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Balance is certainly the order of the day in this debate. We are a new Congress with a balanced 50/50 Senate. We have a new President, faced with the challenge of uniting an evenly divided electorate. We have a new and real opportunity to work together to pass genuine bankruptcy reform, reform that is balanced, meaningful, and fair.
In a few moments I will send to the desk an amendment to the bankruptcy bill aimed at another area of abuse which should be resolved. It is directed particularly to what is known as predatory lending practices. Much of our discussion concerning reform of the Nation's bankruptcy laws is focused on the perceived abuses of the bankruptcy system by consumers and debtors. Much less discussion has occurred with regard to abuses by creditors who help usher the Nation's consumers into bankruptcy.
I believe there are abuses on both sides and that bankruptcy reform is incomplete if it does not address both sides. Studies have identified a host of predatory financial practices directed at the Nation's financially vulnerable. These studies suggest that many low-income Americans participate in a virtual fringe economy. They may lack access to mainstream banks and financial institutions. They may lack the collateral or the credit rating needed to secure loans for a home, to buy a car, pay for home repairs, or other essential needs. This vulnerable segment of our economy is at the mercy of a variety of credit practices by a variety of offerors that can lead to financial ruin.
High-pressure consumer finance companies have bilked unsophisticated consumers out of substantial sums by aggressively marketing expensive loan insurance products, charging usurious interest rates, urging repeated refinancing, and loading their products
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with modest income but substantial home equity of their lifelong home ownership investments. Senator Grassley of Iowa, who has been the chairman of the Senate Special Committee on Aging, has held hearings, heartbreaking stories of elderly people, usually women living alone, who are preyed upon by these companies that come in and lure them into signing documents they barely understand for repair of their homes with terms and conditions that are unfair by any standard.
Some auto lenders in the used car industry have gouged consumers with interest rates as high as 50 percent, with assessments for credit insurance, repair warranties, and hidden fees, adding thousands of dollars to the cost of an otherwise inexpensive used car. Pawnshops in some States have charged annual rates of 240 percent or more to customers who have nowhere else to turn for small short-term loans. Abusive credit practices of every stripe harm millions of older and low-income Americans every single year.
During the committee debate on S. 1301, I offered an amendment designed to address and curtail just one bad practice among many predatory high-cost mortgage loans targeted at the low-income elderly and the financially unsophisticated. This amendment was adopted unanimously on a previous bill and was stripped out in conference. The credit industry did not want us to even go after the bottom feeders in their business, the people who prey on the elderly and uninformed.
I will reoffer this language today as an amendment to this bankruptcy bill. This is the exact same language that was in the 1998 bankruptcy bill that passed the Senate 97-1. It is also the same language that many of my colleagues, including Senator Grassley and Senator Specter, voted for in the 106th Congress. It is my hope that they will join me in supporting this amendment again.
In recent years there has been an explosion on the market for this type of home mortgage, generally for second mortgages that are not used to fund the purchase or construction of a home. The market is known as the subprime mortgage industry. The subprime mortgage industry offers home mortgage loans to high-risk borrowers, loans carrying far greater interest rates and fees than conventional loans and carrying extremely high profit margins for the lenders.
According to the Mortgage Market Statistical Annual for the year 2000, subprime loan originations increased from $35 billion in 1994 to $160 billion in 1999.
As a percentage of all mortgage originations, the subprime market share increased from less than 5 percent in 1994 to almost 13 percent in 1999. This is not an isolated incident. This is a trend, a trend where people are preying on vulnerable consumers across America, usually widows, usually elderly women, ultimately trying to take away their homes in bankruptcy court.
We are considering a bankruptcy reform bill where we are supposed to be eliminating abuses? For goodness' sake, should we not eliminate the use of the predatory lending which we see is growing by leaps and bounds in this country?
By 1999, outstanding subprime mortgages amounted to $370 billion. Home Mortgage Disclosure Act data shows a substantial growth in subprime lending . The number of home purchase and refinance loans reported under HMDA by lenders specializing in subprime lending increased almost tenfold between 1993 and 1998, from 104,000 to 997,000. I will relate a few stories in a moment that will illustrate the kinds of loans, the kinds of, what I consider, extremely corrupt practices by the credit industry that are rewarded in bankruptcy court.
You will see when this amendment comes up for a vote if the credit industry itself, which prides itself on being a major financial institution in America, is willing to step forward and point out the wrongdoers within its own ranks. Sadly we have seen over the last several years they were not.
The growth of the subprime lending industry is of concern to us for two reasons: First, because of their reprehensible practices called predatory lending practices, which some of these companies use to conduct their business; second, because of the vulnerable people involved, senior citizens, low-income people, the financially unwary to whom they often target their loans.
According to 1998 Home Mortgage Disclosure Act data, low-income borrowers accounted for 41 percent of subprime refinance mortgages. African-American borrowers accounted for 19 percent of all subprime refinance loans. In 1998, when Senator Grassley held the hearing I referred to earlier with the Special Committee on Aging, several people came forward to tell their stories.
William Brennan, director of the Home Defense Program of the Atlanta, GA, Legal Aid Society, put a human face on this issue and this amendment. He told us of the story of Genie McNab, a 70-year-old woman living in Decatur, GA.
Mrs. McNab is retired. She lives alone on Social Security and retirement. In November of 1996, a mortgage broker contacted her and, through this mortgage broker, she obtained a 15-year mortgage loan for $54,000 from a large national finance company. Her annual percentage rate was 12.85 percent. Listen to the terms of the mortgage. She will pay $596.49 a month until the year 2011, when she will be expected, and required, to make a final payment of $47,599.14--a balloon payment for an elderly lady living on Social Security. By the time she is finished with this mortgage that this fellow convinced her to sign for, her $54,200 loan will have cost her $154,967, and she faces a balloon payment of almost $48,000 at the end.
When Ms. McNab turns 83 years old, she will be saddled with this balloon payment that she will never be able to make. She will face foreclosure of probably the only real asset in her life--something she has worked for her entire life--and she will be forced to consider bankruptcy. She will face the loss of her home and her financial security, not to mention her dignity and sense of well-being. Ironically, she had to pay this mortgage broker a $700 fee to find her this ``wonderful'' loan--a mortgage broker who also collected a $1,100 fee from the mortgage lender.
Unfortunately, Ms. McNab is a typical target of the high-cost mortgage lender--an elderly person, living alone, on a fixed income. She is just the kind of person who may suddenly have encountered the death of a spouse and the loss of income, a large medical bill, an expensive home repair, or mounting credit card debt. All of these things could push her over the edge, just making regular monthly payments, not to mention a $48,000 balloon payment, at the age of 83.
These are all real-life circumstances which make her an irresistible target for some of the most unscrupulous members of the mortgage industry in America.
According to a former career employee of this industry who testified anonymously at a hearing before Senator Grassley's
committee, ``My perfect customer would be an uneducated woman who is living on a fixed income--hopefully from her deceased husband's pension and social security--who has her house paid off, is living off credit cards but having a difficult time keeping up with her payments, and who must make a car payment in addition to her credit card payments.''
This industry professional candidly acknowledged that unscrupulous lenders specifically market their loans to elderly widowed women, people who haven't gone to school, who are on fixed incomes, have a limited command of the English language, and people who have significant equity in their homes.
They targeted another such person right here in Washington, DC, by the name of Helen Ferguson. She also testified before Senator Grassley's committee. She was 76 years old at the time. This is what she told us: As a result of predatory lending practices, she was about to lose her home. In 1991, she had a total monthly income of $504 from Social Security. With the help of her family, she made a $229 monthly mortgage payment on her home. However, on a fixed income she didn't have enough money for repairs. She started listening to radio and TV ads about low-interest home improvement loans. She called one of the numbers. She thought she had signed up for a $25,000
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Again, describing the predatory cases, Ms. Ferguson decided she needed to take out a loan. She thought she was borrowing $25,000. After the fees, she was borrowing $15,000. She was living on $500 a month in Social Security. The interest rate the lender charged her was 17 percent. Her mortgage payments went up to $400 a month--almost twice her original payment. Over the next few years, this lender repeatedly tried to lure Ms. Ferguson into more debt. He called her at home, called her sister at home and at work, and he sent her letters, and, God bless him, he even sent a Christmas card. In March of 1993, she gave in to this lender, borrowing money to make home repairs.
By March of 1994, she could not keep up with her mortgage payments. She signed for a loan with another lender, unaware that it had a variable interest rate and terms that caused her payments to rise to $600 a month and eventually to $723 a month. Remember, $500 a month was her Social Security income. She is now up to $723 a month in mortgage payments. For this loan, she paid $5,000 in broker fees and more than 14 percent in total fees and settlement charges. The first lender also continued to solicit her. She eventually signed up for even more loans. Each time, the lender persuaded her that refinancing was the best way out of her predicament.
Ms. Ferguson was the target of a predatory loan practice known as loan flipping.
Why is this an important discussion in the middle of a bankruptcy bill? Because, frankly, these bottom feeders make terrible loans to vulnerable people who ultimately end up in bankruptcy court, taking away the homes of people such as Ms. Ferguson.
I have tried to convince my colleagues on the committee that if we are going to reform the bankruptcy code, for
goodness' sake, why would we reward people who are making these terrible arrangements with elderly, low-income people, with limited education, and taking away the only thing they have on Earth--their homes?
When I say this to the financial industry and the credit card industry, they say, ``You just don't understand the free market.'' The free market? This isn't a free market. This is some of the worst corruption, worst credit practices in America. We are about to protect them with this bill.
Let me tell you what Senator Grassley said about it when he held this hearing back in 1998. My colleague from Iowa has a lot of Midwestern wisdom to share here:
What exactly are we talking about when we say that equity predators target folks who are equity rich and cash poor? These folks are our mothers, our fathers, our aunts and uncles, and all people who live on fixed incomes. These are people who often times exist from check to check and dollar to dollar, and who have put their blood, sweat, and tears into buying a piece of the American dream and that is their own home.
He goes on to say:
Before we begin this hearing, I want to quote a victim--a quote that sums up what we are talking about here today. She said the following: ``They did what a man with a gun in a dark alley could not do: they stole my house.''
That is Senator Grassley talking about predatory lenders, who are protected by this bankruptcy bill. That is why I am offering this amendment. They don't deserve this protection. Ms. Ferguson was eventually obligated to make more than $800 monthly payments, although her income was $500--and the lenders knew it from the start. In 5 years, the debt on her home--this elderly lady living on Social Security--increased from $20,000 to over $85,000.
She felt helpless and overwhelmed. It was only after contacting AARP that she realized these lenders were violating the Federal law.
Lump-sum balloon payments on short-term loans, loan flipping, the extension of credit with a complete disregard for the borrower's ability to repay--these aren't the only abusive mortgage practices. Lenders on these secondary mortgages sometimes include harsh repayment penalties in the loan terms, or rollover fees and charges into the loan, or negatively amortize the loan payment so the principal actually increases over time--all of which is prohibited by law, although ordinary homeowners are unlikely to even know that. Some of these homeowners will make it to a lawyer and get help before it is too late. Many of them will be forced into bankruptcy court. They will walk into that court, and this slimy individual and his company, which has given them this terrible loan that violates the law, will stand up proudly, through his lawyer, and take it all away.
This bill will not even address that issue unless the Durbin amendment is adopted.
On March 5, US News & World Report featured a telling article in their business & technology section entitled: ``Sometimes a deal is too good to be true: Big-bank lending and inner-city evictions.'' In the article Jeff Glasser describes two cases that originate from my home state of Illinois that I want to share with you.
The first involves Goldie Johnson. The lender was Equicredit, a subsidiary of Bank of America:
Goldie Johnson is a 71-year-old homeowner who lives on the Westside of Chicago with her daughter and 4 grandchildren. Her income is $1,270 a month from Social Security and pension. Between June 1996 and March 1999, Ms. Johnson entered into at least three refinancing agreements with various subprime lenders and brokers.
In March, Ms. Johnson was contacted through a phone solicitation by a mortgage broker, who promised Ms. Johnson that she could get a new loan that would refinance her two existing mortgages, provide her with $5,000 in extra cash and lower her monthly mortgage payments. Ms. Johnson was in desperate need of cash to repair her kitchen. She agreed to meet with the broker.
She met with broker twice. On second visit she was presented with a myriad of papers to sign.
Ms. Johnson, who suffers from glaucoma was not able to read the documents carefully. In fact, after looking over only a few of the papers she stopped because her eyes became too tired to continue.
Nonetheless, based on the broker's promises and representations that the loan would provide her with cash to repair her kitchen and lower her mortgage payments, Ms. Johnson signed the loan documents. She was not provided with copies of any of the documents.
The mortgage documents created a loan transaction between Ms. Johnson and Mercantile for the principal amount of $90,000 with an annual percentage rate of 14.8 percent.
The transaction created a 15-year loan with monthly mortgage payments of $994.57, excluding taxes and insurance, with a balloon payment on the 180th month of $79,722.61.
The monthly mortgage payment was 80 percent of this retired lady's income.
The final balloon payment--the amount of principal owed after Ms. Johnson pays the lender approximately $1,000 a month over 15 years--was greater than the secured debt on her home before she entered into this agreement.
Ms. Johnson received no proceeds from the transactions. The broker and lender received at least $9,760 in points and fee from the loan. Equicredit is now attempting to foreclose on Ms. Johnson's home.
Then the case of James and Clarice Mason, the lender was Fieldstone, then Household.
James Mason, age 62, with his wife Clarice who died on June 8, 1999, owned and lived in his home on the west side of Chicago since 1971.
In 1991, the Masons successfully paid off the original mortgage on their home.
In 1993, Mrs. Mason became disabled due to diabetes and arthritis.
In 1995, Mr. Mason became disabled due to a stroke. The stroke has left Mr. Mason with brain damage that has impaired his memory and thinking.
In November 1998, Mr. and Mrs. Mason's home was free and clear of all liens.
On or about the end of November 1998, they were repeatedly solicited for home repair work. Mrs. Mason eventually agreed to meet with home repair company and later mortgage broker. They promised the necessary repairs would cost $15,000 and that the broker would help them find financing.
On December 6, 1998, about a week after completing the loan application, Mrs. Mason was hospitalized for complications arising from her diabetes.
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On December 7, 1998, Mrs. Mason was visited at the hospital by a broker who explained that he had come to visit Mrs. Mason and to help her complete her loan transaction. What a wonderful person. He then present Mrs. Mason with numerous documents and told Mrs. Mason to sign them. The agent of the company provided Mrs. Mason with no opportunity to review the documents, but assured her that this was the loan she had ``discussed'' with New Look that would allow her home to be repaired.
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