July 29, 1999
Seven subprime mortgage lenders from across the country have agreed to pay redress or be banned from making certain loans to settle Federal Trade Commission charges that their lending practices violated various laws enforced by the agency. The agreements are part of the Commission’s “Operation Home Inequity,” a law enforcement and consumer education campaign that seeks to curb abusive practices in the subprime mortgage lending industry. All seven proposed agreements would provide substantial remedies and protections for past and future borrowers. Six of the companies have agreed to pay consumer redress totaling $572,500, two companies must obtain performance bonds before they offer or extend specified credit in the future, and one company is banned from any future involvement with high-cost loans secured by consumers’ homes.
“Predatory home equity lenders target the most vulnerable homeowners – the elderly and people in financial or personal crisis – for high-cost loans secured by their homes,” FTC Chairman Robert Pitofsky said. “These subprime lenders appear to care little about a borrower’s ability to pay, so long as he/she has enough home equity to secure the new loan. The lenders are able to prey on homeowners because mortgage transactions are often very complicated and difficult to understand. These practices are among the most abusive forms of consumer exploitation that I have seen. ‘Operation Home Inequity’ underscores the FTC’s commitment to curtail home equity abuses by unscrupulous lenders.”
Pitofsky warned consumers who are thinking of refinancing their home or getting a home equity loan to consider their options carefully: “Don’t let anyone talk you into using your home to borrow money you don’t need. If you can’t make the required payments, you could lose your home as well as the equity you’ve built up.” He also said that consumers should always shop around — costs can vary greatly. And he warned consumers never to sign any documents that they do not understand. “Call a lawyer, visit legal aid, talk to someone you trust.”
AARP appeared at a FTC press conference in Washington, D.C. announcing “Operation Home Inequity.” Anne Harvey, Director of AARP’s Program Development and Services, said “Older homeowners are popular targets of fraudulent home repair financing schemes because they’re likely to live in older homes that need repair, they’ve built up substantial equity, and are less likely to undertake home repairs themselves. In addition, older homeowners are more likely to be vulnerable to high pressure pitches.”
According to the FTC, “subprime” lenders generally extend credit to higher-risk consumers and charge significantly higher rates and fees than lenders charge those who obtain “prime” loans. Subprime lending has grown dramatically in recent years. During 1998, subprime mortgage and home equity lenders originated $150 billion in loans, an increase of almost 58 percent over the prior year. While many subprime lenders are reputable, some unscrupulous subprime lenders make costly home-secured loans to consumers who are unable to repay them, subjecting such consumers to refinancing with additional high or unfair fees and charges and possible loss of their homes through foreclosure or forcing an undesired sale.
The Home Ownership and Equity Protection Act (HOEPA) took effect in October 1995. Congress passed the law to stem the growth of certain predatory lending practices. HOEPA amended the Truth in Lending Act (TILA) and provides special protections for consumers in certain non-purchase, high-cost loans secured by their homes. In loans covered by HOEPA, the lender must give the borrower certain disclosures in writing at least three business days before closing. This information includes a notice that the consumer could lose his/her home and any money put into it, if he/she does not meet his/her obligations under the loan. The notice also requires disclosure of the annual percentage rate, amount of payments and, if applicable, certain variable rate information. The law also bans from high-rate, high-fee loans such terms as balloon payments due in less than five years, increasing the interest rate at default, and most prepayment penalties. Lenders also are prohibited from engaging in a pattern or practice of lending based on home equity without regard to consumers’ ability to repay loans (“asset-based lending”) and making direct payments to home improvement contractors. Other TILA provisions require disclosure of key credit terms and give consumers three days to rescind after they sign loan documents.