distress sale is a significant financial loss because of the hidden costs that emerge at this point in time. Families often lose their equity, built over years. The loss of their homes is often a traumatic experience, particularly when they have worked hard to overcome home ownership hurdles in the first place.

Since most predatory lenders are licensed by a State to do their business in the geographies they choose, weak local consumer protection laws are vital to their business. Delaware is home to over 150 licensed lender companies and mortgage loan broker licensees, and licensed lenders can charge unlimited fees and interest rates on their lending transactions. These lenders are not adequately regulated and evaluated for fair lending compliance.

If you have the time, make sure you read Michael Hudson's "Merchants of Misery'--a profound argument for the eradication of predatory lending. Also, in April, 1997, ABC News "Prime Time Live " news magazine aired a segment on Ford Motor Company's loan sharking. A must see for those who do not believe that loan sharks do booming business in contemporary America. There are numerous law suits across the nation against predatory lenders.

DCRAC is a non-profit citizen's advocacy group, founded by James H. Sills, Jr., now Mayor of the City of Wilmington, in 1987. Our mission is "to ensure equal access to credit and capital for the under served populations and communities throughout Delaware through Education, Advocacy, and Legislation". In order to accomplish our mission, we shall ensure that all Delawareans are aware of their rights and responsibilities under the Community Reinvestment Act and other fair lending laws, and ensure that Delaware lending institutions meet their communities' entire banking, credit and capital needs. The under served communities are Low and moderate income families, Minority communities, and distressed neighborhoods. Community groups such as ours focus on identifying and addressing the root causes of disparity in lending and the disparate impact on our constituency.

You can contact Rashmi Rangan, Executive Director of DCRAC at (302) 654-5024.