First of a Two-Part Series About Predatory Lending
Predatory Loans Take Bite Out of Home Values
By Kim Shindle
Predatory lenders beware. Pennsylvania was a magnet for predatory lending schemes but tough new laws and indicted offenders are making the Commonwealth less attractive to these companies.
The predatory lending situation came to light several years ago. Pennsylvania Human Relations Commission (PHRC) defines predatory lending as “any loan where the borrower’s expenses cannot be justified on the basis of the lender’s risk and cost.”
Pennsylvania is currently prosecuting predatory loan offenders, according to Ray Cartwright, director of housing and commercial property division at the PHRC. There are currently 15 cases on the public hearing docket.
“We took in our first cases about five to six years ago,” Cartwright recalls. “Two months ago, 47 new cases were filed in one of our three offices. Overall, two out of three cases this office handles involve predatory lending.”
Cartwright says the problem is especially prevalent in Philadelphia’s culturally diverse neighborhoods. “We saw ethnic communities where people had purchased homes and they were being targeted by companies trying to drain their equity with refinancing loans,” he says.
Cartwright says the sheriff’s office in Philadelphia reported the first drop in foreclosure rates this year. The office credits the prosecution of predatory lenders as a key to the drop.
“Other financial institutions, REALTORS® and municipalities realize these predatory lenders are sucking the value out of people’s homes,” he says. “REALTORS® are able to help us when they are involved in a sale. They recognize that this type of loan isn’t the best for their customers but the loans are often offered to people who have credit issues,” he adds.
Predatory lending isn’t limited to the urban areas. The Pocono Record reported in June that the area saw a decline in foreclosures last year. Foreclosure filings totaled 540 in 2005, down from 941 in 2003. Many of the homeowners in foreclosure were minorities who purchased homes at inflated prices. These homeowners were unable to sell their properties because they owed more to lenders than what the residences were worth.
“Minority groups in cities were targeted by these groups to get a chance to move away from the city. These ‘wonderful deals’ also included extraordinarily high interest rates,” Cartwright notes.
The PA Department of Banking issued a report titled Losing the American Dream: A Report on Residential Mortgage Foreclosures and Abusive Lending Practices in Pennsylvania. The report is based on the department’s study of the lending practices, trends in foreclosures and lending practices that hurt consumers. It shows that foreclosures in Pennsylvania are less than the national average. “However, the foreclosure rates of subprime loans are disproportionately higher,” according to Heather Tyler, director of communications at the state Department of Banking. “It is a cause for concern.”
Tyler says there are differences between large mortgage scams and “irresponsible” lending but the bottom line is still the same. “They both have the same effect,” she notes. “Families are still losing their homes.”
The department is defining appropriate conduct for mortgage brokers and lenders, working with industry and community leaders to address areas of concern. “Many of the loans need to be looked at on a case-by-case basis,” she explains. “No product needs to be off the market but if not applied properly to the right consumer, it can be deadly to families.”
The state is addressing the issue through a package of bills introduced to the Pennsylvania legislature. The bills address regulating mortgages, reorganizing the appraisal board, extending loan caps and licensing mortgage brokers. Within the next several months, the Department of Banking will also issue a statement of policy outlining appropriate conduct in the mortgage industry and what the department will be looking for, according to Tyler.
“Home buying is an emotional issue,” Tyler says. “It has one of the largest financial impacts on your life. Consumers need to understand all of the issues. Some of the loan issues are really subtle and there are so many places where irresponsible lending can sneak in.
“REALTORS® have relationships with mortgage brokers and lenders and they should take the time to investigate what they’re offering,” she adds. “The loan portfolio might not be great. It’s worth doing your homework for the long-term benefit of your client. People trust their REALTORS® to help them through this process.”