This is a true story.

An elderly woman, "Alice," hired a small Central Pennsylvania company that advertised it would finance improvements to her home. She signed a contract to finance the $6,000 that the company representative says she needs to complete the repairs. Two months later, she is shocked to learn that her home is mortgaged for $18,000 — $12,000 of which were deemed "closing costs".

Since she cannot afford the mortgage payments, Alice’s home is ripe for a tax sale.

With her husband dead 10 years, her income is not enough to pay for the real estate taxes and utilities. She’s unsuccessfully applied for a home equity loan from her bank, refused because she’s "overextended" — owing too much money to possibly borrow any more.

Later that week she receives a card in the mail offering her a home equity loan — "Guaranteed!" Sound familiar? It should. It’s happening to your friends, your neighbors, your parents. It could be happening to you — right now.

Historically, home ownership has been the primary way for families to build economic security and transfer wealth from generation to generation. According to the Associated Press, over 65% of Americans now own their own homes. Increasingly over the last decade, however, our most vulnerable homeowners have been put at risk of losing their homes and financial security by predatory lending practices. Predatory lenders target elderly and other less savvy consumers, using an array of practices to strip the equity from their homes. The abusive practices include excessive loan fees, costly insurance policies, large "balloon" payments, high interest rates, and frequent refinances.

But the purchasing flurry is beginning to subside in a debt-laden, consumer-driven market and the credit card market is saturated, forcing financial institutions to offer credit to people with shaky credit histories. For consumers, easy credit is a mixed blessing. Credit-challenged individuals have a chance to re-establish good credit or to recover from a divorce or bankruptcy. On the other hand, extending credit to individuals who have already proven they have difficulty handling credit may create for them nothing but more hardship and bad debt for themselves.

"Where did you get that definition?" asked President of the PA Bankers’ Association, Jim Biery. "We just had our [annual convention] and asked the question ‘ What is "Predatory Lending?"‘ and no one raised their hand. It’s not that easy to define." North Carolina attorney, Charles Reinhardt, is a great proponent of consumer protection and is helping to frame the architecture of the country’s first Predatory Lending Law. He echoes Biery’s notion that "predatory lending" is a cloudy term. "The line where sub-prime lending becomes predatory is a gray area," says Reinhardt, "but we know it when we see it." Dan Geduldig, a.k.a. Dan the Mortgage Man, our local poster boy for mortgage brokerage, says, "To me the only predatory lending is when a rate is offered and hidden costs are added after the agreed rate."

Though definitions may differ, what is agreed upon is that companies making predatory loans are becoming increasingly more ravenous in their marketing. Many noteworthy predatory lending scams center on real estate because it is a reasonably safe and stable investment for average families.

Predatory lenders often target homeowners with Home Equity loans. Essentially, home equity is the amount of money the house is worth minus what’s owed. Many homeowners, young and old, find themselves "house rich and cash poor" and, until recently, there were few options for them, short of selling their home, to get cash — enter the home equity loan. These loans allow homeowners to borrow against their equity as long as they give the lender a claim against their deed. If they default on the loan, lenders force them into foreclosure, taking the investment from the sale of their home. In return for providing borrowers with cash at reasonable interest rates, lenders have collateral for their loaned money.

Sub-prime lenders are attracted to this type of loan because if borrowers make payments, lenders make big bucks. If the loan holder can’t make timely payments, lenders take the house. And while it might sound unsympathetic, it’s not conniving … yet. The loan becomes predatory when lenders set up the loan to fail or overcharge the loan holder in sneaky and illegal ways.

This gimmick is commonplace for selling real estate in the City of Harrisburg, as well as the surrounding suburbs. Bad as it sounds, it’s legal — sort of. As long as the house is appraised at the amount requested by the seller, the price can be set at whatever the parties agree upon.

This little swindle requires the cooperation of three parties — the realtor, the seller, and the appraiser. This is an attractive set up for all parties involved — except the buyer, who ends up purchasing an overpriced house with an expensive mortgage that comes with a second mortgage in tow. The realtor makes a bigger commission, the seller gets a significantly higher amount of money for the property, and the cooperating appraiser gets the referral and future business from realtors. Often times, the mortgage broker is involved, loading the loan with fees.

But buying a home is not the only way predatory lenders strike. The threat of foreclosure generates its own pool of easy money as desperate homeowners reach out for solutions to their financial problems. Predatory lenders often comb through courthouse records and solicit consumers they identify as being threatened with foreclosure. This is an easy source of revenue as these borrowers are often desperate and vulnerable. These lenders aggressively target struggling homeowners or neighborhoods identified as being lower income, with mailings, flyers, and neighborhood signs. They offer loans that will consolidate all bills, including lower interest mortgages, into one lump sum. Some even go as far as to offer mortgages of up to 125% of the value of the home, or ‘no equity’ loans. These loans are often packed with fees that the broker can pocket up front, a mortgage payment that may not be even practically affordable (one local lender advertises that they will let you borrow ‘up to 55% of your income’), and excessively high interest rates. Such loans are generally set to fail from the beginning, with the broker getting their money up front and the lending company often getting the biggest prize — the house itself. In addition, these mortgages often prohibit the homeowner from ever refinancing to a lower cost mortgage. And if that isn’t unscrupulous enough, the same lenders often perform illegal foreclosure practices and abusive debt collection practices.

Both Biery and Bayer agree that the banking industry is already one of the most heavily regulated industries in the country. Legislation exists that monitors the activity of most of the lending institutions in this country, but not all. While some activities are blatantly illegal, others fall in the hazy topic of lending practices that are currently being examined, but are not, as of yet, technically against the law.

Some local real estate companies and alternative lenders, who won’t allow us to use their names, have attorneys on staff to ensure that they stay one step ahead of the system. Consumer agencies are reporting that they simply don’t have enough time or staff to keep up with the growing influx of consumer complaints involving the sub-prime lending industry. But help may be on the way.

Reform will take time, but there are things that you can do on your own.

Shop around for loans. Check with different lenders — especially those with good reputations such as banks and credit unions. Call the Better Business Bureau and find out if any complaints have been filed on this lender. Beware of ads that say "No Credit? No Job? No Problem!"

Know your basic rights in lending. After the approval of any type of loan, there is a federal, three-day Right of Rescission grace period. If you change your mind, you can back out of a loan during these three days, without penalty — even if you signed it. The creditors are then required by law to return any and all monies to you within 20 calendar days after you’ve changed your mind.

Learn to plan your spending wisely. A good rule of thumb: If you don’t have it now, you’re not going to have it at the end of the month.

If you have questions, ask them! If you are having credit difficulty, contact your local Consumer Credit Counseling agency for assistance. Try the Consumer Credit Counseling Service of Greater Harrisburg (541-1757) or Consumer Credit and Debt Counseling (691-9860).

Loan Rangers

The following specific practices are common in the sub-prime mortgage market:

• Deceptive and Targeted Solicitations:
Predatory mortgage lenders and brokers engage in extensive marketing in targeted neighborhoods, most often with a high percentage of African American and/or elderly residents. They advertise through a variety of means, including television commercials, direct mail, telephone solicitations, door-to-door solicitations, and fliers stuffed in mailboxes. Bayer at Vartan Bank once worked for Norwest, a consumer finance company now part of Wells Fargo Bank based in San Francisco and considers that type of financial institution "the biggest predator." Many of these companies deceptively tailor their solicitations to resemble social security or other U.S. government checks. Many brokers and lenders advertise "bill consolidation" home equity loans — encouraging consumers to pay off credit card, retail, and motor vehicle debt by consolidating them all into one home loan and promise to reduce the monthly debt payment. This practice of "selling the monthly payment" misrepresents the benefits and risks of home equity loans.

• Mortgage Broker Fees and Kickbacks:
Most consumers who contact a mortgage broker expect the broker to arrange a loan with the best terms and at the lowest possible rate. In the sub-prime market, however, there are mortgage brokers who do just the opposite. A system of "reverse competition" has been created wherein the broker will attempt to find a loan with the most fees and highest rate possible so that the broker will get more compensation. It is not uncommon for a broker to charge fees of up to 8 – 10 points. On a $100,000 loan, that means the borrower is paying and financing an additional $8,000 – $10,000. In addition, the broker may get additional compensation for arranging a higher than necessary interest rate for the consumer. For example, if a consumer qualifies for a 10% interest rate, but the broker can arrange the loan at 11%, the broker will get compensated for his or her efforts by the lender. This method of indirect payment, commonly referred to as a "yield spread premium," is not clearly disclosed to the borrower.

• Excessive Rates and Fees:
It is not uncommon for predatory lenders to charge interest rates of 16 – 18%, double that of conventional rates. Each state has different rates. In California the legal lending rate can be up to 30%. Here in Pennsylvania, the rate is 27%. Which is ironic considering that a loan associate in the Camp Hill satellite office for sub-prime lender Consumer Finance Corporation commented that it was only 21%. Lack of knowledge or still selling something?

In addition to reaping the profits from the high interest rates, predatory lenders charge borrowers an array of fees on their loans, including loan origination fees, discount points, underwriting fees, document fees, processing fees, and other "junk fees." It is not unusual to see loans with fees exceeding 10% of the loan amount. These fees are not paid in cash by the borrower at the time of loan closing, but are rolled into the loan and financed at the high rate of interest along with the loan principal. Even if the borrower may later be able to refinance the loan later at a lower interest rate, he or she cannot get any rebate on the fees because they are earned at the loan’s inception.

• Home Improvement Scams:
Some predatory mortgage lenders use local home improvement companies essentially as mortgage brokers to solicit business. These companies solicit homeowners for home improvement work. "They canvas the area and take off before the Better Business Bureau gets a hold of them," says Bayer. The company will then either originate a loan for home improvements and then sell the mortgage to a predatory lender, or steer the homeowner directly to a predatory lender. The home improvements are often grossly overpriced, and the work is shoddy and incomplete.

• Balloon Payments:
Predatory lenders frequently structure the amortization of loans so that over the term of the loan, the borrower’s payments are applied primarily to interest with the entire value of the loan coming due at a later date. This method of financing will result in a huge "balloon" payment at the end of the repayment term, usually after 15 years. The last payment is often almost as much as the principal amount borrowed. In most cases, this method of financing is not explained to or understood by the borrower.

• Excessive Prepayment Penalties:
Predatory mortgage lenders often impose exorbitant prepayment penalties. This is done in an effort to lock the borrower into a no-win loan for as long as possible by making it difficult to refinance or to sell the home. If the borrower prepays the loan, the lender still gains.

• Flipping:
"Flipping" is the repeated refinancing of the consumer’s loan. Flipping is done by rolling the balance of the existing loan into a new loan instead of simply making a separate, new loan for the new amount. As soon as the consumer has paid down the loan slightly, a predatory lender may encourage the consumer to refinance and get more cash out of the available equity in his home. Each time the loan is refinanced the lender charges more fees, placing the borrower further in debt over a longer period of time. Flipping always results in higher costs to the borrower.

• Insurance Packing:
"Packing" is the practice of adding unwanted extras to the loan without the borrower’s full knowledge. One of the most prolific products added to consume loans is credit insurance. Some predatory mortgage lenders market and sell credit insurance through deceptive schemes that impose these items without the knowledge or consent of the borrower. Credit life and disability insurance is almost always overpriced and a poor value for consumers. In mortgage loans, the cost can be enormous. The insurance company is almost always a subsidiary of the lending company, benefiting only the bank. So then, the credit insurance premium, which can exceed $10,000, is added to the loan amount and financed over the life of the loan, earning more interest income for the lender in addition to the commission and/or profit from the sale of the insurance. Coverage does not even extend for the life of the loan.