Loan Shark Attack
By Rich Lord, Pittsburgh City Paper
April 22, 2003
Jill Eselman
is no dummy. She handles a home full of four kids and
kittens and puppies while making CD-ROM business cards – and
suing her mortgage company for $2.5 million without the aid
of a lawyer. Back in 2001, though, she and husband C.J. were
in a tough spot, and not yet wise to the ways of the
subprime lending world.
They were
seeking custody of Jill's two children from a prior
marriage. Unless they added two bedrooms to their home in
rural Evans City, Pa. – and fast – they'd likely lose. "We
were in a state of panic," says Jill. In January, C.J.
refinanced the home, but the proceeds weren't enough to pay
for the addition, and the payments were hard to handle.
Early that spring, they got an unsolicited call from Conseco
Finance Consumer Discount Co. The St. Paul, Minn.-based
company wanted to know if it could refinance their debt.
Conseco's
proposal, dated April 5, 2001, called for a $100,000 loan,
including $6,781 in closing costs, at 11.74 percent
interest. On April 25, says Jill, Conseco's representative
asked them to hurry to the company's Pittsburgh office to
close the loan, because time was running out. When they
arrived, they learned that Conseco had "refigured" the loan.
They were presented with a $97,000 mortgage, including
$9,966 in closing costs – leaving too little to cover all
their debts and the addition – at 12.24 percent interest.
The
application listed an income that was quadruple the $10,000
a year they were then earning, at a time when C.J. was
working as a laborer and musician and they were living off
of credit cards. Under pressure, they signed. "We didn't say
anything the whole way home."
The Eselmans
were in the grip of the subprime lending industry, which
makes high-cost loans to people with low incomes or
tarnished credit histories, whom conventional banks
typically won't serve. Many subprime lenders have been
accused of high-pressure "predatory" tactics that trap
borrowers into loans they can't afford, and may never be
able to pay off. The industry's growth and its tactics have
spurred anti-predatory-lending legislation in some states
and municipalities, and several tough bills have been
introduced in Congress. But the legislation garnering the
most attention in Washington is an Ohio Congressman's bid to
curb consumers' rights to sue, squash state and local
reforms, and put federal lending policy in the hands of a
lender-dominated board.
Congressman
Robert Ney's Responsible Lending Act "allows lenders to do
anything they want without any meaningful limits at all,"
says Margot Saunders, managing attorney at the National
Consumer Law Center in Washington, D.C. The bill isn't
moving quickly, but Saunders and others fear it has set the
stage for a battle over lending reform, on big money's
favorite playing field.
Predators
Go Hunting
Conseco says
it did nothing wrong. The increase in closing costs, says
Conseco attorney Dan Collins, was the result of a credit
insurance policy the Eselmans requested, part of the cost of
which was later refunded. (The Eselmans say the policy was
forced upon them, the refund hard to obtain.) The income
estimate, Collins says, came from the Eselmans. (The
Eselmans say Conseco invented the figure.)
In any case,
the Eselmans got the kids, but promptly fell behind on their
$1,039-a-month payments to Conseco, and the company filed
for foreclosure in June 2002. Suddenly the Eselmans' debt
included thousands of dollars of late fees and legal costs.
"The truck got repossessed. Our credit is crap. No one will
ever refinance us again," says Jill, as she assembles
lasagna and shoos kittens off the kitchen table. They draw
the line at the house. "We are not losing our home. We are
not!" says Jill. "I'll chain myself here before I let them
take this."
They sought
a lawyer, but none wanted to fight. "They all wanted us to
file for bankruptcy," Jill says. So in July, they wrote up a
lawsuit themselves, alleging that Conseco rushed them into a
loan they couldn't afford, and demanding the cancellation of
their debt and $2.5 million in punitive damages. "These
people give out crappy, bull loans knowing that they're
going to end in foreclosure," says Jill. "There has to be
some kind of punishment somewhere."
You'd think
making a bum loan would be its own punishment. But the
strange world of subprime finance turns bad loans into big
paydays.
Rather than
making money by collecting monthly rent checks over decades,
many subprime lenders get their paydays much faster. First,
they charge high fees and tack on expensive insurance;
Conseco, for instance, immediately pocketed $8,820 in the
Eselman transaction. Second, they bundle thousands of loans
into investment products called securities, and sell shares
in those securities. In June 2001, for instance, Conseco
sold shares in a bundle of loans with principles totaling
about $500 million. (It's unclear whether the Eselmans' loan
was in that bundle.) The fees and the securities sales
create incentives for companies to write loans – any loans.
If the borrower doesn't pay, they take the home.
Federal law
isn't much of a brake. It bars lenders from knowingly making
loans to people who can't reasonably be expected to make the
payments. But to get a loan cancelled, aggrieved borrowers
have to show that lenders have made "a practice" of lending
to people who can't afford to repay the loans, and that has
proved extremely difficult.
Not
surprisingly, the subprime industry's expansion has been
accompanied by a relentless surge in foreclosures. In Butler
County, Pa., where the Eselmans live, lenders of all kinds
filed 314 foreclosures in 2002, up from just 136 in 1998. In
nearby Allegheny County, which includes Pittsburgh, lenders
filed 4,015 foreclosures in 2002, up from 2,034 in 1998.
Foreclosure filings usually lead to the sheriff's sale of
the home, bankruptcy, or a negotiated settlement that may or
may not result in the lender taking the house.
Democrats,
led by Sen. Paul Sarbanes of Maryland, have repeatedly
introduced bills to regulate subprime lending. Sarbanes'
proposed Predatory Lending Consumer Protection Act, for
instance, would restrict high-cost lenders' fees, make it
easier for people with bad loans to sue, and bar the
gigantic "balloon payments" that some lenders include in
loans, and which often force borrowers to refinance again
and again. But the Democratic bills have gone nowhere in the
Republican-dominated Congress.
Instead,
consumer groups have turned to the states for legislation.
California, Georgia, North Carolina, New York, New Jersey
and New Mexico have passed laws that provide meaningful
consumer protections, according to the Association of
Community Organizations for Reform Now (ACORN).
That trend
may continue – unless Congressman Ney has anything to say
about it.
Loan
Shark Protection
Republican
Bob Ney of St. Clairsville, Ohio, isn't saying much about
his 71-page Responsible Lending Act. His press secretary did
not respond to four phone messages and e-mail over the
course of eight days, and other news organizations report
receiving the same treatment. The act, introduced in
February, has garnered an unimpressive five cosponsors, and
isn't scheduled for any hearings or votes. Nonetheless,
consumer groups are afraid it might be the first volley in a
war to turn back the gains they've made in some states, and
hope to make in Pennsylvania and elsewhere.
Ney's bill
would add a few new consumer protections, like one making it
tougher for lenders to refinance loans they just made – a
practice called "flipping" that typically leads to high
profits for the lender and mounting debt for the borrower.
But consumer advocates say Ney's bill would do more harm
than good.
- The bill would
gut the ability of borrowers to sue by forcing them to
prove "actual damages" from a loan, which is a very high
legal hurdle, says the National Consumer Law Center's
Saunders.
- It would free
companies who buy loans from lenders from any liability
for problems in those loans. Since many subprime loans are
bought and sold repeatedly, and lenders including Conseco
Finance have declared bankruptcy, aggrieved borrowers
might be left with no one to sue.
- It would
invalidate, or "preempt," all current and future state and
municipal mortgage lending laws.
- It would create
a 15-member board to write lending policies and
anti-predatory-lending materials, of which 11 members must
come from the lending industry.
- The only
penalty mentioned for any violation is a fine of up to
$100,000 and a prison term of as much as five years – for
anyone who releases government information about mortgage
brokers to the public.
"We think
it's a good start," says David O'Connor, vice president of
governmental affairs for the Mortgage Bankers Association.
"It has preemption [of state and local laws], and that's the
biggest problem we have as an industry." As more states pass
lending laws, national lenders have to navigate an
increasingly diverse tangle of regulations, he says, "and
that's costly for them."
"We have
renamed it the Loan Shark Protection Act," counters David
Swanson, an ACORN spokesman.
No one
predicts that it will pass as written. The biggest danger,
says Saunders, is that it will be the starting point for a
"compromise" bill that would offer a few more consumer
protections, but cancel state laws, and prevent other states
from enacting anti-predatory-lending statutes in the future.
The problem, Saunders says, is that the federal government
isn't likely to pass anything particularly comprehensive or
pro-consumer.
It's easier
for the subprime lending industry to fight one battle in
Washington than 50 in the states, and the lenders appear to
be gearing up for an attack. In January, subprime lenders
created the Coalition for Fair and Affordable Lending, which
has vocally backed Ney's bill and reportedly retained 15
top-level lobbyists and a public relations firm. And the
mortgage banking industry gave $12.5 million in campaign
contributions to federal candidates in the 2002 election
cycle – more than 10 times what it gave 10 years earlier,
according to the nonprofit Center for Responsive Politics.
(Consumer groups are insignificant givers and aren't tracked
as a category by CRP.)
One
beneficiary has been Ney. During the 2002 election cycle,
the three industries that gave the most to his campaign were
banking, real estate and securities – all of which could
benefit from deregulated subprime lending – kicking in
$139,000 out of the $654,000 he collected.
Told of
Ney's legislation, Jill Eselman stops sprinkling cheese on
the lasagna. "Who's in his pocket?" she asks. "He's
privileged. He's got it good. I don't see why he'd ever
worry about poor people like us."
For the
moment, the Eselmans are treading water. The foreclosure
filing and their countersuit are on hold while Conseco
Finance tries to reorganize and come out of bankruptcy. Jill
hopes that if the company emerges from bankruptcy, she'll
have her day in court – and have a fighting chance. "We as
the consumer have to be able to do something," she says. "If
I was a millionaire tomorrow, I still wouldn't pay them
their loan. I will fight them until the end."
Rich
Lord
is a reporter for the Pittsburgh City Paper
who has written extensively on predatory lending
