Kleczka's Korner

A weekly update for Wisconsin's Fourth Congressional District

The ads come in the mail, on TV and over the Internet.  They offer loans and credit to those who may have trouble getting either.  While promising much, what they don’t talk about are the huge fees, high interest rates or what happens if there is trouble repaying the loan.

This is “predatory lending,” and those who practice it often target homeowners, particularly the elderly and minorities, with weak credit histories.  Because of either a poor credit history or lack of finances, they are unable to get a loan from a traditional lender, such as a bank.  Offers of high-cost, home-secured credit are made, but the loans carry high fees and are more likely based on the homeowners’ equity in their property than on the ability to make payments.

This has become a particular concern in Milwaukee and Waukesha counties, where foreclosures increased by 31 and 29 percent, respectively, in 2001.

Would-be homeowners with poor credit ratings who take a high interest loan may not be aware of all of the fees tacked on by credit lenders. The average fee to originate a bank loan is one to two percent of the loan, but predatory lenders charge nearly eight percent, according to the Association of Community Organizations for Reform Now.

Beyond the cost of the fees, borrowers may not be able to afford the loan that they are offered.  Approval of the loan may be driven by mortgage brokers looking for a commission or companies more interested in racking up high fees than the financial health of the borrower.  With foreclosure as a tool, predatory lenders may not really consider if a borrower can repay the loan.

Along the way to foreclosure, when there are problems repaying the debt, homeowners may be encouraged to refinance their loan. Frequently, this leads to another high-fee loan that provides little or no economic benefit to the homeowner, but large profits for the lender.  After racking up high fees and finance charges, the end result may be foreclosure of the property, leaving the borrower with no home and further credit history damage.

This is a growing problem in many communities and as a result Congress is weighing proposals aimed at curtailing such predatory practices. One such bill is the Predatory Lending Consumer Protection Act of 2001 (H.R. 1051).  The bill would expand the number of high interest loans that are subject to federal regulations.  As a result, lenders would be required to disclose more information about the loans and their risks.

The bill also would prohibit lenders from making loans unless it can be determined that the borrower will be able to repay the loan.  The bill also would prevent mortgages that allow lenders to demand payment in full of the loan balance at any time.

Another bill being considered this Congress is the Equal Credit Enhancement and Neighborhood Preservation Act (HR 1053), which targets discrimination in lending.  This legislation would require the lender to extend credit to an applicant under the most favorable terms available for which the applicant qualifies.  It also prohibits creditors from providing separate credit terms on the basis of race, color, religion, national origin, sex, marital status, or age.

Lenders catering to borrowers with bad credit histories are taking a greater risk than with those with unblemished records.  However, that does not mean they should take advantage of someone who is vulnerable.  I support these two bills that will protect borrowers from those who might prey upon their financial distress.

If you get an offer that is too good to be true, it probably is.  Take the time to call the Wisconsin Department of Financial Institutions at 1-800-452-3328 and find out about the offer of credit and the company.