|Steve Parker and Lu Porter, co-chairs of a group fighting predatory lending in Evansville, Ind., walk through a neighborhood that has seen the problem.|
The campaign to fight predatory lending in Evansville, Ind., started quietly on several fronts. The local newspaper reported that the FBI was investigating reports of questionable mortgage lending practices. Allegations ranged from inflated appraisals to forgery.
Meanwhile, the director of a nonprofit housing agency noticed that the number of foreclosed homes being brought to auction was rising every week. The director, Kathy Muller of HOPE Inc., suspected unethical lending practices were involved: At least 75 percent of the properties were located in older, minority neighborhoods, and almost all of the liens were held by five subprime lenders from out of state.
About the same time, a local bank president attended a conference in Washington, D.C., at which predatory lending was discussed. When he got back, he asked one of his officers at the bank, Lu Porter, to look into the problem locally.
The campaign began to gel when the Federal Reserve Bank of St. Louis brought together lenders and other community leaders in the fall of 1999 in Evansville to discuss the topic. A committee was formed to investigate.
"We sensed that this was more serious than many other community concerns," recalled Porter, the co-chair of the committee and the Community Reinvestment Act officer at Integra Bank. "Predatory lending and mortgage fraud are stripping the wealth that our families and communities have worked so hard to build. Lenders take advantage of a consumer's lack of knowledge or poor credit rating to charge high interest rates and hidden fees."
Today, the volunteer committee has about 40 people, including bankers, loan officers, brokers, appraisers, nonprofit employees and government officials. The campaign that started quietly about two years ago has grown into a vocal, visible attack on predatory lending and related problems throughout the area.
Although more headlines may have been made by other cities' efforts—Chicago's $2 million fund to help victims, for example, or Philadelphia's recruitment of religious leaders to preach from the pulpit against predatory lending—Evansville's fight has made many sit up and take notice. The city is believed to be more active on this front than any other community in the Eighth District.
Bringing all the affected parties together to cooperate on the problem wasn't easy, Porter remembered.
"I don't think anyone knew what to expect," she said. "Mortgage brokers had called prior to coming and wanted to know who all was going to be there."
Plenty of finger-pointing occurred at first, largely because the mortgage brokers felt that they were being picked on and that the lenders were being portrayed in the media as saints. But the different camps eventually agreed to work together on the problem.
"Once it was all over, they had to shake hands and congratulate one another," Porter said. "One of the brokers told me that was the first time they had ever come to the table with a lender."
That doesn't mean disputes disappeared. Even the group's decision to change its name raised eyebrows. The change, from Predatory Lending Committee to Tri-State Best Practices Lending Committee, was made to emphasize the campaign's goals and positive aspects.
"Almost all lending institutions are trying to be positive about it, but the fact remains that it is a very negative issue," acknowledged Steve Parker, co-chair of the committee and co-owner of Bartlett, Parker and Associates, an appraisal company in Evansville.
Another person who was involved in the early stages of the campaign worried that the committee would become a self-proclaimed police force for the lending community. Rick Edwards of The Mortgage Co. Inc. pointed out that not all of the blame for predatory lending could be laid at the feet of the gigantic mortgage companies in Texas, California and elsewhere. If local lenders had done more to serve residents who have lower than average incomes and higher than average risk, these people would not have had to take such loans from the out-of-state companies. Edwards feared that the committee's campaign would dissuade people from taking out loans that would be perfectly appropriate for them.
Before the committee could tackle predatory lending, the members had to define the problem. No one definition has universal acceptance. (Click here for commonly used definitions.) In the end, the Evansville committee defined predatory lenders as those "who operate in unethical and, often, illegal ways, using high-pressure sales tactics to help people to obtain credit while charging extremely high costs and interest for their services."
The committee said such lenders' targets usually include: the elderly; those with low-to-moderate incomes; people desperate to consolidate debt; and those who recently have gone through a divorce, death of a spouse or a bankruptcy. The victims are found most often through telemarketing; TV, print and direct mail ads; and courts and credit bureaus, where names of people with mortgages and of those who often take out high-interest loans are readily available.
"These loans are designed to trap borrowers in excessive debt until they are forced to foreclose," Porter said. In African-American neighborhoods, 28 percent of all mortgage lending is predatory, she said. Of those loans, 90 percent end in foreclosure.
"This needs to stop."
The problem may be worse than many suspect, Parker said. "I don't think we see the damage that predatory lending does because people are embarrassed" to talk about it, he said.
The problem isn't just with the lenders, however. Builders, real estate sellers and title agents are among those who have been accused of partnering with predatory lenders to make such loans look attractive to the victims.
Parker said the two weakest links in the chain are the appraisers and those loan originators who work on commission. The latter will often do whatever it takes to make their commission, even pressuring the appraiser to inflate the value of the property so that there's enough collateral to support the loan.
Because it's easier to become an appraiser than in the past, Parker said, there are many inexperienced people on the job who cave in to such pressure or don't realize they are being manipulated. Some are willing participants, specializing in "drive-by" appraisals and using nonexistent "comps" for comparing home values. A few appraisal companies just changed their names when they found out they were in trouble—and kept right on with the same practices.
Parker thinks these appraisal problems could be lessened if banks and mortgage companies were forced to rotate appraisers. The cozy relationships would be less likely to develop.
Also a big part of the problem are greedy and unethical mortgage brokers, said Dan Jost, a broker himself and another member of the Tri-State committee. Fed up with such behaviors, Jost started his own company, Cornerstone Financial, to help those in need find loans at reasonable rates when they can't obtain traditional loans.
Jost faulted Indiana for making it easy to become a broker and make a lot of money at it. He said a broker is allowed to charge 10 percent of the amount of the loan as his fee—$10,000 on a $100,000 loan.
To spread the word about these problems and their solutions, the Tri-State committee held a daylong workshop this spring called "Predatory Lending: A Professional Alert." Brokers, appraisers, inspectors, title agents—all those who deal with the consumer along the path to getting a mortgage—were encouraged to attend. Fifty-one showed up. The for-credit session was led by Nick Tilima, who runs Education REsources, a school in Indianapolis.
As part of its education mission, the committee also drew up and publicized a list of best practices for lenders to discourage anything remotely approaching predatory lending. A list of warning signs for consumers who are looking for a loan was also compiled.
The committee has also encouraged Indiana government officials to crack down on the problem. Porter and Muller have testified in the Legislature. The establishment of a mortgage fraud unit in the attorney general's office has been recommended.
|Steve Parker inspects a house for appraisal. He warns that some appraisers are a big part of the predatory lending problem.|
No new laws are being sought at the state level, just better enforcement of the ones already on the books. Some national lenders have been lobbying against the proliferation of new city and state regulations aimed at predatory lending. The companies say they fear a hodge-podge of rules. If anything, the national lenders would prefer regulations that would apply to the country as a whole.
Muller, of the HOPE housing agency, thinks the government should require, at a minimum, some sort of education for everyone buying or refinancing a house.
Although it's wise to target the "bad guys" involved in predatory lending, another banker on the Tri-State committee reminds that consumers must accept their share of responsibility for this problem, too. Richard Condi, the Community Reinvestment Act officer for Old National Bancorp, said consumers would be well-advised to address the problems that kept them from being considered for a prime loan in the first place. But if they can't correct these problems, they should be aware of the availability of subprime loans that aren't predatory.
Edwards of The Mortgage Co. suggested that "responsible competition" by mainstream lenders might be a solution to predatory lending. The director of the Office of Thrift Supervision agrees. In a speech in Atlanta, Ellen Seidman said: "To combat predatory lending successfully, lenders must create responsible credit and financial service alternatives for customers, and they must market these products and services in ways that actually reach those for whom they are intended—just like predatory lenders are doing."
Those who want to learn more about Evansville's efforts may call Porter at (812) 461-9521 or Parker at (812) 476-1000.